Chris Parker – SAHJ
I recall the time shortly before asking my wife to marry me, I started shopping around for a wedding ring. I knew nothing about diamonds, I thought 1 carat was small – after all its only 1, how much smaller can you get? Believing that 1 carat was the lowest number you could get I thought I would probably need something bigger – maybe 2 or 3 carats (for those of you who have bought diamond rings bigger than 1 carat please stop reading here).
I walked into a jeweller and asked for some pricing for a 1 carat diamond ring – just to get a benchmark or starting point. Well, I had to quickly recalibrate as I learned my starting point was in the region of R60000. The thought that went through my mind was that either I am not going to be able to get married or I would need to be able to motivate why diamonds were not actually a girl’s best friend.
So the hunting began, along with the research about how diamonds are valued by the 4C’s (Cut, Colour, Clarity and Carat), so you might get a larger diamond but the clarity or colour may be of lesser quality and so the value would be less. I had to find the right balance of all of the above so that my fiancé to be would not start crying for all the wrong reasons when I finally went down on one knee to ask her to marry me.
The more I shopped, the smaller the diamond became and the lesser the quality. Until I came across a couple who owned a jeweller business, which was not in a shopping mall but rather in the business district in Cape Town. They found me a diamond that I was happy with and we finalised our design for the band and they provided me with my diamond certificate and I was good to go.
Their pricing was much better than those on the “high streets” or should I say shopping malls but a nagging feeling in the back of my mind eventually compelled me to ask them how their prices could be so competitive. Straight away they advised me that they did not have to pay the high rentals of their competitors, which allowed them to compete much more on price. Their labour and material cost for making the ring was also very good and I found out from my wife that immediately after our engagement she had the ring valued at a different jeweller. I never told her how much I paid for the ring but the value she was given by the jeweller she took it to was about 3 times the price I had paid for it. By the way, she loved the ring … and still does. Mission accomplished.
Reflection
So, looking at the above story it seems that the major factor that influenced the price of the ring for this jeweller was the cost of their overheads. This being attributed primarily to rent and perhaps the labour cost of their jeweller that made the band.
As a client I was concerned about price, however, I still wanted a good quality product as I didn’t not want to get a substandard product for such an important life occasion.
I was happy to “shop around” until I found the right deal, which was a combination of price and quality.
Some of the things I had to forego included the convenience of an easy to locate jeweller in a shopping mall and the prestige of having a “brand name” associated with my purchase. I know some folk who would not be happy putting in the hard yards to try and find the right jeweller for the same reasons because they may not be as price sensitive. On the other hand I know some that would not choose a diamond at all, or they would be happy for an alternative or much smaller option because they are very price sensitive.
So, when it comes to pricing products and services in the salon what can we learn from this. I believe that pricing in the salon will be a combination of cost-plus pricing and competitor based pricing within the context of your brand positioning.
Cost Plus Pricing
Cost plus pricing is when you determine your selling price based on the costs linked to the products and services you sell. This method, although not the only factor, is probably the biggest consideration for at least setting your base price for services.
For retail products you should have roughly the same selling price as other salons for the same items because the supplier generally has a recommended selling price. However, your costs may vary based on your particular deal with the supplier in question. If you have bigger spending power or you are a good negotiator you may be able to obtain the stock at better prices and therefore, even though you have the same selling price you have a greater profit margin.
For services you would need to account for the professional stock you use to provide the service, the commission you have to pay to a stylist for performing the service and perhaps other peripheral costs if you shampoo the clients hair (cost and labour) involved, which you may recover by means of some sort of “docket fee”. You may even look at including things like overheads (rent etc) although this can be a little trickier on an item for item basis. Once you have your associated costs you would then determine how much you would need to charge in order to make a profit. Once you have arrived at a price you will need to determine if it is still worthwhile to offer the service.
Competitor Based Pricing
Once you worked out your costs for supplying services then you will need to consider your competitors pricing. If your competitors are able to provide the same service that you are at a better price, then you will need to consider either dropping your prices or alternatively you will need to differentiate yourself in some way so that your clients will be happy to pay more for your service – add value in some way.
The reason that your competitor may be able to supply it at a lower price may be due to a number of factors. For example, they may have been able to negotiate a better rental than you or the products they use may be cheaper or they are able to obtain them at better prices or maybe they don’t add as much value in terms of the experience (refreshments, satellite tv, head massage etc).
If your competitor is selling the same service at a much lower price then perhaps they themselves are selling the service as a loss leader or they are positioning themselves as a “value for money” brand rather than a premium brand. They would then most likely be appealing to different clientele than what you would be and perhaps you should not worry about those salons, but rather compare yourself with other premium or value for money brands depending on how you are positioned in the market.
Conclusion
The goal of your business is always to make a profit. In overly simplified terms you want to sell as many products and services as you can at the highest price and lowest cost possible, ie you want to maximise all the good stuff (volumes and margins). However, you may at times be under pressure from the market, your clients and rising costs that will always seem to try and drive your prices down. By doing the exercise of working out all associated costs, being clear on your positioning in the market place and being even clearer on your real competitors are you will be in a better position to compete. All of the above must translate into perceived value in the eyes of your clients, it therefore goes without saying that the more you understand what your clients value the better positioned you will be to provide that value.