Navigating pricing strategies amid rising wage costs: Insights from NEXT

Tax measures taking effect in April mean that businesses are facing rising wage costs in 2025.

As a result, many businesses are looking at whether price increases could help them manage the financial impact without losing customers.

High Street retailer Next recently announced a price increase of 1% on some clothing items to help offset an anticipated £73 million rise in staff wages and taxes. Their strategy and decisions provide some useful lessons.

Why wages costs will increase

Wages are increasing due to changes announced in the 2024 Autumn Budget, that start in April 2025, including:

• An increase in employers’ National Insurance contributions from 13.8% to 15%.
• A rise in the National Living Wage from £11.44 to £12.21 per hour.

Next’s 1% price increase, despite being below the rate of inflation, reflects a broader trend among businesses. The British Chambers of Commerce business group recently said that over half of companies plan to raise prices in the coming months to cope with higher costs.

A pricing strategy based on a shift in behaviour

For businesses like Next, keeping the price increase modest allows them to avoid alienating their price-sensitive customers. Their decision to target specific product lines – rather than implementing a blanket rise – may help to retain customer loyalty while addressing the immediate financial strain.

Next acknowledged that the price increase is “unwelcome”, however they feel their analysis supports their strategy. They have observed a trend in shoppers choosing mid to higher priced items instead of buying cheaper items. They are not necessarily spending more overall but are buying fewer, slightly more expensive items. This is a trend Next expects to continue in the short term.

This shift in behaviour has influenced Next’s decision on pricing strategy. By targeting price increases on product lines where customers may be less sensitive to paying more, they can maintain value for their customers while managing their margins.

Lessons for businesses

Next’s approach offers valuable lessons for businesses developing pricing strategies in response to rising wage costs.

• Incremental adjustments: Small, targeted price increases can help mitigate your cost pressures without overwhelming customers.
• Focus on value perception: Shopper trends suggest that emphasising mid-to-higher priced items could help maintain your profitability.
• Monitor your customer’s behaviour: Next have undertaken a strategy based on what they’ve observed in their customer’s behaviour. Likewise, if you can understand any shifts in the spending patterns of your customers, this may help you to see where price increases are less likely to alienate them.

There is no doubt that rising wages costs will present challenges to businesses over the coming months. However, if Next have got their sums right, they are expecting to be able to increase their profits by 3.6%. This demonstrates that a carefully planned pricing strategy may also help you to adapt to the rising costs while maintaining competitiveness in these challenging times.

If you need help with an analysis of how changing your pricing strategy could help your business, please contact us.We would be happy to help you.

See: https://www.bbc.co.uk/news/articles/cgkxlnlne0po

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