Smoothing Out The Effects of Overreacting to An Economic Downturn

Is the medical aesthetics industry impacted by recessionary forces?  That’s a question that has been asked by many investors and wanna be entrepreneurs looking to get into the space.  What we have learned recently is that the medical aesthetics industry does experience retraction during recessionary times. However, it has proved to be more resilient than most other industries. Some services experience what has come to be known as the "Lipstick Effect". Meaning, due to the uncertainty that accompanies economic downturns, people still retain a strong desire to look good and feel good about themselves.  

While there is always a desire to look and feel one’s best, this desire may be more prevalent during stressful economic times than when times are “good”.  As such, we saw that many people tended to pursue services that enhanced how they looked and felt over buying luxury items, eating out, and spending money on entertainment and extravagant vacations. That said, high ticket procedures suffered the most, while enhancement related services such as facials, neurotoxins, injectables, and wellness related services remained consistent.  McKinsey’s latest article also provides some guidance on the resiliency of the medical aesthetics industry, as well as some predictions.

The bottom-line impact for medical aesthetics practices was that they tended to be less profitable during the downturn. This was due to several factors, of which the sale of higher margin and higher priced services was only one contributing factor. Other contributors to lower profitability included the reluctance of clients to add on services or additional products at their visit. Poor financial management during the robust years also forced some practices to offer deeper discounts than they may have wanted to keep revenue at a level that allowed them to meet operating expenses. 

We observed a trend where practices transitioned from providing high-quality services and products at a reasonable volume and fair price to offering the same high-quality services but at a lower price to attract more customers. This was done out of necessity to sustain their operations, even though it resulted in a decrease in profitability despite only a slight dip in revenue.

So, what is the long-term consequence of such behavior? Only time will tell, but for many practices the challenge of returning to pre-economic downturn profitability looms.  Clients may have developed a newly normalized behavior when it comes to specials and promotions.  Instead of receiving services as regularly scheduled and recommended by their provider, they may tend to wait it out to see if a promotion “pops up”, giving them a better deal for the same service.

There is also a perception created through the offering of deep discounts.  The perception with current clients may be that the practice has more to give or that the practice was too profitable prior to the downturn.  The perception of those on the outside looking into possibly receiving services may be that the practice is a discount brand and not as high quality as others. 

The question now becomes, how does a practice recover from the unintended consequences of decisions made during an economic downturn? For those who may have over leveraged themselves during “good times”, the answer is obvious.   For those who have inflated compensation plans, the answer is also obvious, but painful nonetheless.  A practice can only spend within its means and pay providers for results, which are both driven by revenue.

If not already, it is important that a practice become very data driven.  Managing by KPIs that matter most, such as revenue per hour per provider, labor/payroll as a % of revenue, average invoice, schedule utilization, client acquisition cost, etc. will help an owner make decisions about the health of the practice in real time.  Tie this together with continuing to offer a great experience, great results, and products and services that are based on client demand, and a practice can recover quite nicely. By implementing these practices, the business will be positioned well for a recovery and the next economic downturn, which could happen at any time.

💌 Are you ready to take on an investment partner to help you grow your medical aesthetics practice? If so, we are here to partner with you every step of the way. Fill out the contact form or send us an email at info@baraesthetics.com and we will schedule a call to discuss the possibilities.

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