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How do I price the rise in GST?

With the Goods and Services Tax (GST) changing in New Zealand from 12.5% to 15% there’s a lot of discussion about how to change your pricing so that the rise in GST is passed onto your customers and does not become a cost to your business. For some businesses the GST increase will be simple, but for others especially for those selling low priced, high volume goods or services, the GST change will affect their margins.

The best example of this is an item that sells currently for $9.99. This has $1.11 of GST on it, making the net price $8.88. With the change to 15% the GST will rise to $1.33, making the gross price $10.21. To my mind $10.21 is not as attractive as $9.99. A huge amount of research and live testing has gone into what’s termed psychological pricing all around the world. And there’s a fairly widely accepted belief that $9.99 will encourage more sales than $10.00.  So what can you do?One option is to actually mix up your pricing and see if you can make the next natural leap up to say $10.99, or to another price like $10.74, which feels like a discount from $10.99. Lots of big brands and retailers use this strategy.

Option two is to wear the GST rise and drop your net margin so the gross price is still $9.99. If you do this, your net price would be $8.69, so you lose 2%. If you think your volume will be adversely affected by increasing your total cost price -being the GST inclusive amount – you might like to keep the same price and forgo 2% on your net sale.

Option three is to display only the GST exclusive amount. In New Zealand the GST rules stipulate that you can display a price excluding GST, but if you do you must state that it ‘excludes GST’. This might be useful because a lot of people now use debit and credit cards to make their payments and the ‘add GST’ might be lost in their decision process. Also for a business that is GST registered, it can claim the GST back, so the net of GST price is more important anyway.

Last year there was a short-term increase in VAT in the UK and there is talk this will move again. We’d love to hear about your experiences in adjusting your pricing to accommodate a change in the rate of sales tax – wherever you are in the world.

 

Read more about Business, New Zealand, Small Business

 

3 comments

Ari Sargent
26 May 2010 #

Good post Hamish, it is useful to think beyond the simple arithmetic of the change to GST when adjusting prices. I must say though that I disagree with option three – this is confusing for customers and could be perceived as deliberately misleading.

Jack
27 May 2010 #

Ari – Option 3 is useful depending on what industry you are in. As a consultant doing IT Support & Websites, mainly for businesses, all prices I quote are exclusive of GST anyway. Businesses can claim the gst portion back, so effectively “don’t pay it anyway” so the excl gst price is what matters to them.

Blair
2 June 2010 #

@Jack – same here. Every price I quote is GST exclusive as I’m only ever dealing with companies or GST registered organisations.

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