Last weekend my wife was on a Zoom call with some friends, during which I overheard them all say they couldn’t wait for their hair salons to reopen. During cocktails that night, my daughter echoed the sentiment, so I said, “Your salons should raise their prices.” My wife and daughter disagreed so I explained my rationale. Initially, demand will exceed supply for salons, and many customers will gladly pay more money to see their stylists ASAP. It will be an opportunity for salons to partially recover from the Covid-19 shutdown. Other businesses may not be as lucky, but all reopening businesses should rethink their pricing strategies.
You might be thinking, “Wait a minute. In your last blog, you said price sensitivity would be increasing. Did you change your mind?” I have not changed my mind. People are poorer as a result of the economic shutdown, and they will be more price-sensitive than they were last year. However, price-sensitivity is relative, not absolute. We should have strategies that enable us to differentiate between the most and least price-sensitive customers. Let’s think about some examples:
Personal care providers
Demand for personal care services like hair salons, nail salons, personal trainers, etc. is pent up and building. Many customers, like my wife’s friends, will want to make appointments as quickly as possible, and will happily pay extra to do so. The providers should use dynamic pricing concepts like that used at theme parks and entertainment venues, and they should raise prices for the high-demand days. If demand is slow during certain parts of the day, offer discounts for only those slow periods. This lets them allocate the best days and times to the least price-sensitive customers. If/when demand overall starts to recede, the providers can reduce prices for the high-demand periods.
Before you object to this from your own provider, please recognize their cost to serve you has gone up. With social distancing requirements, most will be required to serve fewer customers per day, which means their cost per customer will have increased. While we customers don’t generally care about our providers’ cost, they probably can’t make enough money to stay in business if they maintain their old prices while their costs increase significantly.
Bars and restaurants
It remains to be seen whether demand for bars and restaurants will be strong. I suspect we will have a mix. Many people will be tired of having cooked every night for the past six weeks and will welcome a night out. Others will be concerned there is too much risk in even going to such a place and will stay away. Social distancing requirements mean the purveyors can serve fewer people than in the past. My guess is that means demand will be greater than supply for a while.
Of course, those who want to go out will have a range of price sensitivity. To deal with this, I recommend the businesses offer some low-price specials and raise prices on everything else. A limited range of low-price drink specials with house brands can appeal to the more price-sensitive customers, but many others will be happy to have a night out and won’t mind paying a little extra for drinks. Similarly, discounted fixed-price dinners available before 6 pm or after 9 pm could attract price-sensitive customers during slow periods. For prime time, I would raise prices on entrees.
Another option for restaurants is to raise prices on wine. Offer house wines by the glass at low prices and increase the others. As an incentive to the most price-sensitive customers, they could offer a free appetizer with every bottle of wine. Before doing this, make sure you are not just cannibalizing appetizer sales that would have occurred anyway.
When the Coronavirus has faded away and restaurants and bars can reduce space between patrons, supply will expand. If demand has increased proportionately, the price increases may stick. It is also possible the prices will have to be adjusted downward again.
Retailers
It will be difficult for most retailers to raise prices above pre-shutdown levels. Those in large and small shopping centers who were forced to close, saw many of their customers increase their online shopping. This trend has been growing over time but was accelerated by the shutdown. These retailers need to find a way to get customers back in the store. That means providing and emphasizing services that are not available online, especially the local personal touch. That said, retailers who have been closed may have inventory that must be moved so they can pay suppliers, or because it will soon be out of date. They could run targeted sales with a few deep discounts to attract customers to come in and browse.
Limit the big discounts to items that will attract attention and get customers in the stores. Maintain prices on accessories and ancillary items that customers will buy once they are there. Also, maintain prices on newly purchased and seasonal items. These things are unlikely to be discounted online, so there is no reason to discount them if customers are already in the store.
Healthcare providers
Many healthcare prices are negotiated annually with insurers and can’t be changed mid-year. However, some health services like dentist visits, orthodontic treatments, chiropractic treatments, eye exams, and plastic surgery are not covered by insurance. Once again, there is likely to be pent-up demand for some of these services, and the doctors may have to spread out the patients due to social distancing. Like hair salons, these docs should consider targeting their least price-sensitive customers for higher prices.
They could start with a booking fee, e.g., $25 – $50 to book an appointment. If you keep the appointment, the fee is waived. If you cancel, you are charged the fee. They could also charge a fee for premium appointments during the busiest two hours of each day.
Another option is a surcharge. During multiple periods in the past 25 years, fuel prices increased dramatically so companies added fuel surcharges to their shipping and transportation charges. (Those were actually just price increases.) Well, the costs for many of these doctors have increased substantially due to increased personal protective gear, enhanced cleaning methods, enhanced screening of customers before entering, and less efficient use of space. The doctors could increase prices (where they are not already negotiated with insurers) with a Covid-19 surcharge. This could be effective with those customers most anxious to be treated again.
Notwithstanding everything I just wrote, closing our economy has caused hardship for many, and some people won’t be able to afford to pay more for a chiropractor or dentist. The doctors want and need to treat those customers too. They could offer lower prices for the typically slow periods of the day. They could also offer slow-period prices for customers who will come in on short notice when another patient cancels.
I have only covered a few industries, and I recognize that each one is unique. I still believe that as we reopen the economy, customers will be more price-sensitive than they were last year. However, it is important to recognize that the transition back to “normal” times may be lengthy. Businesses that were shuttered will not recover if they operate at a lower capacity and offer lower prices. It will be more profitable and sustaining to focus on pricing strategies first on the least price-sensitive customers. Then build a plan to address the more-sensitive customers with available capacity. Monitor your results and be prepared to adjust.
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