Supply Chain Disruption and Pricing Strategies

Supply Chain Disruption and Pricing Strategies

The price of the beauty supply products is soaring. This is because of the collapse of the product supply chain, which began with the start of Pandemic last year. In fact, transferring the increase in product cost to retail prices can immediately cause a decrease in demand and lead to a deterioration in the profitability of the business. In the meantime, because of Covid grants that have been distributed by the government, Beauty Supply has been booming and sales increased significantly. Recently, however, the special ‘Covid Circumstance’ is slowly coming to an end. The cumulative rise in product prices over the summer off-season when unemployment benefits are cut off is causing sluggish consumption. So how can we, the beauty supply industry, wisely overcome the sharp rise in product cost? With the cover story of this issue, BNB sought a strategy to respond to it.


Goods are Hard to Get and Prices have Jumped High

At the end of last year’s Covid-19 lockdown, the Beauty Supply stores that opened their doors again were flourishing. This is due to the government mass distributing various liquid funds for economic stimulus to the people of the country in order to overcome the pandemic crisis.
But there is no free lunch. The fear that the end of the ‘liquid feast’ will eventually result in inflation is becoming a reality. The value of the dollar is falling and the value of goods is rising sharply. Last June, the year-on-year consumer price growth soared to a record high of 5.4%.


The steep inflation tendency is no exception to beauty products. The supply shortage that has appeared in almost all the items handled by Beauty Supply is resulting in a sharp price rise. Rising raw material prices, rising labor costs, rising distribution costs, and rising exchange rates are all reflected in the prices of goods.
Wholesalers’ purchasing representatives or sales representatives say that product price increase is inevitable for the time being. Human hair is very hard to get, and its price has already risen more than twice last year. It is questionable whether it will be able to return to its old price over time.
Synthetic hair products have also endured as much as possible without raising prices by using inventory from warehouses, but they will soon be at their limit. According to sources in the hair industry, this fall, synthetic products such as braids and wigs will eventually be forced to go up in price.
In addition, miscellaneous goods and chemical products have increased in price by about 10% recently.
The problem is that the upward trend in prices will continue for some time. When prices go up, consumers who are on tight budgets are forced to reduce consumption.


Typical sales margin of beauty supply: 30~40%

According to a survey conducted by BNB on various Beauty Supplies, the sales margin rate averaged between 30% and 40%. So how much should one set the selling price to secure this margin rate? Different regions have different indirect costs such as labor costs, and rental costs, so setting sales price varies widely. For reference, retail owners in the Southeast United States say that “Roughly, hair is sold twice, wigs are sold three times, chemicals are sold 1.5 to 1.7 times, and miscellaneous goods are sold twice as much as the original purchased price.”
How do we calculate the proper selling price to leave a margin, or the net operating revenue minus the cost of the purchased items and various costs? The formula to calculate the sales margin rate and sales price is very simple.

For example, if you put a 30% margin rate on a product with a cost of $10, what would be the sale price?

The above sale price is $14.28, according to the formula.

Of course, this is a simple calculation that does not take into account various costs. After calculating the cost for each store in each region, the sales price should be calculated by summing it up.
However, this simple calculation is only a reference. The relative value recognized by customers at the store is even more important. Therefore, store owners should always worry about the appropriate price level that customers would want to pay without reluctance. This means that it is more important to create a pricing strategy from a consumer psychological perspective, rather than a simple calculation from an economic perspective.


Respond with ‘Price Diversification Strategy’!

How should we respond when there is a price increase factor, or when nearby shops want to increase market dominance by using price as their weapon? In conclusion, the strategy to cut prices and continue promotion prices is hard to succeed in the long run. This is because the price reduction strategy is a means of securing market share, but it can significantly worsen revenue.
When price competition intensifies, there are many ways to overcome it, but among them, the ‘price diversification strategy’ is a good alternative. As a way to diversify prices, ① Nonlinear pricing strategies and ② Bundle pricing strategies can be useful for beauty supplies.

Nonlinear Pricing Strategies: This is a way to adjust the price to loyal customers who buy more than a certain amount of goods per year. For example, offering a 5% discount to customers who buy $300 or more, and a 10% discount to customers who buy $ 500 or more. Of course, the customer must sign up for membership, and the customer registered for membership must have a system that automatically stores and data the items and amount purchased when they check out after shopping. This approach has the effect of locking-in customers by inducing large purchases and giving more benefits for customers with high revenue contributions.

