Improving Profitability through Pricing Optimization
A hair salon chain discovers the beauty of effective pricing
With business down and consumer buying habits changing, an owner and franchiser of hair care salons looked at pricing optimization as a way to improve profitability. A test of modified pricing using three of the biggest-selling hair care brands in the salons yielded an increase in gross margin equal to $2 million a year, with the potential to reach $5 million a year.
Reduced customer traffic and significant changes in consumer purchasing behavior was hurting top-line revenue throughout the company’s salon divisions. The company believed that more scientific and targeted pricing could help improve profitability, but it needed evidence, as well as a plan that spelled out which products to target and at what price points.
Deloitte practitioners assisted the company in their efforts to analyze the pricing of three brands across nine product categories (e.g. shampoo, conditioner, finishing spray, etc.), including studying competitor market positions. Deloitte helped them develop demand elasticity models to identify prices that would enhance gross margins. These price changes were tested at a select group of salons, and the benefits of the optimized prices were measured against a control group.
The test salons produced a 1.6 percent gross margin improvement, equal to a $2 million annual increase, from just three hair care brands. By extending the price optimization to the remaining hair care brands, the company could achieve an estimated $5 million improvement in gross margin.