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Price points

After 1 October:

– a $4 coffee will be $4.09
– a $2 loaf of sliced bread will be $2.05
– a $3.99 jar of vegemite will be $4.08
– a $4.99 packet of wheet bix will be $5.10
– pre-cooked sausages at $7.95 / kg go to $8.13 / kg
– beef mince at $12.99 /kg goes to $13.28/kg –

assuming suppliers add the full GST rate increase on to the final retail price.

That’s by no means an automatic assumption. Wholesalers and retailers have some complex decisions to make.

I’m not going to complain about the extra cost of my $4 coffee but, to be honest, having to find two gold coins and a ten cent piece for each coffee is going to be a little irksome. If I haven’t got the correct change in all likelihood I’ll hand over three coins (or a fiver) and get two, three or more coins back. It won’t exactly reduce the jingling in the pocket! The charity collection box on the counter might be better off though.

Us consumers can be pretty fickle. If an item’s price increases from $4.99 to $5.10 our reaction can be disproportionate to the amount of the increase. Jumping over the $5 barrier by 11 cents to many of us can appear to be a bigger price hike than a move from $5.25 to $5.36, yet it’s the same increase! It’s the psychological barrier of the round number. These issues are common around price points and are why retailers will be thinking for some products it’s better to keep the price at, say, $4.99 than to go over $5.

You might think it’s not that big a deal and consumers these days are more intelligent than to fall for subtle pricing distinctions like that. Well I’m not so sure. And anyway, who can say they haven’t at some stage had ringing in their ears the Mad Butcher’s radio ads in which he punctuates the airwaves with that distinctive “$8.99 a kilo!” – Magic! This type of marketing works.

What does it all this mean? Well in all probability some prices will rise by the GST increase, some will stay the same and some will increase by more than just the extra GST. Watching it all will be the Commerce Commission, looking after the interests of New Zealand consumers. This is from a warning they issued recently to businesses:

“Businesses are not required by law to give reasons when they raise prices. However, when a business does try to justify a price increase to its customers, the reasons they give must be accurate and not misleading. For example, businesses will run the risk of breaching the Fair Trading Act if they explain price increases as being caused by the increase in GST, where the price rise exceeds the extra GST,” said Commerce Commission Enforcement Manager, Wellington, Greg Allan

In reality a business might keep some products’ prices where they are, or even reduce some, and increase others by more than the GST rate increase so that they align their prices as much as possible with strategic price points. What’s unclear though is whether, if these pricing decisions have all been caused by the GST increase will the Commerce Commission see it that way?

Iain

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