Bundle Pricing Strategy: This is a way to set prices by combining multiple products together. Buying multiple products as a set makes the price cheaper than buying multiple products individually. This is often used in meal menus at hamburger shops. This avoids single-product-oriented price competition and can have the effect of generating additional revenue growth. For example, a 10% discount can be provided when purchasing a set of chemical products required for wig and wig care.


Let’s Understand What Price Elasticity is!

In order to maximize sales margin while securing market share, it is important to understand the concept of ‘price elasticity’. Price elasticity is measured by changes in the amount of purchases made according to changes in price.

If the absolute value of price elasticity is greater than 1(if the rate of change in sales is higher than the rate of price change), it is a product with high price elasticity. In this case, lowering the price increases the total profit due to an increase in sales volume, and raising the price decreases the total profit due to a decrease in sales volume. (for example, low-cost braid products).
On the other hand, if the absolute value of price elasticity is less than 1, it is a product with low price elasticity. For products with low price elasticity, lowering prices reduces gross profit, and raising prices increases gross profit. (For example, expensive premium human hair products).

Examples of high and low price elastic products

Therefore, it is important to understand what products are high in price elasticity. After the price increase, you should check the sales trend and be careful when raising the price for products that are highly elastic.
On the other hand, products frequently used by consumers who are not sensitive to prices, or products with low price elasticity, will be relatively safer to raise the price than high-elastic products, especially these days.


Take Advantage of the Inventory in the Warehouse!

There is an opinion that supply shortages and rising prices can be an opportunity for the beauty supply business, albeit paradoxical. While the shortage of goods, a beauty supply owner remarked, “I’m selling out the inventory that had been piled up in the warehouse and organizing it,” and said, “It’s rather good for me.” As the price of goods skyrocketed, the sales of popular new products decreased a lot, but the goods that had been piled up in the warehouse for a long time were taken out and attracted customers through widespread discount sales. In addition, as the price of the product rose, he also added, “as the unit price of goods increased, the profit rate did not decrease.” Also, as the value of the goods jumped, “The price dumping offensive at large beauty stores around them has decreased a lot, so the business environment has improved,” he said.


Check the Product Price Information and Prepare in Advance!

It may already be too late to start responding by the time you receive a notice from a wholesale company that the price of the product rose. Let’s check the price trend in advance with salesmen and wholesale companies. If there is any information about when the price will be raised, let’s secure the item in advance.
Please note that you should not commit overstocking or hoarding too much stuff in the warehouse. According to a wholesale company official, “The stagnant international maritime logistics situation is slowly getting better.” Which means the price rise may be temporary. Use information sources to investigate future price trends and obtain the ‘right amount’ of products beforehand.


Develop New Items.

Currently, human hair-related products and some popular chemical products are shipped after weeks of being ordered. One simply cannot stop business because of a lack of goods. Instead, you need to find new items that can raise sales.
Fortunately, traditional hair and cosmetics are not the only types of products being sold in beauty supply in recent years. In addition to hair-related products, sales of fashion products such as clothing, shoes, jewelry, bags and various miscellaneous goods have increased significantly. According to one beauty supply owner, who is making up for fallen sales with fashion products, “One thing to note is that you shouldn’t only handle items that are commonly sold in other shops as well.” Even if it takes time and effort to sell your products, you should find and display unique products that fit the trend and that local consumers will love.


Use ‘Anchor Price’ When Selling at Discounted Price!

‘Anchor price’ is an important concept often mentioned in price strategy theory. The anchor pricing strategy is to let consumers know in advance how much the appropriate price for a particular product is. Consumers believe that they have benefited from buying at a lower price than the perceived reasonable price.
There are many places that sell products that were purchased at low prices in the past, therefore marking the price lower than the current market price. In this case, even if you sell at a cheap price, let’s put the current high price (anchor price) on the price tag.
For example, lace closure bundle hair products have recently become overly expensive. If you have a product that was secured at a low price a long time ago, you can sell it at a lower price than the current price. In this case, if you prominently write the current price(=anchor price) based on the price list, cross it out in red, and write the lower current sales price below it, customers will recognize the benefits.  This is a wise and useful discount sale method that can increase the probability and satisfaction of purchase.


