GST rises to 15% on 1 October 2010.

A critical aspect of the increase is how to manage your pricing.  You need to make pricing decisions quickly as there may be a lot of work required to implement changes.

It's only 2.5%

A 2.5% increase doesn't sound like much.  On a $100 item it's only $2.50.  However if you can't pass on the increase to customers, 2.5% will be a significant cost to your business.

Let's say you current;y have annual GST inclusive sales of $1m.  At 12.5% the GST contenet is $111,111.

If you can't or don't put your prices up on 1 October, the GST content of you $1m sales will increase to $130,434.  You will be $19,323 worse off.

Put another way, you'll need $22,222 more sales (2.22%) to be in the same position as you are now if you don't increase prices.

Everyone's in the same position

Some have commented that they can't afford to put prices up for the GST increase, that their market is too competitive.

However all businesses have to deal with the GST increase.  Unless you are sure you'll be at a disadvantage or can get an advantage over your competition you need to pass the increase in GST onto your customers.  Not doing so ensures you'll be worse off.

Using the figures above you would be better off if you could increase sales by mroe than $22,222 by not increasing GST, assuming other costs didn't increase, e.g. no additional advertising, wages etc.

Conversely if you increase prices to pass on the extra GST you would have to lose $22,222 of sales, about 2%, to be in the same position as not putting them up.

Sensitive price points

A targeted approach will be needed when increasing prices.

An item that currently costs $9.95 would move to $10.17.  $99.95 goes to $102.17.  These headline prices may need to stay the same.

Similarly you may not be able to pass on the GST increase for al items you sell due to competitive pressure.

You'll either have to absorb the additional GST cost on these items as discussed above or raise the prices of other items by more than the extra GST to maintain your overall margins.

Share the pain

The GST increase will not affect most business transactions, as purchasers can claim the increased GST.

However if you have limited ability to increase your prices talk to your suppliers.  They could share the GST cost by offering you lower prices.

There's no need to wait to do this.  Stock you are buying now may be on hand at 1 October - you need to start managing your margins now.

Test and measure

Whether you pass on the GST increase on 1 October or not, you should regularly review your prices.  If you increase them and thurnover drops you may need to lower them again.  If you didn't increase them when your competition did, you may be able to raise them later.

Displaying prices

You need to consider how you will display prices.  Signs, labels, advertising may all need changing.  You may need to display two prices, one for 30 September and earlier and one for 1 October and later.  Point of sale systems will need updated prices.

As always you need to be careful of the Fair Trading Act 1986.

Art or science?

Pricing is always somewhat of an art rather than a science.  Your products, your customer and your market are all relevant.  It's very difficult to create formulas or models which take all the variables into account.

However understanding the effect pricing has on turnover and margins is critical.

Accountants have tools such as Profit Optimiser which can let you test variables and project the effect on your business.

Conclusions

There's a lot to do before GST increases on 1 October.

You need to make decisions about your pricing, overall and by product.  This may require analysis so you understand the effect of these decisions.

You need to consider whether your suppliers can assist with your pricing, with promotions, with the prices they charge you.

You need to implement new prices.  Lables, signs, point of sale systems, advertising will all need updating.

(SOURCE: WHK, www.whk.co.nz)