To price a spa menu, the best place to start is with your costs. What make up these costs and what other factors should be taken into consideration? By Trent Munday
Over the years, many people have told me that pricing a spa menu is not easy. Pricing something such as a service, they say, is more complicated than pricing a product. I disagree. Pricing is a simple enough task, for either a service or product. The best place to start is with your costs. As a starting point, let us take a closer look at the basic cost components that go into spa treatment.
Your biggest cost will almost always be the payroll cost of the therapist performing the treatment. You know your therapist’s hourly wage, so simply multiply this by the number of hours they will spend performing the treatment. For example, if the hourly wage rate is $20 and they are doing a 90-minute Thai Massage, the payroll cost allocation for this treatment is $30 – or 1.5 times the hourly rate.
Depending on your spa’s operating procedures and staffing levels, your therapist may also be responsible for setting up the room before the treatment and cleaning up afterwards, preparing a welcome drink, performing a pre-treatment consultation and offering post-treatment retail recommendations. All of these tasks require more time. So just make sure that you include in the calculation the total time your therapist is occupied pre, post and during the treatment. And if it is not your therapist performing these tasks, then someone else is. Maybe a Spa Attendant. If so, add their costs in as well.
Employee on-costs are another element of payroll that is often forgotten in calculations of cost allocations for treatment pricing. Social Security contributions paid by the employer would be an example of an employee on-cost. Staff meals and accommodation could be another. You might think these costs are not so significant, but they can be 20% or more of the direct salary component. Thus, it is important to factor them into your hourly staff cost calculations.
Many people expect the massage oil, lotions and creams used in a treatment to be a significant cost item but the actual cost of the products used is usually quite low. A massage oil, for example, is often a blend of a base oil and some essential oil. Good quality essential oils can be expensive but only a small quantity is required. The cost of the base oil can again vary dramatically depending on the quality but the quantity used is not that great.
The product cost of a facial treatment is usually higher than for a body treatment. This may seem counter-intuitive, as the face area is obviously much smaller than the body area. But our guests expect high-performance skincare when it comes to their face and that means a more expensive product. Also, there are multiple products used for a facial. For the body, it is usually just one product. A typical facial includes the use of at least a cleanser, toner and moisturiser and then an active ingredient – the secret sauce. It is the secret sauce that costs the most.
Laundry & Linen
After payroll, laundry and linen is usually the next most expensive cost component of a spa treatment. In a luxury spa, the massage bed can often be set with multiple pieces of linen including sheets, towels, face cradle cover and mattress protectors. With the possible exception of the mattress protector, all of these will need to be laundered after each treatment. Then there are all the other linens if shower or bath facilities are going to be used. And remember, these linens will have traces, sometimes heavy traces, of oils. To remove these stains requires a more stringent laundering process than regular hotel linens would. And all of this adds to the cost.
Electricity and water are the main utility costs when it comes to providing a spa treatment. The good news for many hotel spa operators is that these costs are often not attributed directly to their P&L. If you are a third-party spa operator, the hotel may decide to put a separate meter on the spa so that they can charge you for utilities based on your usage. But based on my experience, most hotels tend not to bother with this, unless the spa space is rented out as a pure retail space.
The big question with the allocation of utilities cost is whether or not the pool, steam, sauna and jacuzzi are considered part of the spa. If they are, these areas will represent the bulk of spa utilities costs.
In most cases, guests are not willing to pay for these facilities either. It is just expected that a quality hotel will provide them at no additional charge. So my advice to spa operators is to always avoid taking ownership of these spaces if at all possible. They are usually non-revenue generating and they cost a lot to maintain.
Price is Relative
Once you have a clear understanding of your costs, you now have the baseline for setting your spa menu prices. Obviously, you want to make sure your selling price is higher than your costs. But how much higher? Unfortunately, there is no definitive answer but there are some simple reference points you can use.
Potential customers will always make comparisons between the product or service you are selling and something else they know the value of. Hotel guests will compare the price of a spa treatment to the price of the hotel room. If they pay $200 for one night in the hotel, they might be willing to pay $100-120 for a one-hour massage. Or 50-60% of the price of the hotel room. If the spa is truly unique they might pay as much as $150.
Food and Beverage prices in the hotel provide another good reference point. If the price of a meal in the restaurant is $40, you should be able to get two to three times that price for your one-hour massage. That would be $80-120.
