“I don’t know what to do,” said my friend on the phone, the angst clearly audible in his voice. “Should I or shouldn’t I?”
And this crucial decision he had to take?
Whether or not to buy a fridge before VAT went up on Tuesday. This was Monday, and my friend was paralysed by indecision.
“If I don’t do it today, I won’t beat the VAT increase,” he lamented.
Beat the VAT increase, I thought with a wry smile. He’ s obviously got swept along by the tide of hysteria surrounding the tax increase from 17.5% to 20%.
Take a deep breath, I counselled. And he did.
Then so did I, just for good measure, and to give my voice the note of gravitas of a primary-school maths teacher.
“Let’s look at the facts,” I said professorially.
And the facts are simple. If you’re buying a fridge that’s £400 before tax, then VAT at 17.5% adds another £70 to it. So it’s £470 in total. And when you add VAT at 20%? It comes to a grand total of £480.
So you’ve saved the princely sum of £10. Enough to put a couple of bottles of Australian chardonnay in that shiny new fridge, but not much else.
“Ten pounds?” my friend said scornfully. “Is that it?”
Yes. I’m afraid it is.
And there and then, he decided to stay in bed and watch a bit more daytime TV, on the last official day of his Christmas break.
The fridge could wait.
2 + 2 = 5
Let’s face it – we’re all a bit innumerate these days.
The decline started with calculators, and continued with digital watches, PCs and mobile phones. Who needs to do mental arithmetic when gadgets do it all for us?
I read an article earlier this week saying that prices were going up by 20%, and a rush of panic buying was expected. I’m not surprised, with that whopping increase on the horizon.
On Monday, 3 Jan – the last day at the old rate – there were reported to be queues at petrol stations around the UK.
Why? If it costs £40 to fill up your car before VAT, then on Monday, your total bill is £47. On Tuesday, it’s £48. So that’s a pound more.
Add a few more pence for the increase in duty, and you might hit £1.40.
And for that, it’s worth queuing in near-freezing temperatures, running the engine to keep the heater going, thus wasting even more fuel?
I don’t think so.
OK, so we’re innumerate. So what?
Well although we don’t understand the detail (percentages, fractions, discounts, multiples) we do understand the bottom line. I do, you do, your customers do.
When you’re setting your prices and working out your discounts, bear in mind a few simple things:
Customers remember: when the VAT rate temporarily dropped a couple of years ago from 17.5% to 15%, the manager at my gym told me it would be ‘too difficult administratively’ to change what I paid each month. So I paid the same, but they kept more, as they handed over less tax. Conversely, a year later, when the rate returned to 17.5%, that administrative difficulty suddenly vanished and I ended up paying more. So they scored – twice. Punters in the changing room were not happy, and it still rankles. Now it’s going up again, and it simply reminds members of the earlier sleight of hand.
Customers aren’t taken in. Is £499 cheaper than £500? Yes, but not much. Enough to make a difference? Maybe, though perhaps not in the way you imagine. To me, and probably to more people than you think – the dyed-in-the-wool cynics out there – it’s a just a transparent ploy to get customers reaching for their wallet. It’s one of the reasons I never give anyone a quote that ends in 9. They’re cleverer than that.
Customers notice. Now that we’ve gone from 17.5% to 20%, prices that were nice and neat last year suddenly look messy. That £15 mobile phone contract now works out at an unfortunate £15.32. And that carefully pitched £19.99 widget crashes through the pain barrier and ends up at £20.42. So what do you do? Well how about leaving prices where they are? First, you keep that nice round figure. And second, and more importantly, you endear yourself to your customers, as you take the hit, not them. I’ve already made a mental note of who’s leaving prices unchanged in 2011, and who’s increasing them. So are your customers.
Numbers are complicated if you let them be. And easy if you put a bit of thought into them.
In the words of Benjamin Franklin:
“In this world nothing can be said to be certain, except death and taxes.”
And he was right. There’s nothing we can do about death and taxes. It’s a numbers game – and when you’re number’s up, you pay the taxman (or the ferryman).
Well they’re ours to lose. So let’s make sure we win them.
Happy New Year.