If you have been giving something away and you stop, do you really make more money? What about raising prices only for your best customers?
Those are the questions posed by the place where I’ve been getting my hair cut.
Background: There are at least four places to get my hair cut down at the bottom of our hill, a one-mile walk away. I chose this particular “salon” (what happened to “barbershop”?) when they opened some years ago because they had an introductory low price and a buy-eight-get-the-ninth-free policy.
Now cutting my hair is in effect a commodity. As you may note from the pictures that sometimes appear atop the page, my hair thickly curled, unstyled, extremely easy to cut. There’s also less of it than there used to be, but that doesn’t seem to affect the price. In other words, I can go to any semi-competent hair cutter and get a similar satisfactory result. I’ve noted that most of the folks who patronize these places also have commodity-type straightforward, simple haircuts. You don’t get to choose your “stylist,” many of whom are relatively transient at these places anyway.
So I differentiate on price, convenience, and inertia. I believe most other patrons of this chain do the same, based on my observations.
The nine-for-eight deal represents inertia. Convenience is the same for all the shops in the area, and I suspect price will be similar, too, for my simple cut. And there’s a 2x multiple, since my son also has easy-to-cut, unstyled hair, and we often patronize this shop together.
I went in to get my hair cut yesterday and found a small sign noting that at the end of the month they were eliminating the nine-for-eight deal “because of the recession.”
In effect, they’ve implemented a 12.5% price increase.
Specifically, they’ve increased prices 12.5% only for their regular patrons. If you didn’t use the place often enough to take advantage of the nine-for-eight deal, your price remained the same.
Now what kind of a business raises its prices only for its best customers?
Enter the law of unintended consequences. I now have reason to consider their competitors that I didn’t have before.
Granted, they were making less margin on good customers than on casual customers. So if some of their good customers leave, their margin per haircut will indeed go up. However, their overhead remains the same, and their total revenue will decline with even a smallish loss of clientele. It’s not like they’re so busy that people see the lines and walk out; they have an enormous amount of excess capacity at most times on most days. In addition, some customers buy the very-high-margin hair-care products on display, meaning that even these “free” ninth haircuts can generate profit.
They likely look at the economics of their situation thus: If they lose one-eighth of their regular clientele, their average margin per haircut will improve while their revenue (and profit) remains the same.
It remains to be seen what percentage of their good customers will explore other options. Inertia is a powerful force even without incentives, and perhaps they will indeed lose less than 12.5% of the business from their erstwhile regulars.
They will, however, lose mine.