This Part 1 of our 2-Part Blog Series on Rising Supplier Costs will cover the importance of ‘reflecting’, not ‘absorbing’ price increases, as well as an introduction to setting standards for price increases in your business.
Running a profitable spa business takes experience and know-how
It’s very important that you watch that thin line between profit and loss like a hawk. As business costs rise, so must your prices.
Let’s say your revenue has been increasing year over year, but you are still left with a perpetual and mounting loss in profits. As you think back over the last 12 months, you are reminded of the numerous increases in your operational costs that you chose to ‘absorb’ rather than ‘reflect’ back into the business, for example: your renewed lease payment increased significantly; utilities went up; you signed an expensive maintenance and housekeeping contract; your new webmaster is the twice the price of your old one; and payroll taxes continued to rise.
Not only are your fixed operational expenses demanding more and more from your gross profit line; your COGS are eroding that thin line too, as your multiple product suppliers continue to hand down price increases.
Let’s zero in on a very common oversight seen in spas, which is the choice to absorb supplier price increases, rather than reflect them back into the business.
Supplier Price Increases: Are you absorbing or reflecting?
When you started your business, if the mark up on retail skin care products was 100% / 50% gross profit, you need to strive to maintain that, forever. If product costs on your facial treatments hovered somewhere between 5 – 15%, you need to strive to maintain that forever, as well.
When your costs of doing business increase, as in the case of supplier price increases; you must proactively offset that increase to avoid ongoing gross profit erosion. That means implementing price increases in both your retail products and your service prices. If you fail to do this ongoing, you are effectively placing your spa on the extinction list.
And if you are absorbing rather than reflecting your supplier price increases, are you also still continuing to make the same business decisions you always have? For example:
- Are you still paying 10% retail commission to your staff on those eroded profit margins?
- Did you still opt to offer that 15% spring discount on skin care products, on top of those eroded profit margins?
- Maybe you even raised employee wages on those now under-priced treatments suffering from the same eroded profit margins?
It’s critical that you maximize profits within your business, not just sales. If you know your product and service margins intimately, you will recognize when you need to make changes. Remember that price is only one of the reasons your customers buy from you; but if you believe it is the only reason, they will believe that too.
Regular price increases are a necessity
Your costs of doing business will definitely rise year over year, and these increases must be reflected in your prices so that you can enjoy running a robust business enterprise. Otherwise, what is the point?
Set your standards for increasing prices and make it a way of business
As you contemplate increases, always calculate what the impact might be on the business and decide on an approach that ensures its success. Do you need to implement new value incentives (real and/or perceived) in tandem with product and service price increases to turn a possible negative impact into a positive one?
A sudden “across the board” increase may not always be the best choice, as it can cause too much of a shock wave; but each business owner must decide what the best method is for their particular business situation.
If any of these points resonate with you, be sure to tune in for Part 2 on Rising Supplier Costs, where we’ll discuss the importance of cost containment in these three vital areas:
- Retail Costs and Commissions Paid
- Skin Care Product Discounts
- Service Pricing and Staff Wages
We will also discuss how to increase your prices by using a spiraling method that will minimize the ‘shock wave’ and maximize your chances at profitability.
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