Margin computed on a price that includes VAT

The mistake

In markets where shelf prices include VAT or GST, the number on the product page isn't the store's revenue. Part of it is tax, collected for the government and passed on.

The sheet computes margin from the shelf price: price minus costs, divided by price. The numerator counts the tax as money kept. The denominator is too large as well, which hides part of the damage.

A worked example

One bottle of supplements at a shelf price of $37.95 that includes 20.0% VAT, shipped free. The store keeps $31.63, and $6.32 is tax.

On the shelf price, the sheet shows a margin of $11.69, or 30.8%. On the revenue the store keeps, the same order makes $5.87, or 18.6%.

The costs are nearly the same in both columns. Only the card fees and the refund reserve move, because they are a percent of revenue. So of the $6.32 of tax, $5.82 comes straight out of the margin.

The order's figures are computed by the margin engine in Offer Suite's own code, in whole cents. The sheet's are the same order with the mistake applied.

What it does to the decision

The sheet's margin is 12.2 points too high, and a discount shows what that costs. Take 20.0% off the shelf price, to $30.36, and the sheet still shows $4.70 kept on every order. The store keeps $0.04.

The same error bends every comparison between a market where tax is inside the price and one where it is added at checkout. The tax-inclusive market always looks better than it is, so it gets the budget and the deeper offers.

What prevents it

Offer Suite books revenue tax-exclusive. Each order line is read the way Shopify charged it, net of the tax inside a tax-inclusive price, and that was checked on real orders in both kinds of market: tax added at checkout, and tax included in prices.

Costs that are a percent of revenue use the same base, so nothing downstream is computed on tax either.

A spreadsheet is still the right tool for some of this. Where it is, and where it stops: Offer Suite vs a spreadsheet.

Where the numbers come from

The example is not a real brand's offer. The 20.0% VAT rate and the 20.0% sale are made up. Every other input is sourced below, or marked there as an assumption.