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Who, What, Why: What happens to £9.99 when VAT rises? Who, What, Why: What happens to £9.99 when VAT rises?
(40 minutes later)
The standard rate of VAT has gone up from 17.5% to 20%. What will this mean for the familiar "price points" to which consumers are accustomed?The standard rate of VAT has gone up from 17.5% to 20%. What will this mean for the familiar "price points" to which consumers are accustomed?
They are the magic numbers of retail - usually ending with 99p, in a bid to convince us that we are spending less than we actually are.They are the magic numbers of retail - usually ending with 99p, in a bid to convince us that we are spending less than we actually are.
But the rise in the sales tax pushes the psychologically all-important figure of £9.99 up to the rather more ungainly £10.20. Will shops really change their pricing habits?But the rise in the sales tax pushes the psychologically all-important figure of £9.99 up to the rather more ungainly £10.20. Will shops really change their pricing habits?
The British Retail Consortium (BRC) insists the competitive pressures of the current UK economy mean there will be no repeat of the introduction of the euro, when consumers complained about shops grabbing the opportunity to round up prices.The British Retail Consortium (BRC) insists the competitive pressures of the current UK economy mean there will be no repeat of the introduction of the euro, when consumers complained about shops grabbing the opportunity to round up prices.
But Neil Saunders, consulting director at retail analysts Verdict, warns: "Retailers will be reluctant to change the magic numbers like £9.99 on some products - but this may mean other items going all the way up to £10.99."But Neil Saunders, consulting director at retail analysts Verdict, warns: "Retailers will be reluctant to change the magic numbers like £9.99 on some products - but this may mean other items going all the way up to £10.99."
In December, a survey by accountancy group KPMG warned that 60% of retailers and consumer product manufacturers planned to use the VAT rise to "mask" more extensive price hikes - a prediction dismissed by the BRC.In December, a survey by accountancy group KPMG warned that 60% of retailers and consumer product manufacturers planned to use the VAT rise to "mask" more extensive price hikes - a prediction dismissed by the BRC.
Certainly, many large chains have said they will delay passing on the increases. Tesco has said it would freeze VAT on all its non-food products until 25 January, while John Lewis has also promised to hold off raising its prices until its competitors have done so first.Certainly, many large chains have said they will delay passing on the increases. Tesco has said it would freeze VAT on all its non-food products until 25 January, while John Lewis has also promised to hold off raising its prices until its competitors have done so first.
However, as Mr Saunders points out, most chains are currently in the midst of their January sales period anyway and are focusing on clearing out old stock. Consumers will notice the difference, he predicts, when new product lines for spring hit the shelves.However, as Mr Saunders points out, most chains are currently in the midst of their January sales period anyway and are focusing on clearing out old stock. Consumers will notice the difference, he predicts, when new product lines for spring hit the shelves.
"Every retailer has a margin and the first thing they will think about is what the VAT rise will do to their profitability," he says."Every retailer has a margin and the first thing they will think about is what the VAT rise will do to their profitability," he says.
"It's a well-proven fact that 'price points' like £9.99 do sell, and some items will be left where they are. But to balance that out, other products will have to go up further to make up the difference.""It's a well-proven fact that 'price points' like £9.99 do sell, and some items will be left where they are. But to balance that out, other products will have to go up further to make up the difference."
The 99p factor is certainly well established. A 2008 French study of the phenomenon found that lowering the price of a pizza from 8.00 euros to 7.99 euros boosted sales by 15%.The 99p factor is certainly well established. A 2008 French study of the phenomenon found that lowering the price of a pizza from 8.00 euros to 7.99 euros boosted sales by 15%.
Of course, retail chains may have other options if they wish to balance the goodwill of their customers with their own need to protect their margins, argues Richard Dodd of the BRC.Of course, retail chains may have other options if they wish to balance the goodwill of their customers with their own need to protect their margins, argues Richard Dodd of the BRC.
Firms can look for costs savings in their staffing and in their supply chains "That's why retail costs are lower than they were historically," he says.Firms can look for costs savings in their staffing and in their supply chains "That's why retail costs are lower than they were historically," he says.
But consequently, he adds, waste and inefficiency have already been stripped away, meaning there is not much more in the way of savings to be made from laying off staff and squeezing suppliers.But consequently, he adds, waste and inefficiency have already been stripped away, meaning there is not much more in the way of savings to be made from laying off staff and squeezing suppliers.
With competition fiercer than ever in the post-credit crunch climate, he argues that retailers are under too much market pressure to profit from eurozone-style rounding up.With competition fiercer than ever in the post-credit crunch climate, he argues that retailers are under too much market pressure to profit from eurozone-style rounding up.
What this could mean, Mr Dodd suggests, is an end to the preponderance of number nines on display in the nation's shops.What this could mean, Mr Dodd suggests, is an end to the preponderance of number nines on display in the nation's shops.
"In the past few years a lot of retailers have moved away from £9.99 because there's a feeling that it doesn't work any more," he says."In the past few years a lot of retailers have moved away from £9.99 because there's a feeling that it doesn't work any more," he says.
"In the last few years we've seen a lot of £9.56 and £9.84 and these kind of prices which are a better reflection of the costs involved.""In the last few years we've seen a lot of £9.56 and £9.84 and these kind of prices which are a better reflection of the costs involved."
Consumers may be sceptical about the prospect of a fair pricing structure, but whatever happens, retailers will continue to make the most of the numbers game.Consumers may be sceptical about the prospect of a fair pricing structure, but whatever happens, retailers will continue to make the most of the numbers game.


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Mr Dodd reckons there are already a lot of "random" prices like £9.56. I've only ever seen such prices in supermarkets and on Amazon. It will be like the last VAT increase in the early 90s all over again; we'll have a month or two of £10.21 for a DVD instead of £9.99, then it will creep up to £10.49 or £10.99.Mr Dodd reckons there are already a lot of "random" prices like £9.56. I've only ever seen such prices in supermarkets and on Amazon. It will be like the last VAT increase in the early 90s all over again; we'll have a month or two of £10.21 for a DVD instead of £9.99, then it will creep up to £10.49 or £10.99.
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    • I supply a wholesaler in the more expensive end of the mass-market fashion industry who has been holding off price rises for years; letting their profit margins slip. They can do so no longer and they see this as a chance to "restructure" prices when eveyone else will be as well. I suspect their attitude is not unusual. (And invisible to the BRC as a wholesaler - so a delayed retail impact)I supply a wholesaler in the more expensive end of the mass-market fashion industry who has been holding off price rises for years; letting their profit margins slip. They can do so no longer and they see this as a chance to "restructure" prices when eveyone else will be as well. I suspect their attitude is not unusual. (And invisible to the BRC as a wholesaler - so a delayed retail impact)
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