Retail surgery: Maintaining good customer will despite price hikes

The 2.5 percentage point VAT increase will lead to a product price hike of pennies for many retailers, but customers will be reluctant to pay more during a recession. In addition, there is the inevitable comparison with other retailers that may choose to absorb the cost rather than change their prices.

Tim Robinson, partner at management consulting firm Kurt Salmon Associates, says: “You will have to be a brave retailer to add it on in the new year. Given the current financial crisis and that people will have no money after Christmas, you just don’t know how consumers are going to react.”

Demonstrating effort has been made elsewhere to keep prices low could be the best way to maintain customer goodwill.

Robinson says: “You could do an Ikea and reinforce the cuts you have made to keep costs down. It puts up signs in-store saying: ‘We flat-pack furniture to save you money, we don’t have many staff on the shopfloor to keep costs down’.”

He adds that retailers need to give out the message that they’ve cut the margin so thin that they have to implement the VAT increase. Reinforcing value is important.

Robinson also stresses the importance of keeping staff informed about the increase so that they can talk easily to customers.

“Communication is key,” he says. “Staff have to be well-versed in what the company is doing and be prepared to answer customer questions.”