Pricing is Magic

In a discussion with a salon owner the other day, the subject of pricing came up.  This particular salon owner hadn’t had a price increase for over five years. So, we asked her if her rent or utilities had gone up in that same time frame.  Sure enough, the owner was paying a substantial amount more in costs than she had five years earlier. So why hadn’t she passed some of those cost increases along to her clients?

The problem with holding your prices for an extended period of time is that you reach a tipping point.  This is where your prices and revenues remain the same, but your expenses continue to rise.  At first, your revenues may be greater. But as your expenses rise, you reach a plateau. Eventually, your costs outweigh your revenues and you are now “tipping downwards,” on a slippery slope to mounting debts and business catastrophe.  

Pricing is Magic

Finding the right price is the first step, but it’s only the first step.  Inflation and your costs continue to move upwards either with you or without you.  Every increase in inflation or costs means your prices and profits are going down.  Pricing can never be static!

Too many salon owners set their prices out of fear.  Then, they become boxed into “average” by their own pricing. They perceive their products and services as being ordinary.  Here is what we see when salon owners are pricing their services: They find out what their peers are charging for their services and then build their price structure on what they see is going on in their community. This is unfortunately an industry norm that hurts everyone. For small business owners, there are typically three different, better ways to determine the prices you should set for your marketplace.

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Cost Based Pricing

The number one pricing error is pricing too low.  Every time we drive by a salon with a sandwich board outside their door offering $10 or $15 haircuts, we see a salon dying by suicide.  Offering the lowest price in town doesn’t guarantee that you’ll be flooded with clients – in fact, the reverse is true.  Price is perceived value.  Your customers will choose a higher priced salon over that $15 haircut because they perceive that the higher-priced salon provides better quality services.

For example, consider the Republic of Tea store.  They call themselves the “Leading purveyor of premium teas.”  You can buy 100 bags of tea at any grocery store for around $5.00. By contrast, a single cup of tea at The Republic of Tea costs customers that same $5.00.  Their customers are called Citizens, and their staff members are called Ministers and Ambassadors.  What they’re selling isn’t just the tea. They’ve moved beyond selling just tea and are additionally selling a lifestyle and a concept. It’s the presentation — and the story — that they’re selling. 

The reality is that for pricing in a salon, all of the above practices need to be taken into consideration.  Your pricing should be a reflection of cost, value, and market strategies.

Let’s take a look at your costs.  Assume you have a break-even point of $20,000 per month.  Determine how many hours you are open during the week.  For example, if you are open 50 hours per week, that’s 215 hours per month which means that you must bring in a minimum of $93.00 per hour to keep your doors open.  Then you can determine how much each stylist should be earning per hour to make that budget.  (Please remember, this is just break-even.  If you wish to actually earn a profit, you will need to build this into your hourly rate.)  The scary thing is, if we asked the majority of salon owners what they needed to bring in per hour to break-even, they would not be able to tell us!

Most salons have a tier-priced program in effect.  This means that junior stylists charge less than intermediate or senior stylists.  This is a perfect example of value based pricing.  This structure allows us to cater to many different socio-economic demographics.

Finally, determine your competition.  What is happening in your community with salon pricing?  This doesn’t mean that you charge what your competitors are charging, but it will help you to determine where you want to be in the market place.  For example, if you’re a high-end salon, you will want to price your services above your neighbors.

What we really want to see in a pricing strategy is “pricing as positioning”.  Use your pricing as a message to your potential clientele about the quality and value of your products and services.  Many people believe that you get what you pay for.  Look at how successful Starbucks became in charging more for their coffee.  Would you only choose the cheapest car available, or the cheapest house to live in?  Would you choose the cheapest clothes or only buy generic foods?  Pricing is perceived value!  Make your price tell your clients who you are!