To increase or not to increase?

When the VAT increased on 4th January how did you handle it?

If your customers are other VAT registered businesses any increase in VAT has little impact on them, because they can claim it right back. In this case an increase in the gross selling price of 2.5% has no impact on the actual price they are paying.

However, if your customers are members of the public who, by definition, are not VAT registered, the matter needs to be given more thought. Clearly the increase in VAT has just made you 2.5% more expensive than you were before. So, do you just put the extra VAT on your prices or absorb the increase so your customers see no difference?

Here is my take on the problem:

If all your direct competitors are increasing their prices there should be no impact to your competitiveness if you follow suit. So do so!

If your competitors have decided to absorb the increase I think you need to consider hard before you follow their lead.

Firstly, you would essentially be discounting your price, which means that to maintain your overall level of profit you would have to increase business won by 3-12% (depending on your gross margin).

On top of that, the underlying level of inflation is running at around 3-4%, with fuel inflation likely to be much higher. This means that if you absorb the VAT increase and do not increase your prices this year, you could see a net reduction in profit of between 6 and 15%. This is a huge amount for just doing nothing!

Secondly, you need to know how affected your sales volumes are by changes in price. If your customers tend to be higher earners they will be relatively unaffected by any small increase and it is unlikely they will look else where because of it. Customers with lower disposable incomes will be much more affected and are more likely to shop on price.

Having said that everyone knows the VAT price is going up and are expecting it. This means that, as long as you are offering a great product/service, most customers will expect your prices to go up with the change.

Overall, you know your customers and your business. It is vital you look at both before you decide NOT to put the increase in VAT into your prices.

🙂 Fiona

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