We’ve talked before here on the blog about how to address a planned price increase with your customers. But what about the rate hikes that weren’t your idea?
This comes to mind as Washington, DC prepares to implement a controversial new sales tax on wellness-related businesses in the District. The so-called “Yoga Tax” will add 5.75% sales tax onto the fees for businesses like gyms, yoga studios, tanning salons, and water delivery services starting October 1st, 2014. This, understandably, has business owners in DC concerned. Supporters of the new tax are quick to point out that DC is also lowering business income taxes at the same time, suggesting that what business owners may lose in memberships, they will make up for in tax savings.
The Wellness Tax is, of course, a very specific example. But, it’s a great reminder that businesses do not operate in a vacuum. Even the most conscientious small business owner can’t plan for things like tax increases and other outside influences that may throw a wrench into careful business plans.
So when the unexpected does throw off your supply/demand/cost/benefit structure, how should you react? Well, you basically have three options:
1. Wait and see
For all the hand-wringing going on in Washington right now, it’s entirely possible that the sales tax increase will have very little real effect on memberships. As policy director Jenny Reed points out, the tax on a $70 gym membership will shake out to around $4 in the end. So the first step when a change like this is announced is to run the numbers and see what the impact really is. That said, consumers are notoriously irrational, and to many of them, an increase is upsetting no matter how small. If you choose to take no action with regard to your business model, your business would still benefit from an information campaign to educate your customers about how the change will impact them.
2. Lower your prices
The feasibility of this approach depends entirely on your business overhead and the amount of cushion you have built into your current pricing structure. This is most advisable for businesses that operate at a low price point with a lot of competition. When your customer is very price-sensitive, even a small increase can cause them to try a competitor, or even drop out of the market entirely. In businesses like these, success often depends on volume, so every customer counts. If that’s the boat in which you find yourself, you may discover the customer retention and acquisition benefits far outweigh the loss from a slight price drop.
3. Add value to your offerings
Conversely, for businesses whose brand positioning revolves around quality and exclusivity, lowering prices might actually do more harm than good. If you offer a high-end product or service, but are still concerned about losing or slowing business, a value-added approach might be right for you. For example, a hotel that has just been hit with an increased occupancy tax could react by informing their loyal clientele that they will be making checkout times two hours later. If clients have to pay more for their room, they’ve earned more time in it, right? This approach strikes a good balance between hoping for the best (wait and see) and preparing for the worst (lowering your prices).
Has your business ever been subject to a surprise change in the market? How did you accommodate the change? Tell us about it in the comments below!