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VAT increase is over-estimated by more than 85% of consumers

02 September, 2010

Although 89% of consumers know there will be a VAT increase, only 53% know when it will happen, according to a recent study by global pricing and marketing strategy consultants Simon-Kucher & Partners.

However more than 85% of consumers overestimate the 'real' price increase and one quarter wrongly guessed that a £5 product will increase to £6, a corresponding price increase of 20%. The correct price would be £5.11, yet only 15% of interviewees estimated the price correctly. On average they expected the price to increase to £5.52 - over-rating the VAT impact by a factor of five. Interestingly 60-79% of consumers said they would continue spending as normal.

"This over-estimation should provide food for thought for companies," commented Stephan Butscher, the company's managing partner. "Companies should develop intelligent strategies on how best to pass on the increase to customers."

Mark Billige, partner at Simon-Kucher & Partners, said: "In view of current return rates of most industries and customer expectations regarding price increases, it's not a question of† 'if and when' but a question of how.

"Companies should use this VAT increase as an opportunity to analyse their price positioning more accurately... Surprisingly many companies pay very little attention to the overall strategic impact of VAT amendments. Considering how much profit as at risk, rigorous management attention is essential."