There cannot be many business owners and managers in the UK who are not spending the time between Christmas and New Year thinking about the possible affects of the impending VAT increase.  I’ve been reading what a few other blogs have to say on the subject and this seems typical of those I came across:

“For businesses like mine that sell mainly to other VAT registered businesses it’s not too big a deal.  The companies I feel sorry for are those selling to consumers. They have to either put up their prices (and make themselves uncompetitive) or they need to take a hit on their already-squeezed margins. Not nice.”

Two big assumptions in there:  The first being that B2B sales will not face price pressure due to the VAT rate increase and the second being that the only competitive edge that a business has is price.

Let’s look at the second: If you are running a business that relies on selling the same commodity as everyone else with only price as a differentiator than, yes, you will suffer.  That said, you would have suffered sooner or later as a competitor would have reduced their prices to take your market share.  Hopefully you have a great value proposition that differentiates you from your competition and will enable you to pass on the VAT increase.

There is, however, a twist in the tail.  It is in the way that the general public have an annoying habit of loving their price points – 99p, £4.99, £1,999 etc. – and it isn’t going to be easy to sell products at 101p, £5.10 £2,041.53 etc.  The truth is, you’d probably be better off increasing your prices (and thus your margins) to £1.19, £5.49 and £2,049.  This is what happened in Europe when the Euro was introduced and the smart money says that the same thing will happen here.

Oh, and what happens if your sales are B2B?  Well, remember that all value chains lead to the high street.  The nearer you are to that end point the more likely it is that a retailer not wanting to pass on the VAT increase will look to you to share the burden.  So, just because you are not a retailer does not mean that you’re safe.

In a recession, or when VAT goes up, the gut reaction is to take the hit and blame the government.  The sensible and rational reaction is to focus on the value proposition and differentiators that you offer to your customers.

  • What is it that you provide that justifies your price?
  • How can you protect, enhance and publicise this proposition in order to maintain and grow your business?

These are the key questions and if you cannot find the answer then the VAT increase isn’t the real issue that you face.

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