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Pricing and Tax

 

DisciplinesMarketing > Pricing > Pricing and Tax

Description | Example | Discussion | See also

 

Description

Very often, prices you charge have and additional tax element you must charge, and then pass the tax to the government. A question in pricing is whether you should show your price and tax separately, or whether you should just show the total amount that customers must pay.

There is no one right way to do this, so do consider the discussions below, including expected norms and how the customer may feel (positively and negatively) about you and your products.

You can also show a total price with a note to indicate 'tax included'.

Sometimes retailers will suggest that a sale item is 'tax free' or 'we pay the tax' as they reduce the total price by the tax amount. Of course they still have to pay government sales tax on the reduced amount.

Example

A business that sells to other businesses prices everything without tax and not even mentioning it as this is the norm within the industry. Tax is only added in the final invoice, along with delivery charges.

A retailer prices goods with a single large price amount, followed by smaller text in brackets indicating the included tax amount. For example '$345 (including $45 tax)'.

Discussion

Reasons to put the tax separately:

  • There is a primacy effect as the first number that the customer sees acts as an anchor, leading them to think of this as the real price, even as they know that tax is added.
  • Given that there is a mathematical effort in adding the tax onto the base price, customers may abandon this work and just accept the basic price.
  • When customers know the separate price and tax they may feel more sympathetic towards you rather than the more antagonistic feeling they may get if they think you are getting all the money.
  • There is a norm within the industry for separating out tax such that customers expect it. Indeed, if you just give a total price, they may assume that tax will be added to this.
  • Business customers may be able to offset the tax or claim it back, so the real price they pay is the non-taxed price.

Reasons to offer a single 'all in' price that includes tax:

  • It makes calculation of what they pay easier for customers, removing barriers where the thought of this effort leads customers to not make the purchase.
  • It makes price labels simpler and hence clearer and more attractive. The extra space also allows for increasing the font size (which is particularly important when the price is a bargain).
  • Customers feel you are being honest in giving single price. They hence trust you more and are consequently more inclined to buy from you.
  • There is a norm within the industry (or region) of including tax within the price.

See also

Customer Price Thinking, Primacy Effect

 

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