If only retail pricing was as simple as VAT

If we lived in a rational, economic world in which firms set and changed prices in transparent and logical ways, Tuesday’s VAT increase from 17.5%to 20% would have resulted in a relatively straightforward, completely uniform and very minor rise in retail prices.

The real world of pricing, however, is a much more mysterious place than most of us would have believed. Strange pricing manoeuvres have been afoot all week on the British high street.

First, before we get onto the pricing shenanigans, let’s acknowledge the straight-shooters who did what economists might have predicted and just increased their prices in line with the VAT rise at midnight on Monday.

In accordance with its brand association of keeping things simple and open, Apple closed its online store on Monday night and re-opened a few minutes later with the price increases.

This did rather mess up Apple’s previous pricing strategy of maintaining prices just below psychological thresholds – Monday’s price for a MacBook Pro, for example, was £999. By Tuesday morning it would set you back the untidy sum of £1,020. But compared with the shenanigans variously described below, Apple gets an A for honesty (once again).

As well as the honest ones, we also have a bunch of VAT promoters, who have taken the growing coverage of the tax rise as a perfect opportunity to run themed price promotions in which customers actually benefit from the rise. Sony, for example, offered to pay back all VAT on any of its products bought in November or December. Superdrug has taken the opportunity to promote its own-brand range by refusing to add the increase to the 2,000-strong product line.

As usual, the big supermarkets are playing one game in public and pretty much every other pricing game in private

Möben Kitchens has gone even further and is offering to pay the VAT on all orders until this Sunday. It’s a clever way to generate some free headlines while allowing brands to achieve the holy grail of discounting their products without apparently commodifying their brands.

At the other end of the generosity spectrum are the brands that have taken the VAT increase as an opportunity to pass on greater price rises. The O2 network, for example, informed many of its customers that text messages on its network will rise from 10p to 12p per text. That sounds reasonable until you realise that’s a 20% increase. Similarly the gym company Fitness First wrote to many of its members last month explaining that because of the VAT increase and “rising costs”, its monthly membership rates will go up by as much as £10 a month – or almost 25%. And they aren’t the only ones taking marginal liberties with the VAT rise. KPMG estimates that almost 60% of Britain’s retailers will put their prices up by more than the increased rate of VAT.

KPMG believes many of the firms that cut prices during the economic downturn now need to make up for lost margins and the rising costs of raw materials such as petrol and cotton.
As usual, Britain’s big supermarkets are eyeing each other carefully, and playing one game in public with their PR, and pretty much every other pricing game known to man in the privacy of their own stores. Marks & Spencer said its VAT increases would be automatically applied to new products in the stores from Tuesday, with the prices on some existing products “being changed in stages over time” and others, such as jogging bottoms and cotton leggings, frozen for the foreseeable future. So that’s clear then.

Tesco engaged in a similar strategy of pricing misdirection, announcing that all VAT price rises will be frozen on non-food products in its seasonal sale until January 25. That sounds impressive until you calculate what proportion of its revenues are derived from currently promoted, non-food products. My best guess would be about 3% of its January income. In the brutally competitive business of British supermarkets, no brand can afford to appear to raise prices – especially when that is exactly what is going on.

But the 2011 gold medal for pricing capriciousness certainly goes to Boots. The high street chemist has elected not to immediately alter its shelf prices but it will be adding the 2.5% VAT increase at the cash register when you make your purchase.

British retail law allows a 28-day get-out clause in which pricing does not have to tally with the prices you are charged. So Boots gets a strategic BOGOF in which its prices do not reflect any VAT-induced rise, but its takings certainly do.

Asda chief executive Andy Clarke also gets an honourable mention for his pricing chutzpah. With immense gravitas, Clarke announced this week: “We’re keeping things simple as always at Asda. The price customers see on the shelf in January will be the price they’ll pay at the till.” Only in the opaque and highly misleading world that is the British high street can a CEO claim credit for ensuring that the prices shown in his store match the amount his customers actually have to pay.