For those who didn’t spot it, last week the excellent Broadband TV News site carried a report about a ruling from the European Court of Justice which may have implications for the pricing of PVRs – the hard disk recorders that many people are using for satellite and terrestrial services like Freeview, Freesat and Sky.
Until now, these have been classified as recording apparatus, and so attract a rate of duty of 13.9% when they’re imported into the EU, which of course makes them a little more expensive in the shops.
The ECJ has ruled that they should be reclassified as set top boxes with a communications function, which exempts them from duties (and that, ‘communications function’ element is why, for example, the iCan EasyHD Freeview HD set top box has a modem port on the back; it’s cheap to add, and reduces the import costs).
How prices work
Of course, the fact that the duty may not have to be paid won’t necessarily reduce prices – it could just be absorbed into the profit margin by distributors or retailers, and eventually eaten away by inflation over time, so don’t get too hopeful about a price drop yet.
It’s also worth looking at how things like this affect the pricing. Let’s suppose that a product costs a nice neat £100 to manufacture and ship to the UK.
Import duties of 13.9% take the cost at the point of import to £113.90. If we assume that the distributor of the product takes just 5% margin – out of which they’ll be promoting the product to retailers, perhaps advertising it, and handling repairs, warranty and so forth – the price that they can offer to retailers is £119.60.
According to people I’ve spoken with, some of the large retailers may demand a margin of 30%; sometimes they’ll work backwards from a retail price-point that they have in mind and say “We want to sell this at £179.95” so you have to sell it to us at a price that gives us 30% margin. But for this simple comparison, let’s assume that they just add 30% margin on, taking the final price to £155.47, but that’s before VAT is added, so the final price to the customer is £186.57, for a product that cost £100 at the point of import.
How much difference does the duty change make? If we assume everything else is the same, then the price after VAT is £163.80, or over £20 on £100 of imported product, so not to be sniffed at. And, of course, most PVRs are starting at around the £200 mark, or even higher, so potentially, there could be even larger savings.
Imbalance of power
Incidentally, going back to the point I made about large retailers having a price point in mind, if they did impose that price, then what happens is that the distributor – especially for smaller brands, who won’t have the same power as the large retailers, who can simply decide to drop the product – will be forced to cut their margin. With the figures I’ve given for the example with duty and a retail price of £179.95, that means they’d have to offer large retailers the product for £115.35, equivalent to a margin of 1%.
And after this duty change – which of course most punters won’t hear about – they could continue to sell at that hypothetical price, and if they paid the distributor his full 5% margin, the retailer would have a margin of 42.8%. Or, they could drop the price to £159.95, maintain their margin and the squeeze on the importer, and boast about having cut prices by £20.
This, of course, happens all over the retail world, not just in electronics – just ask a farmer!