Revenue vs. Margin – Salon Management in a Recession
Posted on June 3, 2009 with 1 Comment
This a bit rambling, but stay with me for the punch line.
My wife, kids and I have been going to the same “favorite” sushi place almost once a week for the past 9 years. The staff knows us and we know them by name. They know what we like to drink, eat, and where at the bar we like to sit (the kids and I love to watch the food being prepared). We’ve seen the owners’ kids get married and have a couple of kids themselves. Even their older boy knows us when we come in and he and my 5-year-old go to the back and play with the toys.
Given the economy and recession, its no surprise that the crowds have dwindled. In fact, we are only going every 2-3 weeks. But here is the kicker. In the past several months (more like a year now), we have noticed the prices going up and up. In fact, I would argue prices have climbed probably 30-40% based on the bill we receive at the end of the night.
The Case Against Margin
I asked the owner why the steep price increases. She commented, rather sheepishly, that they needed to maintain their margins. Well interestingly, part of the reason we go there less often is because its getting too expensive. As a side note, we have several other friends who go there as well and we all agree the cost has gone through the roof. Like everyone else, we’re watching what we’re spending having seen many of our investments drop.
The point I’m making is that though business has dropped-off because of economic woes, they have further cut-off their toes by driving away business they are getting – or could be getting.
Now there is a reasonableness to the level of margins any business can sustain and still pay the bills, but as the saying goes, “I’d rather have 25% of something, than 100% of nothing”!
In the recession in 91′-92′, my wife and I owned a firm with 5 locations and about $5 million in revenue. We had a tough time when our customers’ purchase volume decreased by ~35%. With about 45 employees she and I both were more in management roles (vs. sales that we had been doing since we started). The Gulf War had started and business dropped almost overnight.
We assembled our staff and had a series of meetings to outline a game plan for surviving. The result was a three-point approach involving putting revenue, gross margin and expenses “under the microscope” to see what we could come up with. After several days we had put together a rather long list under each primary category. Interestingly, the gross margin list was the smallest, and it was agreed, the most fragile to our success (and survival). Why?
Raising Prices Can Be Bad for Profit
Fortunately, we had some very good customers – many personal friends. I called many of them and asked if they could continue doing business with us if we raised our prices a bit. The response was friendly, but frank. They too were having a rough time and if we raised our prices (even a bit), their management would ask they find another vendor (see, they were looking to cut costs as well).
The verdict was in. There were some services that were inelastic (less prone to pricing change), so we rose them a bit; but we slowly started lowering prices with new orders. Many of our customers noticed this and we were able to avoid widespread attrition of our client base. In fact, we ended up picking up a bit of market share as a result.
The Case for Traffic, New Customers & Sales
If you’re tired of reading, sorry. That was the prelude. The real story here is the other ideas that came from the meeting. Specifically, we needed to do everything we could to increase revenue and sales.
The list was long. Some ideas were great, some good, some goofy. But we wrote everything down, prioritized, and went to work – but the holy grail was to get more, new customers…period!
We put additional sales incentives in place for account execs (sales folks), and my wife and I returned to a daily sales routine. In the roughly 18 months of the recession, we increased our customer base by ~40% – but, our revenue remained flat. The good news is, if we hadn’t increased the traffic and number of customers, I’m sure we would have seen a steep decline in sales with layoffs and closings as unavoidable results. Another note, when the recovery began in 92″, our sales sky-rocketed. We had ~60% more customers than 2 years prior and everyone began ordering again.
It was a tough time, but we got through it. but the lesson learned was folks are very sensitive to price during a down economy, yet they still need services, though at a greatly reduced level. As per-customer-volume drops, it must be made-up with increased transactions albeit at possibly a lower margin.
Consideration for Salons
I want to finish with a real-world salon story. My wife has been going to the same stylist for 9 years. he and his partner split-off several years ago from a previous salon. The last time she went there, they were “slow” – as is the common phrase I hear with several of the salons we work with.
Well if you have folks on staff or if you are a partner or owner-operator, the time you spend at the shop is a “sunk cost”. Meaning that money and cost is incurred whether 1 customer or 30 come in that day – similar to rent or utilities. With that said, if your cost structure is somewhat fixed, then driving traffic is the difference between making money or not.
Let me give an example. Let’s assume you have three salaried staff plus yourself and two partners. Again, assuming you’re paying yourself a salary (plus tips and commission), you have overhead and daily costs you must cover. If your customer traffic has dropped-off because of the expense of coloring, consider contacting all your customers (email, phone, letter, etc.) and charging just for the cost of the materials and chemicals (and maybe a few extra bucks) – maybe once per month or something else a bit more creative.
Wow…are you kidding? Well consider this. If you have a staff of 6 and you’re working at 50% capacity, wouldn’t you rather have the traffic with hopes of new customers, repeat customers, sale of a few accessories or products, or some pretty healthy tips? I would – and it works.
This is one possible example, but there are more…many more ways to drive traffic, keep everyone busy and gain market share. When the economy returns to “normal”, your customers will love you, tell their friends, and business should be booming. Right now the keyword is market share and volume. Margin will take care of itself. That’s what we found! Good luck.
By the way, if you want to leave a comment or have a specific issue or want some advice, leave a comment, and I promise I will get back with you soon.