LESSONS FROM A $90 BOTTLE OF WINE

Larry, I saw you in Lake Geneva last week. You were talking about increasing prices and you mentioned something about a $90 bottle of wine. Could you pass this information on to me again. Thanks - Brenda

Brenda, we published this article on our blog back in February. Here it is again. I hope this helps. Larry

At a recent program I gave in Wichita Kansas a couple of the salon owners challenged me when I was talking about increasing prices. They said that I did not understand that they lived in a small town and that if they increased their prices they would lose many of their clients. They said that there were several salons in their small towns that their clients would go to. I asked them what they charged and they told me $25 for a cut and style. When asked when they last increased their prices they said that it was three years ago and that nobody in town was increasing prices.

That is not the first time I have heard that excuse for not increasing prices. My comment to them is that if they were providing great customer service they would not lose clients by doing normal increases. I also told them that when my wife Maggie was cutting hair 11 years ago, she was charging $65 when everyone around her was charging $20 to $40. I also told them that every time she increased her prices she got busier. After I said this, several people sitting next to them agreed that higher prices many times can bring more business.

Now we have a study about the price of wine that proves I was correct.

Researchers at Stanford Graduate School of Business have finally proven what most of us suspected long ago. Expensive wine tastes better!

Researchers used MRIs to study Caltech grad students' brains as they swallowed five red wines priced at $5, $10, $35, $45, and $90 per bottle. They found that as the price of the wine rose, so did the activity in the subjects' medial orbitofrontal cortexes. (Apparently, that's the part of the brain that experiences pleasure.)

The "catch," of course, is that the subjects didn't drink five different wines -- they drank three. The $45 wine was really the $5 wine -- and the $10 wine was really the $90 wine.

So why did the subjects like the $5 wine more when they thought it was $45? And why did the $90 wine taste like swill when they thought it cost $10? Researchers concluded that the perceived price of the wine actually affected real quality -- at least, "real" as interpreted by the medial orbito . . . er, brain.

So what's the lesson? (If you answered "you can fool some of the people some of the time," well, you're right -- but that's not what I'm looking for.)The real lesson is that the price you charge for your service affects the value your clients see in it. If you're offering a $90 bottle of wine -- and you want your clients to value it at $90 -- don't pour it into a cardboard box with a $10 price tag!

Do you give your clients more value than your competitors down the street?

Are you charging what you're worth or are you pouring $90 wine into a $10 cardboard box?

Clients will pay more for your service if they see you give them more. The Stanford study proves they'll even feel better paying more! Competing on price is a losing proposition unless you offer the lowest price of all. It's better to compete on value. Give your clients a reason to do business with you, not your competition. Give them a reason to pay more. And they will. Really, they will. The key is showing confidence in your value -- and when you do that, you sell yourself, not your price. You should find it much easier selling yourself than your fee.

Larry Kopsa CPA

THIS IS THE MOST IMPORTANT TIME OF THE YEAR IF YOU WANT TO BE A SUCCESSFUL BUSINESS

I know that most salon owners and their stylists don't want to hear this, but NOW IS THE TIME TO INCREASE YOUR PRICES. Wouldn't you agree with me that the price of everything is going up? Why shouldn't it be any different with your business? It just makes good sense to increase prices on an annual basis.

My rule of thumb for price increases is to increase annually and to do it right now before we get into the busy holiday season. Right now... the first part of November. Get those price increases in and take advantage of the increase now, when you are busy. The second time I recommend raising prices is when a stylist increases by a level or is 60% booked.

I have never ever heard of a salon that did a 3% to 10% increase in prices and in the end felt that it was a mistake. Never! If you have a different conclusion, I would like to hear it. Sure, you may lose a few clients but think about it. If you increased prices by 5% and lost 5% of your clients, you would still be making the same money but working less. What is wrong with that?

I know that when we owned our salon and increased prices, we would have a few clients go elsewhere but for some reason we always got busier. Maybe people thought that since we were at a higher price we were better. I don't know, but that is my experience.

Most salons are working on a small profit margin to start with. It's time for you to get paid what you are worth.

So... Just Do It!!!

FOLLOW UP QUESTION ON PRICE INCREASES

Thanks for the information on the price increases. You convinced me. I have one more question I forgot to ask. I was wondering - do you think that I should let the clients know before I do the increase, or just start charging more? Thanks

Your question reminds me of gas prices. Do you know why everybody complains about the price of gas? I think it's because you can't drive down the street without seeing the price of gas. I have often wondered if people would still complain if the prices were not posted in those huge numbers.

But back to your question. There are two schools of thought regarding letting clients know about price increases. One school says to post them in advance so people won't be surprised when they come in. The other school says to just raise prices and let it be.

I am an advocate of the second school. I am not aware of too many items that I purchase where I am informed in advance that the price is going up. An exception to that might be if a company is trying to create sales by telling you that the price is going up soon, but that is normally on big ticket items that you don't purchase on an ongoing basis.

I have found that a majority of people don't even realize the price has gone up unless the increase is substantial. Sure there are some people that are going to complain, but then again, they were going to complain even if you gave them notice.

As you can see, the choice is yours. Whatever you do, make sure that you make a good business decision and set up a system for periodic price increases.

It is a pleasure to serve you.

Larry Kopsa CPA

QUESTION REGARDING PRICE INCREASES

Larry, thanks for your blog. I appreciate all the information that you provide. I remember a while back attending one of your programs and you talked about when to increase prices. I have not increased prices for some time and am wondering if it is time for an increase. Do you think that I should increase prices and if so, when? Thanks

In a word, NOW! My wife was a stylist and we owned a salon a few years back. I know how difficult it was to convince my wife and the staff that we needed to increase prices. There was always some reason not to do an increase. At the same time, it is important to be profitable.

Recently I was working with a new client and I asked how she determined her prices. She said that she called around to other salons to see what they were charging. Given that and according to some industry numbers, 70% of the salons in the USA are not profitable. She was most likely setting a price point for failure. She then went on to tell me that most of the salons that she talked to were not making money.

Here is my advice. First, we always increase prices on or around November 1st. I want the price increases to come into effect before the busy holiday season. The price increase offsets the fact that all costs are going up. We do a calculation for our clients and, just to keep up with rising costs, they must increase prices by anywhere from 2% to 4%. If you don't do this you will most certainly lose money.

Secondly, as you or your staff advance, it is time to raise prices. This might be due to education or some other factor. One factor should be how booked the person is. Once someone becomes around 60% booked, it is time for a price increase.

I have not yet talked to a salon that increased prices and regretted it. The only regret I have ever heard was, "I should have listened to you earlier."

Larry Kopsa CPA