The use of "Loss Leaders" and Special Pricing

By Skip Williams

Determining the price we charge for our Services and Products is both an "Art" and a "Science". The "science" part is the calculation of "what each service or product costs us" which we will talk about more next month. The "art" part is figuring out how much our customers, (when we talk about sales and marketing, "clients" becomes "customers) are willing to pay for our services and products. It is this art of predicting what our customers pricing expectations are, that we will talk about today.

Every (potential) customer has a pricing expectation or pricing threshold, that when exceeded will force them to move their business to a Spa/Salon that fits within that expectation. That price threshold moves up (or down) depending on things like service levels, ambiance, convenience, industry status and product/service offering. When setting the prices in your Spa/Salon be sure to take full advantage of these assets, for maximum return of your investment. But what about discounts and deals that we offer to our customers?

Loss Leader (definition) - A popular article that is sold at a very low price or at a loss for the purpose of attracting customers and generating additional sales.

In consumers terms a "Sale" would fall into this category. You see this all the time at the grocery store; they sell you a case of Pepsi at or below their cost in the hope that you will buy enough other items at full mark-up to make their profit.

Sometimes in our industry we offer services that do NOT have full mark-up with the same hope. As I consult and calculate the cost and profit of services in many Spas/Salons I often point out a treatment or two that is not very profitable or worse yet taking a loss. Without knocking the profession, only the price structure, the one treatment that I often find lacking in the profit department is manicures.

When I ask why the less profitable treatment is offered at the less profitable price the answer often comes back "if I charged any more I would lose that business". Logically, I then ask why they would care if they lost this less profitable business the answer inevitably comes back "If the customer can not get that service done here, I risk losing all their business".

They are playing the "Loss Leader" game. Sometimes Spa/Salon Owners are taking deeper losses than they realize with these treatments and have not thought through (or calculated) the consequences. Having the basic cost of treatment information is essential before we do ANY discounting.

Assuming we have done our homework and know our costs, we may decide that we are ready to tease a few customers away from our competition with some type of discount.

Are Loss Leaders a viable marketing tool in this industry?

Cherry Picking (definition) – Is when consumers jump from store to store, buying only the items (services) that are on deal (special).

Cherry Picking is widely seen as limiting the effect of Loss Leader pricing. In our industry, even if we are successful in selling this "cherry picking" customer other services, which is doubtful, the likelihood of them being a "loyal customer" is even more doubtful.

There are two types of customers, one is "price sensitive" and the other is "price insensitive". Note: The sensitivity of a customer on average MAY vary with affluence, but both types of customers cross the economic lines.

When we look at the price sensitive customer we find they are far more susceptible to "cherry picking", which makes it difficult to make any long term profits. These one-time sales will increase the overall revenue of the facility but do little to contribute to "profitability". Of course we all wish we had the second type (price insensitive), but with these customers, loyalty levels are high, and it is difficult to lure them away from their present Spa/Salon and to your Spa/Salon with pricing alone.

So what, if anything, can we do with discount pricing can we do to attract new customers?

First I would make sure ALL services and products yield a profit, some may make more, some may make less but be sure none are taking a loss. We do not have all the impulse advantages that grocery stores have. If you have services that do not yield a profit, and your competition is charging roughly the same price, let him/her take the loss for a while. Raise your prices or discontinue the service.

Second I would not discount the same services that Spa/Salon "X" down the street has on special; this only creates competition for the same exact customers. It is better to offer a tease on a completely different service, maybe your signature service, so they can really see the advantage of coming to your Spa/Salon while attracting a different customer altogether.

Third I would urge you to be very careful when setting up any discount that could be used by an employee to embezzle any cash from the business, discounts can make this very easy to do, please see my article: Curbing Fraud in your Spa/Salon, Dermascope Feb, 2000.

Lastly, and most importantly, only do discounts and promotions that encourage long term loyalty, and higher average sales tickets. Instead of giving a special price for a one-time service, give the special price for:

• A series of treatments
• A package of treatments
• Wedding parties
• Groups
• Couples
• Frequent customers
• Customer referral programs
• Spending over a certain amount
• New treatments
• Signature treatments
• Slow days

Best yet, if we give today’s customer a discount that applies to their NEXT visit, we have helped to insured two visits and started to build customer loyalty.

These types of discounts will go a long way to enhancing your profitability and long term growth. Also remember "Up-selling" begins at the front desk, when the appointment is made, if we offer a "Special" to every customer that calls for an appointment, chances are we will sell it to at least 10% of the callers. If we wait for the Providers to cross-sell or up-sell when our appointment book is now more full, we may not be able to accommodate the customer and the additional sale.

In conclusion, it is easy to bring in more revenue, for example if we sold dollar bills for 85 cents we would have more business than we can handle, it is more difficult to make a profit. Through the use of both the "art" and "science" of determining the proper price to charge, we can make sure that when we sell a dollars worth of service for 85 cents that there is still room for the PROFIT.

The only way to make those determinations is to figure out what the customer is willing to pay and how much you will need to charge, more on the latter next time.

Let me know what you think, feel free to write me at skip@vom.com

 

Bibliography

University of Chicago

"Loss Leaders, Store Traffic and Cherry Picking"

By Xavier Etienne Uriel Marie Dreze

August 1995