VAT: The Good the Bad and the Ugly….

December 3, 2010
by Retail Champions

If we cast our minds back to June, we all remember hearing the announcement that the coalition government were planning to raise sales tax by 2.5% to 20% in a bid to reduce the UK budget deficit. How time flies and the change-over point on 4^th January 2011 is now very much on the horizon. Retailers have had 6 months to prepare for this change – but will it be good, bad or just plain ugly in 2011?

The Good…

Some may argue that the effect of the rise won’t be felt by consumers until later on into the New Year. This is because many retailers are using the increase as a point of difference.

If retailers take a hit and freeze VAT then they won’t stall sales in what is essentially a crucial period. This is great news for consumers, and a boost for retailers too! Large retailers such as ASDA have already said they will be freezing VAT on their products.

Others may embark on a pre-2011 sales event to push big ticket items. This would give consumers plenty of time and incentive to buy the big-ticket items before the rise in order to avoid paying an extra 2.5p for every pound spent.

Using the VAT increase as a point of difference either before the event or after will certainly be a good opportunity for retailers to boost sales and consumers to get a ‘good deal’.

The bad…

Once the sales are over in mid January, retailers will (predictably) adjust the prices to compensate for the VAT change… which isn’t so great for consumers.

If retailers do take the hit and freeze the vat increase for a period of time, it is widely accepted that this approach isn’t sustainable in the long-term.

Being focused around price means service and aftercare are often dismissed when these are the key areas to brand loyalty. This is especially poignant when you look at consumers shopping habits which are changing. Consumers are already cutting back on spending. When purchasing discretionary items consumers are taking a more cautious approach, considering all the benefits of the purchase. The VAT increase will only serve to inflate this trend and ensure that value for money remains top of consumers’ minds when shopping.

The ugly…

When VAT goes up to 20%, small price adjustments may need to be made to keep prices within psychological bands. This is all based on the assumption that some prices are ‘better’ (in generating total revenue) than others. ’99p Stores’ would look pretty stupid if they renamed themselves ‘£1.01 Stores’ after the VAT rise.

Not to mention the possible logistical issues surrounding the change…

The ugly issues facing retailers with the increase in the New Year will be customer confidence and possible lull of sales – coupled with the effect of other tax rises we are set to see in 2011.

OK, so what does this mean for Online Advertising?

Online Offers Value for Money

“One of the biggest motivating factors for online shoppers is value,” (Liane Dietrich, MD of LinkShare UK).

Consumers often perceive that online offers more choice and greater value for money than the high street which could aid online advertising revenues if consumers turn to the internet when they shop. Advertisers can take advantage of this by perhaps emphasising things such as value for money in ad copy and ad text.

Promote Big Ticket Items Early

Research shows that 66% of people will look to take advantage of the remainder of 2010 at a 17.5% VAT rate, and make a big ticket purchase (Kinetic Nov 10). Therefore now is the ideal time to push the sale of these goods. Additionally consumers will need guidance in their decision making so this could potentially be where things such as Google Seller Ratings and review pages become even more influential – Consumers will want to make an even more informed decision before parting with their cash and Google Seller Ratings my help to inform them.

Targeted Campaigns and Emphasis on ROI

The affiliate network ‘Linkshare’ believe that targeted marketing campaigns will be the most effective way to win business with the VAT increase and 30% of marketers think mass marketing will give way to more individualised campaigns in 2011. What’s more there will be an increased pressure on ROI and advertisers will be seeking more efficient results driven online marketing techniques.

The start date of the VAT increase will come at a difficult time for retailers, smack back in the middle of the often crucial post-Christmas sales period. But there may be light at the end of the tunnel for retailers and consumers alike.

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