Selling discount vouchers in a time of Corona – Yes or No?
By Simon Clark, Simon Clark Hairdressing, Port Elizabeth
Like it or not the lockdown has changed the business environment and once it ends we cannot expect things to go back to the way they were either. If there is one thing that has characterised the whole Novel (I use this in every sense of the word) Virus debacle it is a chronic lack of information.
The two biggest known unknowns we need to deal with as hairdressers are:
1) How long will the lock down last?
2) What will the business environment be like when we return?
The short answer to both, is we don't know. Take hope from OZ where hairdressing is considered an essential service, with serious restrictions. Here it is unlikely that salons are going to be at the front of the queue when it comes to lifting restrictions.
That said the most important fact hairdressers need to establish is: “how long can I survive with no income?” While I realise that there are various funds in place that we can apply to claim from, very little is known about when they will pay out, so it is probably better to plan on receiving little or no support in the short to medium term.
If the answer to the above is you need income sooner rather than later there are three legal options:
1) Sell vouchers to be redeemed later,
2) Find another source of income,
3) Borrow money
Selling vouchers is essentially a form of borrowing where you get the money up front and pay back the service later. Finding an additional income stream in these times will be tough but tough times also give rise to new opportunity. Borrowing from a bank comes at a cost, and might not be possible in these times, however if you look at the discounts you give on your vouchers this might actually be cheaper in the long term.
Based on the social media pages I follow many of you are already selling vouchers. So lets look at what's happening.
Pros of Vouchers:
• Instant income
Cons of Vouchers:
• The discounts you give will probably amount to more than if you borrowed from a bank.
• Selling advance may limit your ability to make more money later.
• Some income will need to be retained to ensure you can fulfil your commitments ie stock for services later.
Those selling vouchers are also doing so at a discount to encourage their clients to buy them. Hairdressers, sell their time and there is realistically only so many hours in each day one person can sell.
Let’s say you sell vouchers for a service that you take 2 hours to complete.
If you sell 20 vouchers there will be 40 hours after lockdown where you will not be bringing new income into the salon. Moreover if you sold those vouchers at a 20% discount you will only be receiving the income you normally get for 32 hours for doing 40 hours work, or you will need to work 5 days for 4 days income. Put differently you are paying 25% interest to get the money advanced for a couple of weeks!
If you sell more vouchers, then there will be even more time that is not bringing new income.
If you normally have a lot of free time in the day then this makes a lot of sense as you are filling dead time. However if you are normally busy you are shooting yourself in the foot.
Let’s look at the types of discounts that can be offered
A straight discount i.e. 20%
So clients buy a R1000 voucher and only pay R800 for it. This is probably the worst way to go. It only generates income but it also effectively cheapens your going rate as it is just a straight discount. As we said before this is equivalent to borrowing money at 25% interest.
Vouchers can take 2 forms
Option 1: Buy for R1000 and get R200 free
Option 2: Buy for R1000 and get a R200 treatment free.
While this may sound like the same as the first option it is not quite. Firstly you are not discounting but adding value.
Option 1: The addition of R200 to a R1000 voucher equates to a 16.6% discount or an additional R1360 of income for the sale of 40 vouchers over and above the addition R8000 in additional cash income.
It is however still borrowing at 20% interest.
The second option is even better. Not only are you gaining the benefit of the lower discount but you are fixing your time and input costs on the additional R200.00. So if for instance your fixed input costs on the treatment are R50.00 you are now borrowing at 5% interest. (This is not completely accurate but it is still better than the other options.)
Lastly you can sell multiple service vouchers
This means clients buy 5 haircuts and get the 6th free. This has the same benefit as the described above but it spreads the time over which you have to fulfil the voucher, over 6 months to a year rather than all in the first month after lockdown. It also provides opportunities to increase revenue in other ways as it guarantees returning business to your chair.
The drawback is it also extends the period you are liable to fulfil the vouchers. If we apply the same calculations to this and assume 5 haircuts at R200 with the 6th free spread over 6 months You are still paying a 20% interest but as it is spread over 6 months you are only paying back 3.33% interest a month as opposed to the whole 20% in the first month.
While I understand that for some hairdressers selling vouchers may be the only way to survive, please use the information above to try and do so in a way that benefits you the most. At the moment have no idea how long the status quo will remain, my suggestion is to try and do as little as possible that will tie you to long term commitments once it is over. The more flexible you can be once the lock down is lifted the more likely you are to recover from it quickly.
With thanks to Simon Clark for this article.
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