Hotel or resort activities like a half-day excursion or an introductory diving lesson are also good reference points. Guests who look at these prices make a comparison, either consciously or subconsciously, with the price of the spa treatments, and the comparison here is about one to one. So, if an introductory dive is priced at $115, that is the price the guest would pay for a one-hour treatment. If a half-day excursion costs $100, that would be a good price for your basic one-hour massage.
I always recommend taking multiple reference points and then finding a price point somewhere in the middle of them. Somewhere in there you will find your sweet spot. Let us consider the reference points above. A hotel with a $200 room rate, a $40 average food and beverage check, a $115 introductory dive and a $100 half-day excursion should be able to price a one-hour basic spa treatment at around $110. If your cost of providing that treatment is higher than $110 then you have a problem because if you charge more than $110 in the scenario above, your spa will not get many customers.
Cost is Personal
It is important to remember that while price is relative, cost is personal. This is a critical distinction. Price is something that the seller sets based on the cost of providing their product or service, based on their costs and a determination of what it is worth to the consumer relative to the price of similar products. In that sense, price is all about the seller, not the buyer.
The buyer only cares about the cost. Cost is personal. If it costs me $98 for a massage, that is what is coming out of my wallet. I do not care if the spa is giving me a 30% discount off the normal price of $140 or what their profit margin is. For me, all I care about is the $98 it is going to cost me. This is an important distinction in terms of consumer mindset. What will it cost and what value will I get in return?
Remember, it is not just costing the buyer money, it is also costing time. Imagine the busy corporate executive with a $250,000 salary. Her salary works out at around $120 per hour. So, if she is going to go for a one-hour treatment, she needs to get at least $120 worth of perceived value out of it to justify the time cost to her. And that is before you start adding on dollar costs she needs to pay for the treatment. This $120 of perceived value requirement is almost a subconscious judgement the consumer makes, independent of the actual treatment price.
And while we are on the subject of time, let us consider also how much time our busy guest has to give up for the pleasure of a one-hour massage. We tell her to come fifteen minutes earlier ‘to enjoy the wet facilities’, but we are just doing that to make sure she does not keep us waiting. She also needs to allow a few minutes to register at the spa reception and have a consultation with the therapist. Even if she is staying in the hotel, she needs to time to get to and from the spa. We can round all that up to thirty minutes. So now her one-hour massage is costing one-and-a-half hours of her precious time.
But what about if our guest is not going to be in the hotel all day? Maybe she has meetings outside the hotel. Depending on how far away she is, she will need to end her meeting at least thirty minutes before her treatment, to make sure she gets back to the spa on time. And she cannot have an outside meeting immediately after the treatment either. She will need time to get there. So that is at least another one hour of unproductive time. We are already up to two and a half hours.
Finally, there is what I call the Wind Up/Wind Down period. For most people, the Wind Down time is not such an issue. They will just turn up at the spa on time and rely on the spa time to wind them down. But the Wind Up time after a treatment is a different matter. If your therapist has done a good job, you should be kinda ‘zonked out’. Maybe not in a total state of bliss, but at the very least you should be in highly relaxed state. It is pretty hard to walk straight out the spa and go right back to work without missing a beat. It will take you some time to get back into your groove. At least another thirty minutes.
Before she realises where the day went, Ms. CEO has lost at least three hours of productivity out of her day. Tell any busy CEO that they are going to lose three hours out of their day and I am sure they will get a bit stressed. And we are supposed to helping her relax!
Value is in the eye of the perceiver
And so we turn to value. Value is a funny thing. Just like cost is personal, so is value. Something that is valuable to me may not be valuable to you. If I am the consumer, and I believe something has value, then it does. It does not matter how many people have different value perceptions, mine is the only one matters – to me.
I smile when spas talk about offering a ‘value-add’ instead of a straight discount. For sure, discounting can be a slippery slope. But we, as service providers and vendors of the spa experience, often fail to consider that value is a highly personal construct.
Complimentary use of the steam, jacuzzi and sauna. Additional Foot Ritual at no extra cost. Free skincare products with each treatment over $120. All of these are examples of a value-add, and some people will think they are great, while others will see little value there at all. Maybe we had better not think of this as value-add but rather as free.
