Cost of Sold
This is one of the most problematic expenses to try to pre-calculate.
As an example, let’s sell a $200 unit via an online sales channel and utilizing a payment gateway for accepting credit cards. Upon sale:
| The sales channel charges 15% commission on the sales price. | $30.00 |
| The payment gateway charges a $0.50 flat fee per sale plus a 3% rate on successful charges, so $0.50 + $6.00. | $6.50 |
| You need to ship* the product to your customer, at a rate of $12.00. You also need to package it first, for $2.00 worth of packing supplies. And you have some items you include in every shipment — such as business card, flyer, and maybe a coupon, — totaling $1.00 in additional costs. $12.00 + $2.00 + $1.00. | $15.00 |
| Cost of Sold Total | $51.50 |
“Suddenly”, there’s an additional $51.50 that’s taken from whatever portion of the sale we thought would be profit.
* (NOTE: whether or not to included shipping-related costs in the List Price calculations is not always a simple decision. Learn More.)
So you decide you want to recoup these costs by increasing your sales price.
| Initial Sales Price | $200.00 |
| Initial Cost of Sold | $51.50 |
| New Sales Price | $251.50 |
| New Cost of Sold = $37.73 (15% ) + $0.50 + $7.55 (3%) + $15.00 | $60.78 |
| New Unrecouped Difference in Cost of Sold = $60.78 – $51.50 | $9.28 |
You could turn around and add that $9.28 difference back into the sales price, but then the charges also go up again. Round and round you go until you find a comfortable stopping point.
Or decide to sell only in person and only take cash.
Or elect to lose money on this aspect (which can be deducted on taxes as a business expense, but is a tax deduction really the same as not losing money on a sale? I think not. You might think differently.)
NOTE: You can likely safely ignore all or portions of Cost of Sold and the contribution made to the suggested pricing IF your customer is:
- buying from you in person (thus avoiding sales channel charges),
- AND/OR paying cash (thus avoiding payment gateway charges),
- AND/OR paying shipping as a separate line item OR taking the product with them.
NOTE: This example only deals with sales channel, payment gateway, and shipping-related expenses. What about all the other potential expenses incurred once an item is sold? Below are some to think about.
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