This quote comes to us from Ms. Allie Webb, the Founder and CEO of Drybar a blow dry only salon. A blow dry salon is not like any hair salon. It offers, just as name indicates, blow dry and styling. Drybar is a pioneer in this niche and does $40 million in revenue a year. In an interview with The Wall Street Journal she was asked why she raised her prices recently. And she offered this answer,
Ms. Webb: We always were $40 in New York. We tried to keep prices $35 [elsewhere] as long as we could, but you know things go up: rent, health insurance, incentives. There’s just a lot of different things that got more expensive. We had to raise the prices to keep the business model as it was.
I am willing to bet that someone as innovative and entrepreneurial like Ms. Webb, one who invented the category getting customers to pay for something they do for free, knows exactly why she raised her prices and is simply saying the best answer one could give to explain price increases. You have seen this done perfectly by Starbucks and repeatedly too.
We are increasing prices because …. ( anything but we found out customers value and charge that price).
Ms. Webb does just that, citing cost reasons, rent and salaries. I don’t have to repeat that a customer could care less about a marketer’s cost. Ms. Webb would be the first to admit that a customer getting their hair blown out does not think about offsetting Drybar’s rent. However using cost reasons to correct your past pricing sins is a perfect tool. It does allay customer concerns and push backs.
However what Ms. Webb added in the end is concerning.
We had to raise prices to keep the business model as it was
Again I believe she does not believe that statement. And no business should. You never raise prices to preserve your business model. Because your business model is nothing more than – how do you get your fair share of value you created for the customer. Pricing is the simplest way to capture the value created. If you are increasing prices without increasing value you are simply getting more than fair share of what you created. Such a business model is unstable and will be disrupted.
No one can preserve their model, let alone preserve it by raising prices. Someone else will always find a way to deliver customers more value, do it cheaper than you could and share a greater portion of that value with customers that you do. Your option is to do that before others do it to you.
3 thoughts on “We raised prices to preserve our business model”
I would bet that unlike, let’s say a typical grocery product which can be highly commoditized, your business is in one of the goods and services where price signals quality. Low price can be a problem not just from a revenue or margin perspective, but from what it signals to consumers about the quality of the service. In nearly every product category where I have worked, there are consumers who just want the basics and are very price sensitive. However, there are also a group of consumers who want quality and are quite willing to pay for it. From the perspective of price elasticities, the former (price sensitive) people follow the typical negative log-linear curve – the higher the price the less business you get. However, for consumers looking for quality, price response follows an inverted U curve – when price is too low, they are uninterested because they don’t believe that you can deliver the quality they are seeking. When price is too high they believe that you can deliver the quality, but the value is not there and they can get the same from someone else at a reasonable (but, not cheap) price. The sweet spot is the top of the inverted U. The trick is to figure out what segment you are trying to attract, to identify the sweet spot through some strategic testing, and to price accordingly. There was a great article published a couple of years ago by Chezy Ofir, an Israeli academic that found the two price response curves I mentiond. If you are interested, I can find the link and send it to you. He didn’t research service-based businesses, but I would bet that the same principles hold.
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