Pricing Best Practices for Your Salon, Spa, or Wellness Business
You can probably relate to the following scenario: you’ve been wandering a shopping area, and you encounter a window display with some products you’re drawn to—perhaps jewelry, handbags, or even clothing. You really like the look of the merchandise, but before you enter the store, you’re curious about whether you can afford it. However, no price tags can be seen from outside the store. Do you venture in and ask? Or do you keep walking?
This example models the function that menu pricing holds for spas, salons, and wellness businesses. Consumers have a lot of experience with estimating the pricing for hard goods—they’re something we can see, hold, and value. Many of our clients are well-acquainted with the typical price for a dozen eggs, or a gallon of milk—or currently a topic of discussion—a gallon of gasoline. Experiences, like those provided in our industry, are a little harder to quantify. The only measuring tool, really, is what they have paid in the past, or the knowledge of what local competitors are charging for similar services.
While we’re experiencing a high demand for our products and services, the retail price is still a factor in decision-making. Consumers will look at our website and marketing materials to determine if the environment and experience promised align with what they desire, but the amount being charged will still be an important consideration, especially now, amidst economic and political upheavals.
The point is the price you put on your menu isn’t just a price. It’s a marketing tool and should be approached as such. Service pricing and product costs are revenue drivers that are completely in the control of the business, in our case. Despite current supply chain challenges, we don’t need to adjust the price of our services on a weekly basis. We’re all familiar with the completely unpredictable models used by the airlines, and the constantly shifting versions utilized in hospitality and rental cars, and I’m not suggesting we go down that route. However, it may be helpful to consider a variety of factors, beyond what our competitors are charging, when it comes to pricing our services.
Different pricing options for salons, spas, and wellness businesses
At the 2022 ISPA Conference, Adam Hayashi, vice president of revenue analytics for Accor, presented some of the following typical models of pricing options:
- Cost-plus pricing: The retailer purchases a product from a supplier, and the MSRP is set at a particular formula. In this case, you would know your fixed costs, and an example would be the retail products you offer to your clients. Generally, spas use a keystone markup; we purchase the product for $10 and sell it to the customer for $20. Another example would be in the restaurant industry, where they use a formula based on food costs to determine the price of an entrée.
- Value-based pricing: More for a developed brand, this involves a thorough understanding of the product and brand proposition, and how sought after that product is. If you want to stay at the Plaza Hotel in New York City, you’re going to pay the price; the prestige and location outweigh the small guest room.
- Anchor pricing: This is a strategy that uses a high initial price to frame consumer perception. We’ve all seen the commercial; buy our Ginsu knife, regularly priced at $29.99, on sale for $19.99! And get two if you buy now!
- Decoy pricing: Decoy pricing models are utilized when there are three or more options to purchase a particular item, and the decoy is used to drive sales to the more profitable version. Popcorn sales at a movie theater is a perfect example— a small bag costs $3, a medium bag is $6, and a large bag is $7. The medium bag is the decoy that leads the consumer to buy the large size, for only $1 more than the medium. But without the medium option, consumers would opt for the small.
- Variable pricing: This is what we see in the aforementioned hospitality and travel industry examples; prices that fluctuate based on supply and demand. Often uses a higher published or “rack” rate just as a basis to set discounts from.
- Competitive pricing: This model only considers market dynamics; pricing is based on what competitors are charging for a similar product or experience. This is what we see most often in salons and spas; pricing is based on what consumers are accustomed to paying in our locale rather than a scientific approach.
The last example, competitive pricing, has been used almost exclusively for years by salons and spas and has worked to the extent that consumers had an idea of what they could be expected to pay for a treatment in a certain town or region. But the recent pandemic has induced both business owners and consumers to reevaluate many things, in addition to creating shortages of both supplies and personnel. Some salons and spas have raised prices two or three times since the beginning of the pandemic, and they will not be going back down.
How to approach pricing for your salon, spa, or wellness business
One of the valuable factors to consider when pricing services is the fact that whatever strategy utilized is completely within the control of the business owner. If we were to use the cost-plus strategy, we would determine the costs of delivering a particular service, including labor and treatment supplies, factor in a contribution to overhead and our desired profit, and develop a formula. While we’re no longer investing in PPE, most of the other costs of delivering services have gone up, often due to supply and ingredient shortages. Although overall labor costs have not necessarily increased, we definitely have fewer workers—which means we have less supply of our treatments and services inventory to sell. Given that desire for personal care and wellness services has soared, this creates an advantage for the business, as smaller supply and greater demand equal higher prices.
Of course, without applying any math, you may be raising prices and increasing revenue without increasing profits. Being able to determine your cost of delivering treatments as accurately as possible is a key piece of the equation. While we want to maximize revenues, as business operators we have to look ahead as well. You want to be considered fair, and not put off loyal clients with constant and unnecessary price hikes. If you’re charging the highest prices in your target area, make sure you’re providing the best experience in terms of quality of service, environment, and amenities. The goal is to always provide a range of options to capture the largest possible share of the target market, without attracting clients who are not your core demographic. Clients who shop on price will always go to the lowest possible option, and you may be unable to provide the level of service and amenities that are consistent with your brand. For example, if the standard facial in your city is $92, you might offer a range from $85 to $125, but you’re not going to offer a $65 or a $200 option.
Setting the correct prices at your salon, spa, or wellness business
When you look at pricing as a marketing tool, you can see that it is something to be examined on a regular basis—every few months is ideal. Setting your prices correctly is key to avoiding negatively impacting sales, or on the other hand, leaving money on the table with consumers who would be willing to pay more. If you’re considering or actively expanding your menu beyond the typical and expected haircuts and massages, pay careful attention to markets beyond your own. Wellness services such as cryotherapy, saunas, and meditation pods are not in heavy rotation—so consumers don’t have many comparison tools for these wellness services.
A few overall points to consider when developing your pricing strategy:
- Price adjustments should be made continually, which teaches clients to expect more price elasticity
- Raising all of your pricing at once is an extra difficulty for your clients who utilize multiple modalities
- When you raise prices, select a few services at a time rather than across the board increases
- Give clients 4-6 weeks’ notice whenever you make pricing changes
- Consider your compensation plan and any effect price hikes will have on your profit margin; if you’re in a commissioned environment where you’re sharing a portion of every price hike, you’ll have to be very strategic
- Remember that your core audience patronizes your business because of their connection to your culture, branding, and the service that you provide—price is just one part of the equation
- If your pricing is set correctly, you should be able to avoid promotions, discounts, and other margin-eroding actions