Increasing the cost of services in a beauty salon

Irina Shapravskaya-Bench , specialist in the field of marketing and advertising, sales management, motivation, head of the Cosmo-Trade training center (Ukraine)

If your product does not have obvious advantages for the customer compared to other similar products, you will compete only on price. In other words, if you are no different from your competitor, then your main argument for the client is the lower cost of the service. But your neighboring competitor makes the price a little cheaper than yours, and your “better price” argument is defeated. You have no choice but to reduce the price again... Well, congratulations, you got involved in a “price war”, as a result of which, if you don’t stop, the price will drop below the profitability level and you will work in the red

A FEW WORDS ABOUT PROFITABILITY

Let's weigh the pros and cons of raising prices at a beauty salon.

The main argument against raising prices is the fear of losing customers: craftsmen are afraid that an increased price for a service will be more difficult to sell and this will lead to a drop in demand.

Now let's turn to the objective function of the business. Businesses are usually started with the aim of making a profit. What does the salon’s income depend on? Your income is the cost of services multiplied by the number of purchases. And profit is your income minus the variable and fixed costs of doing business. So, your goal is to sell at the highest possible price in your segment with the highest possible load and - a very important nuance - with the lowest possible level of fixed and variable costs. Otherwise, there will be a classic situation: we worked and worked, there is a full record, but there is no money. At the end of the month, the staff were paid, consumables were purchased, but the owner had no profit left.

Fixed costs are those costs that you will still have no matter how many customers you serve. This includes rent, utility bills, staff rates, taxes, business needs, possibly a fixed amount for advertising, etc.

Variable costs are the costs you incur when providing a service. As a rule, these are consumables for performing the service, a percentage for overexpenditure, a master’s bonus, advertising, etc.

Typically, inflation is 10–20% throughout the year. In 2014–2015, inflation was, according to conservative estimates, about 200%.

Pricing formula

Let's take a look at the service's pricing formula.

The cost of the service consists of variables (consumables, master's bonus, advertising, overruns) and fixed costs (rent, utilities, taxes, business needs). Since almost all consumables are imported, it means that due to inflation, their cost has increased by 2-3 times. The cost of rent and utility bills has also increased. In this situation, your profitability has most likely decreased by 10-15%. And considering that the rate of profitability for beauty salons is 30%, but most operate with a profitability of 20%, it is easy to calculate that with the above-described increase in costs and without increasing prices, the profitability of the average salon is now 10–15%. And those salons whose business model before the crisis did not allow them to generate a profit of more than 15% are now operating at zero.

The goal of a business is to generate profit. You will only be looking for options on what else to save on. And you will save on the quality of consumables and wages of craftsmen. Accordingly, the effectiveness of the procedures may decrease, as well as the level of qualifications of the masters.

The worst thing is that you will not be able to allocate money for the development of the salon, for the introduction of new services, for staff training and the purchase of new equipment, which means you will be unable to compete! You will feel this already too late, when at one moment you realize that your services “smell of mothballs” and have become obsolete, it’s time to change the equipment (it is morally outdated), the craftsmen have sunk to the level of mediocrity and clients no longer want to come to you. But there is no money in the budget for an update.

Without increasing prices, the cost of services will be higher than the acceptable level of profitability and your salon will become unprofitable or very close to it. For fear of losing customers, you do not raise prices for 2-3 years. But this is a sure way to ruin the salon. And this is the reality of today's beauty industry market.

A few days ago, during a module on corporate finance, I got into a conversation with one of the participants. This year he and his partner are planning to open a luxury spa salon in Kyiv. Before inflation, at the current level of cost of services, the payback period for the project was 3 years. Six months ago, the payback period due to exchange rate differences was 5 years. At the moment, this period has increased to 10 years. And the equipment has already been delivered and is standing. In such conditions, it is not profitable for new players to open businesses. At first glance, this seems to be good for already existing salons: there is less competition. But competition always develops the market; its new players, as a rule, bring some kind of innovation, which moves the entire industry forward.

Obviously, after weighing all the pros and cons, we come to the conclusion that prices need to be raised. But in order to avoid a sharp outflow of clients, this must be done competently.

PRICE OR VALUE?

Here it is very appropriate to mention such a concept as the value of a product, and how it differs from price. Elena Lamanova, one of the experts in working with staff and clients in the salon business, spoke very well on this topic.

Price is the monetary equivalent of the value that is important to the client and which he expects to receive as a result of the service.

Value is the tangible and intangible benefit that the client receives in the process and result of the service.

For example, when purchasing a “classic manicure” service in your salon, the client receives positive emotions from being in a luxurious atmosphere, from communicating with the master, physical rest and relaxation, time spent on herself and her beloved. The result is beautiful, well-groomed hands, self-satisfaction, confidence in your attractiveness to your husband, and the status of a well-groomed (fashionable) woman among friends and work colleagues. And all this for just 150 hryvnia, for example. Do you notice how insignificant, more than adequate and quite acceptable the price of the service seems after listing the values received by the client?

And the price will seem completely different – inflated and unjustified – if we have not received the values that are important to us. For example, during the same manicure, the master chatted incessantly about herself, her problems with her husband and her health, and instead of positive emotions and relaxation, the client received a headache, fatigue and time spent on other people’s problems that were unnecessary to her. Will the price for this service be perceived as fair? No! What about an increase in this price? Especially! Most likely, the client will look for a salon where she can get a service of the same quality and for the same price. And if she there, in another salon, receives for the same price those valuables that you did not give her, then your salon has lost the client forever!

Your job is to determine what your customers' values are. And if you can give your clients the values for which they come to you and for which they are willing to pay, then the increase in the cost of your services will be perceived adequately.

For example, one of the values may be speed of service. Or the so-called client status. You just need to reduce the duration of the service to a minimum and introduce service standards that emphasize the exceptional importance of your visitors. A business woman client will be willing to pay for such services.

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There is nothing more constant in our time than change. An increase in prices for services by beauty industry enterprises is inevitable. But it is important to note that prices must be raised gradually, even 3-4 times a year, but not higher than 15-20% at a time, be sure to notify all clients two weeks in advance and justify the reasons for the increase in cost.

First published: Nouvel Aesthetic 3 (91)/2015