Yaneek Page | What a small business should consider before hiking prices
QUESTION: Yaneek, I enjoy your articles and learn so much from you. I have a small salon and my prices stay the same since I opened in 2016, but the cost of living is going up every day now. All hair products, the light bill, water rate, transport costs and so forth are increasing. I usually make a young lady work with me on weekends when it is busy in the shop and I had to top up her pay because of the same thing. The worse part, I have not confirmed it yet, but we have been hearing that the landlord is planning to raise the rent on the plaza. It is stressing me out. My boyfriend said I should increase my prices; and I want to but I'm worried about losing. I have never done that and wondering now how my customers will take it. What is your advice?
BUSINESSWISE: I appreciate your kind words and faithful readership.
I agree with your approach of treating price increases with caution, particularly since you're a relatively new salon with no historical data to help guide this decision-making process.
I can't say how your customers will respond to a price increase or whether a price increase is your best option to manage increased costs of inputs and overheads at this time. That is a decision you will need to come to after considering several factors, doing some research, and hopefully even gauging your customer's feedback.
Here are some of the most important factors for you to consider before effecting a price increase.
1. What is the price elasticity of demand for my goods and service?
Price elasticity of demand measures the responsiveness of demand after a price change and helps a business estimate the likely impact on sales that increases or decreases in price will have. Generally, goods and services that consumers can't do without and have limited substitute for tend to be more price inelastic than those which they can do without or substitute. It is therefore easier for providers of such goods and services to effect price increases without any considerable fall-off in demand. For example, you could reasonably expect that motor insurance, bread, electricity, water, petrol and cooking gas would be relatively price inelastic when compared with hairdressing, barbering or fashion apparel and accessories.
The question becomes, how much of an increase, if any, will they absorb? Will they accept an increase across the board in all services? When would be the best time? Is a price increase the only way to go? Can you find ways to become more efficient - like find new suppliers and conserve electricity and water - were your customers to reject a price increase?
2. What options are available to my customers?
Following on the question of price elasticity is the issue of options available to your customers. This is where you need to 'play chess' and think far ahead in terms of the next move your customers would make if you were to increase prices.
Remember that for most goods and services, whenever there is a price increase the customer will pause and reflect on the utility of same, especially if they have little discretionary income, aren't earning more, and are facing increases in other competing expenses.
Would they explore doing some or all haircare at home? Stretching salon visits? Changing to low maintenance hairstyles? Finding a cheaper salon? Do nothing at all? It's important to anticipate the likely scenarios, especially among your highest value customers that is, those who are your most profitable and consistent.
3. How are my competitors priced?
I expect that you did some analysis of your competitors' prices when setting your own in 2016. You would have checked the service offerings and pricing structure for similar salons in your area and in the market generally.
Now is a great time to go back to the marketplace and do fresh research on competing salons and their pricing to see what changes, if any, have taken place in the last two years. This will be a very insightful guide moving forward.
4. How strong is my value proposition, and how can I strengthen it further?
Perhaps the main consideration is the perceived value you deliver to your customer. How do they really feel about your business and service? What about your service is unique or difficult to replicate? For example, do they find your location safe, accessible and ideal? Is it that you're the best braid, weave or natural hair specialist? Are your opening hours most convenient? Are your facilities comfortable? Do you go the extra mile in terms of service quality and delivery?
This requires more than honest introspection. I suggest you ask your customers what they value, create a list and rank in order or what's most important to the largest number of people - and do more of that.
5. When and how should I respond if revenues fall?
Finally, please plan for the worst-case scenario and how you will respond if customers stop coming. Will you be forced to roll back prices? Do more promotions? Find new customers? Change locations?
There will almost certainly be some reaction, and your main job right now is to project the financial implications of each and plan accordingly.
We would like to hope that customers would all understand the need for an increase and be able to afford it, but the reality may not be so. Good luck.