Are You Running Your New Business with an Old Model?
Our economy has changed drastically in the past 30 years. Manufacturing, once the leader, was offshored and replaced with services. Entrepreneurs took up this challenge and established a strong service sector, but many are stuck in old business models and are struggling to generate revenues. If your business isn’t near full capacity, you might be one of these.
The biggest difference between product and service-based businesses is the cost of doing business and how pricing is based on it.
A product has raw materials as a significant portion of the total cost of business. Due to this, a unit can never be sold for less than what it took to make, or the company suffers losses. Success for this type of business is based on finding the equilibrium price and selling as many units as possible. Production is scalable, so the more units sold, the cheaper the cost of production, the greater the profits.
A service based business does not have the cost of raw materials to produce. Sure, a massage spa has massage oils and other services may also use materials, but the cost is negligible compared to the retail overhead.
In addition, services are usually not scalable. There is a set number of hours in a day which limits the number of services that can be offered. This shifts the calculus towards time occupancy more than it does unit pricing. It isn’t the cost of offering the service that is significant, rather, it is the cost of services going unused that is the biggest problem.
The low cost of services rendered plus the high cost of retail overhead makes the success of a service-based business dependant on achieving high capacity bookings, through smart price discounting.
The airline travel industry understands this concept very well. An airplane has limited seating and it is possible that every seat will be purchased at a different price. Prices are low early, as few plan far in advance. As the travel date nears, prices increase until they peak a short time before the travel date. Then, as the normal window of bookings closes, the price drops sharply to compel people to book on short notice to fill the empty spots.
The airline travel industry recognizes that any seat not taken costs them money and the more booked they are, the more they can charge. They use the psychology of pricing to their advantage and small businesses can do the same.
Many service business owners base their pricing on total overhead divided by the number of spaces available. They will keep the same pricing at all times even when space goes unused. It is not likely that a small business will have the sophistication or resources to create an automated pricing system like an airline. So what are they to do?
Offer Memberships and Packages
One effective solution is to offer memberships and packages. Both encourage higher capacity bookings due to services being purchased in advance. However, both also require the client to prepay and we know most won’t. Furthermore, clients that do buy memberships, often have busy lives and when they don’t have time to come in, but get charged anyways, they get upset and cancel. Clients that cancel memberships are actually severing a relationship and often don’t come back even though they like your services.
For the clients who don’t want to pay ahead of time, reward and loyalty retention programs are effective at bringing them back. Virtually all existing programs work by offering clients points to redeem for rewards to encourage repeat visits. Some of the drawbacks to these programs are that people are skeptical of point trade-in values and rewards take too long to earn to be effective at creating loyalty.
RewardMore solved these issues by rewarding based on timely visits, instead of points. A client is rewarded with a discount on every visit in return for visiting sooner. This increases bookings significantly.
Service based businesses have a different pricing calculus than the traditional product based business. Since any space that goes unused costs the business money, it is important to insure higher capacity bookings. Setting up a price discounting system is a great way to get more bookings.
If you are struggling with revenues and find your service-based business has too many holes in the scheduler, be certain to support any new client acquisition efforts with client retention programs to keep your calendar full. Remember, it is the unused services that cost the business everything, so don’t be afraid to discount.