A hot tub is not just a hot tub when it comes to deciding what it should cost consumers. There are numerous intangibles that need to be considered beyond the product’s acrylic shell, jets and cabinetry.
In a time when the portable spa industry is struggling, knowing how to properly price the product is more important than ever. Dealers who previously weren’t meticulous in calculating their sticker prices are now looking for concrete ways to amend their practices.
While most dealers include basic expenses such as delivery and freight in the final price of a portable spa, the reality is that many neglect to consider all the extras that go into moving these products off the showroom floor.
“Very few will add commission and the cost of advertising into the total cost of goods,” says Danielle Lavallee Wasson, international sales director of Bluffdale, Utah-based Bullfrog Spas. “These days, dealers need consistent marketing. [We have] to go to the public; we can’t just sit back and relax.”
Some hot tub sales experts estimate that it costs around $250 per unit to sell a spa, depending on the market.
|To determine if a hot tub’s selling price meets the recommended margin of 40 percent, it should conform to the following calculation:|
|Cost of goods (including freight, advertising,|
Unfortunately, money is tight and many spa dealers say they can’t fit advertising into their budgets. However, some have found success by building a “slush fund” or “plug number” into the cost of goods for each hot tub that can be put in the bank for future spa-centric promotions. The exact amount should be determined by the needs of each dealer and market. This money can go toward a booth at a home show or television ads, or into offering store gift cards to potential buyers on the brink. It also helps defer prices of gifts with purchase.
“Give yourself a little room to move or add tchotchkes to close a sale,” says Tony Nessie, owner of Hot Tubs Etc. in St. Charles, Ill. He typically includes a $150- to $200 plug number to cover such expenses. “That cover lift, that step, it all adds value.”
Other expenses such as start-up chemical giveaways, referral programs and general overhead should also be spread out over each spa.
But while identifying the exact cost per spa of some of these elements might be tricky, determining the right margins for your business should help cover such concerns.
“A big mistake a lot of people make is not understanding the difference between markup vs. margin,” Lavallee Wasson says. “A markup is the cost of goods multiplied by one plus the percentage a dealer wants to charge beyond the cost. A margin, on the other hand, is defined as the profit made on the selling price.”
She suggests a set calculation to determine the difference.
For instance, if a dealer needs a 40 percent margin on his or her hot tubs to achieve long-term growth, the markup must be calculated so that when the cost of goods is subtracted from the selling price, and that amount is then divided by the selling price, the final answer comes in at around .40, or 40 percent. For example, a hot tub that cost the dealer $5,000 must be multiplied by a 1.67 markup to achieve a 40 percent margin, not 1.40. If a spa dealer believes he is selling at a 40-percent margin but is just multiplying his cost by 1.40, he is in fact only marking it up by 40 percent and actually making a margin, or profit, of just 28.57 percent — not enough to sustain the growth needed to survive in the hot tub business.
To realize such growth, experts say to aim for a margin of 40- to 50 percent. That should typically cover additional overhead that may be tough to pinpoint. Make sure to also consider breakages and errors that occur throughout the year in your final margin, as well as discounts. The margin can be lowered for special-pricing events such as trade shows or sales.
“No store is going to hit their exact margin on every sale, and sometimes a smart consumer will get a better deal,” Nessie says. “But if you have an effective overheard absorption technique, it will balance out.”
There are two main models for deciding what to include in the markup calculation. Depending on the buying power of their demographics, some dealers may not feel comfortable applying a growth margin to certain aspects of the cost of goods, such as freight and commission. They still include the base cost of these in the selling price of the hot tub, adding them in after the markup is calculated. This allows dealers to keep prices lower to compete in markets where others are offering deep discounts.
“Choosing the items that you include as cost of goods vs. overhead is always challenging,” says Henry Pine, president of Accent Spas & Hot Tubs near Houston. “Even the accountants don’t seem to agree on exactly what goes where.”
The best tactic is to find the inclusions and exclusions that make the most sense for your own company’s bottom line.
The second philosophy is to include every cost associated with a spa in the cost of goods before determining the margin, and mark it all up. This is often done in high-end markets by dealers who offer an elevated level of service during and after the purchase, which is worth more in the eyes of some consumers.
“Take credit for what your company does,” Nessie says. “A lot of dealers don’t give themselves credit for the white-glove delivery, starting up the spa and talking to the buyer on the phone. The best way to get the price you ask for is to build those things into the value of the product when you talk to the customer.”
Having a minimum profit in mind for each spa slightly below the sticker price also helps dealers stay on track while still making the client feel that they are getting a deal.
“That way, if the salesperson has to take a little bit off, they can,” says Paul Riley, store manager of Fitness Depot Ottawa in Ontario, Canada. “We want to make sure that someone who wants a product leaves with it.”
The discount can also be taken out of a salesperson’s commission to keep margins balanced. A small discount is fine when it can make or break a sale. But beyond the technical aspects of pricing, another element often gets in the way of dealers, leading them to undersell: emotion. Especially in this economy, it is not reasonable to get overly competitive with price-slashers. Once dealers have a clear picture of what they spent on a hot tub and have figured out the correct margin, letting emotion into the equation can quickly derail profits.