Consumers have little knowledge of the exact impact of the new VAT regulation in the UK. 89% of consumers are aware that VAT will increase in the near future, yet only 53% know when it will happen, reveals a recent study by Simon-Kucher & Partners.
The study also revealed that more than 85% of consumers overestimate the 'real' price increase of forthcoming VAT changes. One quarter of respondents wrongly thought that a £5 product will increase to £6 –
a price increase of 20%. The correct price would be £5.11, yet only 15% of interviewees estimated the price correctly. On average, respondents expected an increase to £5.52 – overrating the increase by a factor of five. Interestingly, 60% to 79% of consumers would continue spending as normal.
"Those with well prepared pricing strategies will implement the increase much sooner, for example in late November when the Ashes hype will provide distraction, or during half term when many consumers are away," says Stephan Butscher, Managing Partner of Simon-Kucher & Partners in the UK.
"Companies should use this VAT increase as an opportunity to analyse their price positioning more accurately. We expect price alterations of between 0% and 15%", said Butscher. "Surprisingly, many companies pay very little attention to the overall strategic impact of VAT amendments. Considering how much profit is at risk, rigorous management attention is essential."
Based on the research, Simon-Kucher & Partners recommends the following approaches regarding VAT price strategy:
- Don't go for a general X percent price increase. Take the opportunity to rework your price strategy.
- Start systematic pricing optimisation. Classify products in categories regarding competition, price elasticity and margins, and growth potential. Review factors like price optimisation for each category, impact simulations, and price communication.
- Consider ‘out-of-the-box’ thinking. Implement options such as diversified package sizes and bundling strategies.
- Don't wait. Implement your new price strategy as soon as possible-ideally while consumers are occupied with other matters and are less likely to notice the changes. Then, in January 2011, you can demonstrate price constancy and create positive PR