GST Countdown: More to think about than just raising price tag

Advisers at business.govt.nz are advising retailers to think more strategically than simply raising prices to reflect the new GST rate.

There are several important factors to consider before finalising your selling prices from next month onwards, if your customer is the end-consumer. The first decision to make is whether to increase prices at all.

Absorbing the GST increase
Given tight trading conditions, a number of businesses are likely to decide to absorb the GST increase, rather than risk losing business. Businesses with extremely price-sensitive customers are most likely to choose to leave prices unchanged after October 1 and earn less profit per sale.

The monthly Business Outlook survey for July produced by the National Bank of New Zealand registered a drop in the number of businesses planning to increase prices.

Only 31.4 per cent of businesses indicated they planned to increase prices soon, compared with 38.6 per cent in June. This suggests that a large proportion of New Zealand businesses are planning to absorb the GST increase, rather than pass the increase on to their customers.

Pricing below psychological price breaks
Businesses whose customers are less price-sensitive, such as those in niche markets, are more likely to decide to increase prices. These businesses will need to bear the psychological effects of price breaks in mind when deciding on pricing.

An item that sells at $17.50 excluding GST, sells at $19.70 with 12.5 per cent GST added. This keeps the item below the psychological price break of $20. With the GST increase to 15 per cent, the $17.50 item should sell for $20.10. This requires a decision whether to:

Leave the price unchanged at $19.70 and absorb the additional GST increase.

Increase the price to $19.95, passing on some of the GST increase and absorbing the balance.

Increase the price in excess of GST to just below the next price break of $21. Most businesses are likely to use a combination of all three when setting their prices from 1 October, depending on what they are selling.

Businesses will also need to adjust the way they factor the GST increase into their pricing strategies depending on the strategies adopted by their competitors. If a direct competitor absorbs the GST increase, it makes it harder for a business to increase prices; and similarly if a direct competitor increases prices, it makes it easier for a business to follow suit.Use loss leadersBusinesses should determine which products customers are likely to be price-sensitive to and absorb the GST increase on these items, or use them as loss leaders to attract customers.

Shoppers are likely to compare the costs of basic necessities like bread, milk and baby food, and buy from the store with the most competitive prices. They are, however, less likely to apply the same scrutiny to impulse buys, like chocolate.

This means businesses will need to determine which products or services their customers are most sensitive to, and price their products accordingly.

For business-to-business sales, the GST increase will not have that much impact because business customers can claim the GST back regardless of the percentage. Information provided by business.govt.nz in association with Myob.

Find out more
* business.govt.nz
* myob.co.nz/taxchanges