With recent reports predicting the rise to 20 per cent VAT – on top of increases in rail fares, petrol duty, food prices and National Insurance – will send the UK economy into a deep freeze, what can marketers do, other than reach for the Prozac?
By looking at the effect of the 2.5 per cent tax increase on every household in England, Scotland and Wales, it has been possible to calculate that overall household expenditure will rocket by £6.2bn next year as a result of the rise. In turn, this will have the knock-on effect of slashing £2.3bn from consumers’ collective discretionary income; the amount they have left after paying for legal outgoings such as mortgage or rent, car repayments and school fees.
Marketers should take note of this multidimensional insight in the Affordability VAT Report for several reasons.
Firstly, any campaigns they have been carefully planning for the beginning of this year may have to be hastily rethought. There’d be little point sending direct mail advertising big-ticket items to people who won’t be able to afford them.
Secondly, the analysis shows that some of the groups who will be hit harder by the rise may be pushed into debt. That could mean them building up credit and not being able to afford to pay it off as quickly as they normally might, or defaulting on payments to mobile phone companies, utilities providers, etc. The latter is particularly interesting because even though domestic fuel is still only subject to 5 per cent VAT, the overall financial effect on the household could make people struggle to pay any regular bill.
So although there has been plenty of discussion about how retailers will set prices to deal with the rise and how much it will cost the nation as a whole, these new statistics show at a household level that marketers are going to have to implement more sophisticated targeting methods if they want to avoid wasting budget on campaigns and continue to drive outstanding returns.
Hard as it may be for consumers to cut back on luxuries they might once have considered essentials, they could actually give marketing campaigns a frostier reception this year by saving their own pennies, putting the pressure back on brands to persuade them to part with their hard-earned cash.
Ian McCawley is a marketing consultant at Acxiom UK & Europe