The Discount Addiction
I recall seeing a video discussion between social media and marketing guru Gary Vaynerchuck and Jon Taffer, who hosts the Bar Rescue reality TV show. Taffer made the comment, ‘People get addicted to discounts. They do not get addicted to free.’ This is a fantastic observation. If you get a 10% discount at the spa today, you will expect at least the same discount next time. If you get a free gift today, you will not expect to get a free gift every time you return.
So do not discount, offer something for free. But do not kid yourself that you are offering something of real value to the guest, unless it is. And remember, whatever your offer, if it is costing you something to provide it, make sure you factor in that cost when determining your pricing. It may be free to the guest, but somewhere along the line someone has paid something for it.
Several years ago, my son came home with a McDonald’s Happy Meal, proud that he had got a free toy with his meal. I explained to him that it was not actually free but instead factored in to the pricing. His heart sank. Life lessons are hard. But they are necessary.
Nobody even talks about Yield Management as a special strategy in the airline industry anymore. It is just part of their pricing policy. Hotels too have generally done a good job with yield management. But what about spas? Can yield management really even work for a hotel spa? Maybe.
The Oxford dictionary defines yield management as – The process of making frequent adjustments in the price of a product in response to certain market factors, such as demand or competition.
The hotel room sold in peak season is the same room sold in low season but we pay more for it is because, in peak season, it is a scarce commodity. On the same basis, when a spa treatment is a scarce commodity, it too should demand a higher price. It is one of the fundamental theories of economics: Supply and Demand. Your hotel spa guest has probably already encountered yield management at least twice before they got to you, once when they bought their plane ticket and again when they booked their hotel room. They have already been primed to accept a yield management strategy at the spa.
And yield management does not have to be something that is only applied during seasonal peaks – it can also be applied on a daily basis too. If you know that your spa is always busy between 4-9pm, why not charge a 10% premium for treatments during this time? Assume a Balinese Massage normally sells for $70. The price from 4-9pm then could be $77 – 10% more. Or even better, make $77 your ‘normal’ price and offer a 10% discount before 4pm. Nobody likes a premium but everyone like a discount.
Another way to apply yield management is to only offer the treatment with the highest profit margins during busy periods. Let us stick with our Balinese Massage selling for $77. If the cost of providing that treatment is $50, your profit is $27. Your Reflexology treatment sells for $60, but because you use less oil and less linen, the costs are only $25 so the profit is $35. Financially, then, you want to sell more Reflexology treatments than Balinese Massages – especially during peak times. If you do, you will be making $8 more profit each time.
If a guest asks for Balinese Massage, your receptionist could say something like, “I am sorry, we do not have vacancies for a Balinese Massage today but we do have an opening for a Reflexology treatment – and it is actually 22% cheaper than the Balinese Massage.” The additional step of offering a cheaper alternative will also come off as being more genuine than if you only offered a more expensive replacement.
Then, if you are still having trouble convincing the guest, you can always offer them a 10% discount to come back tomorrow for a Balinese Massage. At this point, the guest sees you have offered them a cheaper alternative for today, plus a $7 discount tomorrow for not getting what they wanted today. And for the spa, you are still $1 ahead! You made $8 more profit today by booking a Reflexology treatment in that slot rather than a Balinese Massage. And tomorrow you only had to give a $7 discount to get the guest to come back. Every little bit helps.
Of course, a $1 saving is not really going to make much difference to your business, unless you do A LOT of treatments. And you will need to weigh up the benefit of the extra profitability with the risk of having an unhappy guest who may not re-book and may not come back. But you get the general idea. Know your profit margins per treatment. Push the high margin treatments – especially at the busy times.
And remember, yield management is all about Supply and Demand. In most cases, spa is a want rather than a need.
So, unlike airlines and hotels, which are by and large catering to a need, spas are unlikely to have the same power over the guest when it comes to yield management. If the demand is not firm, the leverage is weakened. Nevertheless, yield management should definitely be part of your overall pricing strategy.
The Price of Human Touch
It is also worth noting that when pricing spa treatments, we often charge more when there is a fancy machine involved. Whether it is a highly technical facial machine or just a high-tech massage bed with special features to enhance the treatment, it will cost more if we use a machine. But ironically, what guests often value the most, certainly in the case of a massage, is the touch of the therapist. No doubt when it comes to results-driven facial treatments, the technology matters. But I do believe spas generally need to re-evaluate where they place the premium when it comes to pricing, and consider placing it on the human touch.