How the economy works – and how it affects your business

Economics is a broad and hugely complex term. We explain how it impacts your business.

Economics defines many of the financial, social and business dealings people have with each other. Economics is the science of how human beings get the most wellbeing out of what they have. It is the science of managing resources. Economics is at play when you make a sale, apply for a bank loan, lower prices to beat competitors or buy your monthly stock. But it’s also evident in the way people behave and what their attitudes are towards money and spending.

Needs and wants
The things people purchase fall into one of two categories. The first is needs – things that people must have to live a basic existence, like food, fuel, electricity and housing. The second category is wants – non-essential items that people enjoy and that bring them pleasure, but that are not necessary. People will always purchase their needed items, but will only buy their wants when they can afford to do so.

The services and products provided by the beauty industry fall squarely into the second group. This means that in times of financial hardship, people will be less likely to spend money on them – either because they do not have the available cash, or because they feel they should be more prudent and cut out unnecessary expenses. Either way, it is very hard for them to justify getting a haircut or spa treatment when they are struggling to afford monthly groceries and debt repayments.

Macroeconomics
Macroeconomics is the study of economic relationships between corporations, countries and regions – in other words, big global business. It may seem that the US government debt or the rise in oil price have little to do with the local beauty industry, but quite the opposite is true. Global financial events have a knock-on effect to all corners and industries of the globe.

Take exchange rates, for example. An exchange rate is the amount of money it costs to buy a unit of another currency – it costs roughly R8 to buy one US dollar, and R10 to buy one Euro. The exchange rate can fluctuate because of hundreds of factors – the weather, regional politics, commodity prices, speculation and so on.

When the rand becomes cheaper to the US (say, R10 for $1), the US is more likely to buy our exports, but imports from it become more expensive, since you need to spend more rands to make up one dollar. This raises the price of imported beauty products, meaning that salons must either raise their selling price or make a lower profit.

The psychology of a recession
As stated above, economics is essentially the study of human behaviour from the perspective of managing resources. Therefore, it is often easy to understand the reasons behind people’s behaviour in a time of financial strain.

When people have a lot of money, they don’t worry about obtaining the highest possible value from each purchase; they have sufficient resources to spread over a variety of pursuits. However, when they have fewer financial resources, like during a recession, they want to get the most value out of every cent they spend. On the other hand, people also become fatigued with constantly having to save their cash for “sensible” purposes – they want to treat themselves to something special that will make them feel more positive and confident.

Creative beauty practitioners can use this internal tug of war – the desire to save versus the desire for a treat – to ensure that they keep their businesses afloat. Here are some pointers:

• Create cheaper deals. Some hairdressers offer the option of a cut without a blow dry, while beauty salons invite customers to bring their own nail varnish when they come for a manicure. If you can make your offering more affordable, customers will be likely to come and you won’t lose out on profits.

• Add value at no extra cost. There are many ways you can make a customer feel like they are getting more “bang for buck”, without incurring any extra costs yourself. For example, announce that you give extra-long head massages or add an extra conditioning treatment when you wash customers’ hair. Small touches like this really make a difference when customers are calculating the opportunity cost of coming in for a beauty treatment.

• Offer returning customers a good discount. While most customers will still come in for the occasional treatment, few will come as regularly as they used to.

To learn more, consider the part-time University of Cape Town Applied Economics for Smart Decision short course, which starts on 15 September 2012. For more information contact Roxy on 021 685 4775 or roxy@getsmarter.co.za, or visit www.getsmarter.co.za