Anchoring Effects

A kind of cognitive bias in which people do not accept information objectively and rationally by immersing themselves in the first acquired information. The theory is that if a person injects a certain number or range in the first place, it becomes a reference point or ‘anchor’, limiting the range of thought and driving the action in the desired direction. Established as a theory by drawing significant results for the first time from the experimental work of Daniel Kahneman, winner of the Nobel Prize in Economics.
As an example of Kahneman’s experiment on the anchoring effect, a group of people who did not know the height of Mount Everest was divided into two groups and was each asked the height of Mount Everest. For the first group, “is Mount Everest higher than 600m? Or lower?” then was asked, “How much do you think the hight of Mount Everest is?” For the second group, “Is Mount Everest lower than 14,000m? Or higher?” then was asked, “How much do you think the height of Mount Everest is?” As a result, the average answer of the first group was 2,400 m, and the second group was 13,000 m.


Customer-Captivating Friendly Services

‘When the value of goods rises sharply and customer complaints build up, how can we overcome this and do good business?’ To this question, the most frequent keyword that retail store owners answered was ‘kindness.’

“If they are in a good mood and the product is nice, most female customers will buy it, regardless of price.”

“We have played jazz music to suit the age of the customers at the shop and the interior has been changed to a bright and clean atmosphere. After that, the attitude of customers has been relaxed and at peace. There is a large beauty supply nearby that sells more cheap items, but we have regulars who are enthusiastic about our store.”

“Me and my staff have changed our voices. We all greet guests with bright voices.”

“We need to increase the intangible value that our customers feel in our store. The tangible value is only part of it. I think they feel the intangible value of intimacy when I work happily, understand their thoughts, and treat them sincerely. They become regulars even if my store is a bit more expensive.”

“I’m worried that shoplifting will increase because things are expensive and everyone is low on money these days. Since we’ve been in business for a long time, we can recognize that kind of person at a glance when they come into the store. But they are our customers, too. Customers can become thieves and thieves can become customers. There are a lot of young shoplifters that live in the neighborhood anyway, and our employees know who they are. If you report a shoplifter to the police and send them to prison, their lives can be ruined. So rather than reporting it, we are informing the parents of the shoplifter captured on the security camera and encouraging them to educate their behavior. Then parents come instead to apologize and make amends. I think it takes patience to do business in the neighborhood and even make effort to cover for shoplifters.”


NO Refund Regulations- Become Flexible!

Since Covid Pandemic, there have been many places that have implemented regulations that do not return products for quarantine reasons. In particular, wig products could not be tried on in the store, and it could not be returned after purchase. However, as product prices have risen sharply, there have been many complaints that the no-refund rule is excessive tyranny. When customers want to return the product after purchasing it, it is recommended to accept the refund within 15 days of purchasing if there is no special problem and the package is in its original state. If a full refund is difficult, some storekeepers recommend “at least a way to exchange products or provide store credits.”


Make them Believe the Value has Gone Up as Much as the Price has Risen.

As mentioned earlier, it is wise to make sure that customers are not aware of the price increase of individual products. Goods need to be made into luxurious packages. By adding premium products to the package, you can increase perceived value and improve the profit margins of your business. Of course, collaborative package products should be cheaper than buying individually. Discount information should also be stated, including the original price of the individual product and the discount price of the package.


The Rule of 100

Products less than $100 should be marked as a percentage (%) when discounting, and products more than $100 should be marked as the exact amount. As you can see below, it is the same 25% discount, but it is quite different when it is expressed as a percentage and when it is expressed as a discount amount.


You Will Lose Some Customers, But Do Not Fear.

Our fear of losing customers often hinders us from taking a step further and taking our business to a higher level. It’s okay to lose some customers due to price increases! You have to believe that the lost space they made will create space for premium customers who pay more.
Even if some customers are discouraged and leave due to high prices, we hope you don’t blame yourself. Those customers probably couldn’t afford that price because of their other priorities. They may not need the high level of service you provide. Maybe they are not ready to appreciate and accept the experience and value you offer them. At this time, we need patience more than anything else.


Cover Story BY Samuel Beom