Read on Twitter
Ok this is getting out of hand... everyone seems to be starting a side hustle and nobody and I mean not one person who has pitched us their product has any idea how to price properly. Let’s talk about this (thread)
Firstly we are VAT registered. What does that mean? It means we have to give 15% of the selling price to SARS (regardless of whether or not you charged us VAT for your goods). This is important. You must factor this in when you set an RRP for us.
Ok let’s crunch some numbers. You come to us pitching a product that you say has an RRP of R45. Cool, ok. You then turn around and tell us we need to buy 50 units and you will sell them to us at R40 each and charge us R250 in courier fees to get them delivered. What. The. Actual.
So you are saying you will sell me something that costs R40 per unit and you will charge me R5 each to get them to me. Sooo.... that is R45 in total costs and I can sell this item for R45? Eish I am not in business to break even guys. But it gets worse...
Because we haven’t even factored VAT into this yet. So let’s take 15% VAT away from R45 (because the RRP includes VAT for us, folks) that’s 45/1.15 which is R39.13 AFTER we have paid VAT. So if we buy it from you at R40 cost + R5 carriage then we are making a lekker loss.
Now let’s talk about margin vs markup. Markup is vanity, and is the % I have to put on a product to make my desired margin. Margin is the actual % the business makes after we have covered all of the costs of procuring said product. That includes the cost of getting it to us.
We operate on a minimum of 30% margin because we have things like payroll, rent, website fees etc to cover (and yes we do want to make a profit). So in order to make my 30% on the R40 + R5 product you are pitching me I need to generate revenue of R65 AFTER I pay VAT.
The selling price would therefore be 15% more at R75 (rounded) to take into account the VAT. That should be the RRP folks, R75. So how did we get here:
1. This shit isn’t taught in schools... I did accounting as a subject in school and believe me we had to learn everything over again when we started this business.
2. VAT is COMPLETELY misunderstood. Just because you didn’t charge me VAT as a supplier it doesn’t mean I don’t have to still collect VAT from my customers and that has to be factored into the RRP.
3. Margin is COMPLETELY misunderstood. Work off your retail customer earning a 30% margin (and don’t forget VAT) when determining a fair RRP. Please.
Finally: if it costs you around R40 to make something and you are happy to sell it for R45 then you are undercharging and you will never be able to build a sustainable business. Take a moment to know your worth.
