Service pricing doesn’t have to be a guessing game, if you examine all of the playing pieces.
Do you know how much a gallon of gas should cost, or a gallon of milk? How about a 50-minute massage? Spas and spa services are becoming mainstream, which is good for the industry, but it also risks commoditization of our treatments. And, spa owners don’t ease the matter, borrowing generously from each other when it comes to prices and treatment descriptions. Our spas offer a wide array of facilities, amenities and therapists’ skill-sets; yet, within a particular market, spa service prices tend to be remarkably similar.
The truth is that even post-recession, this is still a scary time to do business. No spa owner wants to risk being the most expensive, or giving clients any reason not to return. We recognize that certain services need to be more competitively priced—massage and nail treatments, for example, both of which are increasing their presence in neighborhood locations with value-based price points. Facials, on the other hand, aren’t getting any less expensive. But to the average consumer, our “herd pricing” mentality may blur the differences between one spa and another.
What’s the answer? There’s no one easy response, but let’s take a look at some of the variables that might help you arrive at the appropriate price points for your particular spa and services.
PRICE-SETTING LITMUS TEST
There are a variety of questions to ask yourself when setting pricing at your spa, including:
• What is your overhead expense? Are you located in a high-visibility, high-rent area, or in more moderate surroundings?
• What is your labor cost as a percentage of revenue? An expensive labor or commission plan forces your consumers to pay higher prices.
• What does your facility offer? Do you provide locker areas, or do your guests change in the treatment rooms? Do you have lounges, tranquility areas, wet amenities? Premium environments enable you to charge premium prices.
• What are your product line costs per treatment?
• What is your desired profit target? • What about regional pricing? What your clients are used to paying is a useful barometer for gauging a starting point on your pricing menu.
Beyond the above factors, a major component of your pricing structure entails understanding your value proposition to your clientele. Do they see you as a premium choice in the market, or more mid-level? The facts of your rent, physical plant and labor costs are unavoidable, but the wild card is the intangible value of your customer service and branding initiatives, the way that clients feel when they receive treatments at your spa, and the sense of community that stays with them once they leave. These components are impossible to comparison-shop.
Spa Gregorie’s, with three locations in Southern California, has adopted a formula of sorts for arriving at service prices. “Although it’s getting tougher to decipher when and how to increase your product and service prices,” notes president Scott Duncan, “it’s also important not to undervalue your brand, all while competing with the ever-increasing array of discount and membership stores. At Spa Gregorie’s we look at what local destination/resort spas are charging, as well as what the membership-type massage shops charge. We also consider the consumer’s perspective of value in terms of quality: the training of the therapist, the length of service time (whether massages are a full hour or 50 minutes, for example), and the amenities available to the guests. It’s important to understand who you are as a company and how your client base perceives your brand.”
Colleen Rose, owner of Yoga360 Spa in Frankfort, Illinois, stresses the importance of considering the hard costs of performing a service when setting prices. “We figured out how much our costs were for the treatment room, including the rent, and knew we wanted to charge at least $1.25 a minute for the service time. We also looked at the skill level required; for example, our ayurvedic services are priced higher because they require much more training.” Of course, the COGS (Cost of Goods Sold) should be considered in your pricing strategy, but spas lack a clear formula such as the one often used in the restaurant industry, where entrées are typically priced at food costs times five. If you’re using an expensive product line, or the treatment requires additional training or resources to perform, these impacts on your profit margin have to be factored in.
With her spa recently voted the No. 1 spa in Chicago by readers of USA Today, Allyu Spa owner Tamara Wills acknowledges that she originally set her prices based on those of her competition. “We opened in October 2007, when the economic forecast was (correctly) predicting doom; discretionary income was dwindling and competition was high,” she relates. “Our space had been chosen for its convenient location to primary neighborhoods in Chicago and its reasonable rent, but the reason for that rent was the developing state of the neighborhood. I knew we would have to ‘lure’ people here to some extent, and I wanted to be known as an approachable, urban neighborhood place, rather than the annual luxury visit.”
IS THE TIME RIGHT?
A key challenge is deciding how and when to raise prices. For instance, in the first year or two following the worst of the recession, when clients began returning, spa owners were particularly reluctant to change anything. But the economy isn’t the only yardstick.
“When we raise prices it’s usually due to a combination of factors,” says Misty Hay, owner of Escape Day Spa in Rock Springs, Wyoming. “For example, sometimes we just decide that a certain service is worth more, so we add a couple of dollars to the price.”
Allyu Spa raised its prices for the first and only time about two years ago. “It was because we needed to hire a few more employees to handle our traffic, and I wanted to add some benefits and incentives for the staff, such as CEU compensation, paid vacations, retail and service credit bonuses,” explains Wills. Keep in mind that, depending on your compensation plan, raising prices does not ensure that any of the gains will fall to your bottom line. If you’re in the old-fashioned three-way relationship of a commission-only plan, you may have to institute back-bar charges or raise prices substantially to realize any benefit. (See “Paid in Full” in DAYSPA’s December 2013 issue for more on compensation strategies.)
In addition to good timing, there’s a little psychology involved in a successful price-raising strategy. Spa Gregorie’s Duncan advises staggering increases, rather than trying to introduce a menu-wide hike. “Begin with items that may not be as easy to price shop—exclusive and specialty services such as scrubs, facials and wraps are good targets,” he suggests. “When you decide to increase prices for more mainstream services, like a one-hour massage, it might be a good idea to implement a temporary discount program to mitigate client displeasure, and allow more resistant clients to ease into your new pricing.”
Spa Gregorie’s implemented a price increase last November to capture the benefit through the holiday season, and were surprised to have received very little negative feedback. Clients who did voice concerns were accommodated with the old price for a couple of months. Wills recalls her experience: “No one blinked when we raised our prices last time. It was hardly mentioned except for the few dedicated clients who offered kudos and said we should have done it sooner. The apprehension leading up to it was a total waste of energy.”
When updating prices on your menu, take advantage of that time to introduce any other menu adjustments you’ve been considering, such as service length, or protocols. Wills did just that. “Instead of increasing the price of nail services, we added a ‘seasonal luxury’ option with a significantly higher price point,” she says. “We also changed our menu and communication strategy: express services were separated from the main menu and we began to default to what was previously our mid-level service as our standard service.”
In the end, price setting should reflect the value of your spa and what it offers your guests. “If you set your prices based on the fact that you provide high quality services, products and therapists, chances are your clients will be return clients—even if they have to pay a few extra dollars than they do down the street—because what you provide will be worth paying that little extra for,” says Escape Day Spa’s Hay. “If spas and salons as a whole continue to offer quality across the board, we’ll eventually be able to educate clients as to why it’s important to choose a reputable place to have services performed. And those businesses who don’t feel quality is important will eventually fall through the cracks.”
In short: be aware of your breakeven point, create a compelling vision and branding for your spa, ensure the best possible service and experience for guests, and the price will always be right.
–by Lisa Starr