The Advantages and Disadvantages of Pricing SaaS Products Inclusive of Taxes

How much should you price your product? It’s one of the most important things you decide when creating and launching your business. And for SaaS companies, the question is a tough one to answer.

This is due to the fact that SaaS products are sold internationally across national borders. And each of the nations in which these products are sold have their own sales, VAT, and / or GST tax codes. For clarity’s sake, in this post we’ll refer to all three of these taxes (VAT, GST, and sales tax) as “sales tax.”

So, a SaaS company has to charge its consumers the correct amount of sales tax in each region it sells its product, but how? How can you remain tax compliant if one place doesn’t charge any sales tax at all, and another place charges a sales tax of 20 percent?

Some SaaS companies have decided to charge the highest sales tax rate possible and include it in the price of their product. Other companies use a mosaic approach and take an average tax rate and include it in the price of their products. And some don’t include any sales tax at all, instead applying the additional fee at checkout, depending on the area.

To help you decide what’s best for your company, we’ve outlined potential benefits and drawbacks below.

Including Sales Tax When Pricing SaaS Products

The bottom line is that the customer always has to pay sales tax if the region in which they live charges a tax on the sales of digital services. So, it’s up to you as the business owner or operator whether or not you want to display sales tax in the up front price, or save it until a customer checks out.

When you include sales taxes in the price of your product, the benefit is that there’s no surprise at the end of the purchase. The customer knows exactly what he or she is going to pay for your SaaS product because you’ve already priced in the possible taxes. You can do this one of two ways.

Maximum Sales Tax Possible – The first, and easiest, way to include sales taxes in the price of your SaaS product and still remain VAT and GST compliant is to charge the maximum sales tax possible for all products sold.

This means that the initial price all customers see is the price of your product plus the tax rate of the highest sales tax of the place in which your product can be purchased. So, if you sell your SaaS product as a US $10 subscription service, and the highest tax rate your business encounters is 20 percent, then your overall price would be US $12.00. This is found derived as: (US $10.00) + (US $10.00 x 20% tax rate).

In this pricing model, all consumers would pay a US $12 subscription, even if the product is being purchased from a country or region that doesn’t have a sales tax. The downside to this model is that you might overprice your product in relation to your competitors.

Media of Possible Sales Tax – The other way you can include sales taxes in the price of your SaaS product is to calculate an average sales tax rate based on a media of potential sales taxes, and add that to your price. For example, if your SaaS product is a US $10.00 subscription and is sold in three countries, you can take the sales, VAT, or GST taxes from each and average them together.

So, if one country had a sales tax rate of 10 percent, one had a rate of 15 percent, and one had a rate of 20 percent, you could charge a sales tax rate of 15 percent and include it in the price of every product sold. This rate is derived as: [(1.10) + (1.15) + (1.20)] / 3

In this example the price you charge for each customer is US $11.50. However, the downside is that you may undercharge some customers, which will eat into your profits. Another downside is that you’re not being transparent. Some businesses have a VAT ID, for example, and aren’t supposed to be charged a VAT tax, for which you charged them an average sales tax price.

Excluding Sales Tax When Pricing SaaS Products

Alternatively, it’s possible to exclude all sales taxes when pricing your SaaS product. If this is the case, you’ll need to apply the correct taxes at checkout when a customer introduces their personal data. This way, you’ll know exactly where they’re purchasing from and can apply the correct sales tax rate.

The benefit of this is obvious. You’ll always apply the correct taxes to each purchase and therefore will never overprice your product or underprice and lose money.

So, if a customer was purchasing your US $10.00 SaaS subscription, the price would be listed as US $10.00 regardless of where they were purchasing from. Then, when they reach the checkout page, their data is transferred and the necessary sales taxes are applied to the final price.

If, for example, a person is purchasing from a country with a 20 percent sales tax, the initial price would be US $10.00. Upon checkout, however, the price would increase to US $12.00.

This brings up an equally obvious downside to this approach. It’s not an enjoyable customer experience to notice a 20 percent increase in prices upon checkout.

Quaderno Solves the Problem

With Quaderno, you can create custom and automatic invoices that apply the correct sales taxes in real time to your product price. This occurs during the checkout process before your customer enters his or her payment data.

Using our tool, a person in the U.S. would see a product price of US $10.00, while a person in France with no VAT number would see a product price of US $12.00, which automatically includes a 20 percent sales tax rate.

All of this happens in real-time so your customer sees the correct price every time. There are no surprises, and you always charge the correct amount.