Weathering the Storm

Q: With the economic forecast looking gloomier than ever, I'm concerned about the state of my business. I own a profitable six-treatment-room day spa. My fear is that rising costs are making my clients more budget conscious and less likely to spend on non-necessary luxuries like spa treatments. How can I help my spa weather this economic downturn?

A: You mentioned that your spa is currently profitable. If you are diligent, focused, and flexible, this shouldn't change. However, the harsh reality is that you will lose some clients due to the local and national economy. It is important to remember that in robust economic conditions, many businesses that might not flourish do so because demand often outpaces supply, allowing weaker competitors to survive. Conversely, in an economic downturn, a Darwinian approach often applies. Now is the time to sharpen your pencil and brainstorm ways in which your spa can survive while courting fewer customers. It is your responsibility to enhance the perceived value of your services to increase the value that your core customers will continue to require.

Illustration by William M. Park
Illustration by William M. Park

Being creative and flexible is critical, as is tailoring your services to changing economic conditions. There are a number of ways to approach this situation, but first let's back up and get perspective. Remember, the economy is cyclical. What goes up will also come down, or as they say on Wall Street, "experience a correction." What you and everyone else are facing is the normal economic expansion and contraction. There just happen to be a few anomalies thrown in for good measure, such as volatility in the energy market and the recent presidential election.

It is important to maintain focus in areas you can control. Do not confuse activity with productivity. You could lobby for energy reform, however, it will probably not enhance the profitability of your spa in the short term. For instance, an increase in the price of energy may require you to deploy short-term measures, such as an energy surcharge for certain spa treatments. In the long term, this trend may result in retrofitting your heating system to give you a more energy efficient way of heating not only the water in your spa but also the temperature of your treatment rooms. Matching your resources and timeline with good business practices and readily available technology is crucial at this time.

Secondly, it is important to appreciate that in an economic slump, there will always be people who prosper financially because they either have goods or services that are necessities or their businesses are countercyclical to economic trends. For example, the motion picture industry often experiences strong ticket sales in a troubled economy, as movie price points are relatively low. Seeing a dozen movies is still cheaper than a trip to Rio, and the escapism is a welcome relief to the status quo. Economists refer to this as the substitution effect. Your spa can provide price-sensitive escapism, too. For those customers who are flourishing in a struggling economy, reward them for the use of their capital. Offering packages of prepaid treatments has multiple benefits for your spa and your customers. If you were to sell a package of 10 facials at 10 percent off the individual price, you create a situation where you obtain short-term cash resources as a result of your customers' pre-payment. Additionally, they commit to have their next 10 facials at your spa. But the benefits don't end there. Providing a regimen gives your staff the ability to create maximum efficacy for your clients via consistently delivered services.

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Then there is the concept of "value added." Today's spa consumers are savvy. In robust economies, they appear to have little price sensitivity. Savvy consumers are looking at the value per dollar spent. In essence, they are looking at what they get for what they spend. In hard economic times, the equation is the same. However, as noted earlier, you may lose some clients who find your construct of perceived value doesn't meet their new hypersensitive price expectations. Treat these customers with dignity and respect, and when their economic situation improves, they may be back.

Conversely, the top end of your market may have less appreciation for some of the prevailing economic sensitivities, and discounting services could hurt your business in the long run. Instead, augment your traditional menu with a value-added service menu. Offer them during your spa's slowest periods or couple them with other services. Discounting services sends a clear signal to your market that price erosion is possible. For example, if you take a $150 service and sell it for $110, regaining that $40 margin may be difficult, and your market may resist spending $150 for a treatment that they perceive to be actually deliverable at $110. The take-home message is: Don't discount. Create value instead.

You may also want to consider tracking your clients' preferences, modifying your offerings as a result, and creating incentives to promote sales. As the economy shifts, your clients' short-term historic spending patterns will give you a clue as to those services that they value or can justify in their budgets. You might even want to consider creating a survey to ask your clients what they like. For instance, if massage is still strong in an economic downturn, you may elect to offer mini-massages at 25 minutes as opposed to the traditional 50 minutes. And as noted with pre-selling strategies, a package of treatments may help address client needs and your cash-flow issues. Just remember that the pre-selling of services is a liability for you. Technically, you cannot consider this prepayment as revenue until you deliver the services that your customer has purchased.

Payroll expenses should also be reviewed to determine what makes the most economic sense. A temporary decrease in revenue will require you to be even more focused on how you schedule your staff. You may elect to either trim hours equally from all of your staff (assuming they are all stellar employees) or use this opportunity to "clean house." This may not result in actually firing employees but rather rewarding your best staff members with as many hours as you can afford while sending a signal to your marginal employees that excellent performance is rewarded. You may also want to take a look at your retail and back bar supplies and manage your inventory in these areas so that you have the optimal amount of your capital tied up in inventory and supplies. If you can, defer capital costs.

In short, appreciate that a shift in the prevailing economic winds will require you to take a hard look at your business. If it has been successful and profitable in the past, it should be so in the future, provided you continue to add value, bundle services, and remain constant to your vision.

Peter C. Anderson is a principal at Anderson & Associates, a spa consulting firm based in Santa Monica, CA. He is also on the board of advisors for the Spa and Hospitality Management Program at the University of California-Irvine. You can email him at [email protected].