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Tuesday, August 17, 2010

Global Spa and Wellness Briefing Paper: Part 1

The Global Spa Summit in Istanbul, Turkey explored the impact of the recent economic climate on the spa and wellness industry in the United States.SpaBooker VP of Operations, Dan Chandre, discusses the very clear and dramatic effect of the economy on the industry.

How has the recent economic climate affected the spa and wellness industry in your region, both negatively and positively?

The recent economic climate has had a very clear and dramatic affect on the spa and wellness industry in the United States. The economic crisis that all major industries experienced in the United States was exaggerated in the spa and wellness arena due in part to the period of time that immediately precipitated the collapse. Prior to the economic downturn, the spa and wellness industry in the US had experienced its most prolonged period of expansion and economic success. This, combined with the fact that most consumers budget for spa services comes from their disposable income, exacerbated the economic contraction that resulted from the poor economic climate. The combination of an expanded marketplace and the economic downturn resulted in distinct primary and secondary reactions in the spa and wellness industry.

The primary reaction of the spa and wellness industry in the US was an immediate market contraction and correction. In particular regions of the US, particularly Southern Florida and Southern California, the number of businesses in our industry had grown by so much that the supply greatly outweighed the demand. In areas of overcapacity such as these, the market saw immediate business closures throughout 2009. Of the businesses that survived in the US, over 45% reported reduced revenues compared to 2008.1 To survive, business owners needed to adapt to the economic climate.

One of the most prevalent negative effects of the recent economic climate is the propensity of spas to routinely and deeply discount the price of the services offered. Discounting is a slippery slope and one that has potentially irreversible effects. The industry is continually trying to strike a balance between rising overhead and labor costs and shrinking profit margins. Discounting only narrows the available margin for business owners. Furthermore, wide-spread discounting of services weakens the industry on a whole by devaluing not only the treatment, but also the provider performing it. Once an industry conditions its customers to expecting discounts as a pricing philosophy, it can be nearly impossible to revert to “rack rate” pricing.

Even when faced with challenging economic factors, the best and most industrious business owners find ways to steer through the difficult times and emerge on top without destroying the value of the services they are providing. There has been a short term shift from concentrating on the acquisition of new customers to focusing on the retention of existing customers. The spa and wellness industry in the US has reverted back to focusing on the core customer; the customer that existed prior to the massive expansion.

The shift to retaining core, loyal customers consists of three primary manifestations. The first is the growth and emergence of membership programs that focus on providing value to clients who are already consuming services on a regular basis. Contrary to traditional membership models that are designed to benefit the business through breakage, these membership models are designed to provide intrinsic value to the core consumers that are already spending; essentially providing them with added incentives to continue their spending habits and even increase their frequency of visits. A second trend is the increase of loyalty programs specific to spa and wellness operations. A parallel can be drawn to other hospitality industries, such as hotel and airline, which have been years ahead of spa and wellness with regards to loyalty and point programs, but to which our industry is now catching up. These programs provide an excellent and proven way to encourage customer loyalty and repeat spending. Lastly, more than ever before, spa and wellness businesses are leveraging existing clients to be the source of new clients. By structuring beneficial referral programs, spa and wellness businesses are able to capitalize on the social networks of their existing core clientele to grow their business.

Look out for second installment of Dan Chandre's Global Spa and Wellness Briefing Paper in the coming weeks.

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