Money Matters

Profit at What Price?

Forget what your competitors are doing and what you think your clients will pay –the most important factor in pricing services is to ensure your salon is making, not losing, money.

Even in the best economy, salon owners resist even considering a price increase, pointing to the price pressures of budget salons that have promoted some nail salons to actually lower their prices. And with the ongoing economic downturn, consumer resistance to paying more for anything runs high. But tough times demand a vigilant eye on your bottom line — starting with the knowledge of whether your salon’s current service prices return a profit, or fail to even cover the cost of doing business.

In setting service prices, most salons look first to what comparable salons in their area charge, then go a little higher or lower, depending on their philosophy. But many salons miss the next, critical step of determining if that price structure allows the salon to earn any money. “If you don’t know your salon or spa’s cost per hour to produce services, how do you know you’re making money?” questions Neil Ducoff has consulted with many salon owners who literally have bought themselves a job via a salon financial structure that drains their earnings.

Ducoff urges salon owners to put the same time and effort into the financial performance of then salon as they do into the artistic technique of the services they provide. In Salon Strategies’ Fast Forward Live! seminars and Fast Forward Salon & Spa Business Resource manuals, Ducoff teaches salon owners to crunch some key numbers to help plot their business’s financial success. And what better place to start than to ensure that your business is making money?

Step 1: Gauge Your Salon’s Productivity

“The pricing structure in many salons and day spas ... is based purely on guesswork and ‘what the other guy is doing,’” Ducoff states in the Fast Forward Salon & Spa Business Resource. Certainly, knowing your competitors’ offerings and gauging what the market will bear are critical factors of a salon’s success. But you also have to know that your business can profit within the marketplace. The first step in determining your salon’s profitability, says Ducoff, is calculating your salon’s productivity. With your appointment book and financial ledgers in hand, follow these steps:

Tally your salon’s available revenue-producing hours. Although clients are paying for a service, a salon’s most precious commodity is time, explains Ducoff. Viewed in that perspective, you can translate the total number of hours each employee works in a week to an inventory of service units. To calculate your saleable inventory, add the total number of hours each service provider has for sale in an average week.

Count only the hours each person has available — which excludes lunch breaks, time marked off the books as unavailable, and times slated for salon meetings and other administrative tasks. Once you have an average weekly total, multiply it by 4.3 weeks for the salon’s monthly service-hour inventory.

Calculate the average revenue-producing hours sold. Now that you know how many revenue-producing hours your salon has available each month, gauge how good of a job the business has done selling them by calculating the actual revenue- producing hours sold in an average week. Again, multiply the weekly figure by 4.3 to arrive at the average revenue- producing hours sold in a month.

Gauge your salon’s productivity rate. By dividing your salon’s revenue-producing hours sold by the revenue-producing hours available, you’ve got your first key number at hand, says Ducoff.

View the productivity percentage rate as an efficiency score to gauge how well the salon utilizes its people and payroll resources. According to Ducoff, every salon should strive for 80% productivity. A higher number, he says, puts too much stress on the staff and too much strain on clients’ goodwill as they find it increasingly difficult to get in.

Step 2: Learn the Cost of Sales per Hour of Service

The next step in determining if your salon’s prices cover the cost of doing business is to put a dollar value on your costs for every revenue-producing service hour. Because salon costs fall into two categories—variable and fixed — you’ll need to run two sets of numbers. Start by figuring your variable expenses per service hour:

Count up the cost of sales. The salon’s cost of sales includes the sum of all variable expenses: production payroll (service providers and assistants), payroll taxes, and professional-use products and materials for one month. If you buy some products in bulk (say, monomer by the gallon), divide the total cost by the number of months you estimate it will last to get an accurate number. Do not include the cost of retail goods sold, however, as they don’t contribute to the cost of services. Your final number represents the salon’s cost of service sales for a month. In our example, this figure is $6,383.

Nail the cost of sales for one hour of service. Divide the cost of service sales by the revenue-producing hours sold (calculated in Step 1). This number, says Ducoff, represents the salon’s production costs (which are variable) associated with each hour of service.

Step 3: Figure G&A Expenses per Hour

Unlike variable costs, which typically maintain a constant ratio to gross sales in commission-based salons, fixed costs have an inverse relationship to service sales in that they decrease as a percentage of sales as volume rises.

Tally your general and administrative expenses. Include here all of your non- production payroll (receptionist and management compensation), and related payroll taxes, says Ducoff. Include a salary for the time you spend managing the business (otherwise, why own?). Then add in all other overhead expenses: rent, utilities, cleaning supplies, education, maintenance and repair, bank charges, accounting fees, phone, advertising, etc. Note that some expenses, such as maintenance and repair, may not occur monthly. In that case, divide the total expenses for that category from the previous year and divide by 12, then adjust as necessary.

Add up your general and administrative costs per service hour. In our example, this figure is $3,141. Divide your total general and administrative expenses for the month by revenue-producing hours sold to arrive at your general and administrative cost for one hour of service.

Step 4: Know the Magic Number

To learn your total cost of service sales for every service hour sold, add your cost of sales for one hour of service (Step 2) and your general and administrative expenses per hour (Step 3).

“This number equals the hourly amount the salon must produce in sales to cover all costs,” Ducoff says. Viewfhis cost in much the same way as you view the wholesale cost for a bottle of nail polish. Just as you wouldn’t consider reselling polish for the price you paid, nor should you sell your services at cost. Ducoff advises salon owners to plan for a 15% salon profit margin, above and beyond your earnings as a service provider and manager.

To ensure a 15% profit margin, Ducoff advises owners to assign each service a “base price” according to the total cost of service sales per hour. So a one-hour full set, for example, would have a wholesale price equal to the total cost of service sales per hour, while a 30-minute manicure would have a wholesale price equal to half that amount.

Once you’ve calculated a wholesale price for each service, add a 15% mark-up to arrive at your minimum service price. If your service cost per hour equals $20.13, you should charge a minimum of $23.15, for a one-hour fill.

When Service Price and Profitability Don’t Add Up

If the numbers add up, great. But what if your minimum service price rings up higher than the market will bear? You can’t just lower your prices to what you know the market will pay without changing the equation — you might as well set up your station on the sidewalk and pay passers-by to let you do their nails.

Fortunately, Ducoff offers a number of suggestions on how to re-work the numbers in your favour. And for those owners convinced they can’t increase prices, the good news is that you may have no need.

“Higher productivity results in a lower cost-per-hour to generate sales,” Ducoff observes. Revisit your salon’s productivity rate — most salons have a wide margin for improvement, he asserts.

Consider a salon with 500 revenue-producing hours available each week. At 40% productivity, the salon sells 200 revenue-producing hours each week. Now, assume the salon’s service costs and general and administrative costs per week equaled $3,800. The service cost per hour, then, equals $19 ($3,800 divided by 200) before the 15% salon profitability mark-up is added.

Now let’s assume that same salon achieved 80% productivity with 400 revenue-producing hours sold. Variable costs rise as well, but general and administrative costs remain about the same — together, they rise to $5,600. The service cost per hour for this salon drops to $14 per hour before the 15% mark-up.

For long-term success, however, Ducoff insists salon owners need to revisit their variable costs. Specifically, he urges owners to revise their compensation packages. Performance- based (also known as team-based) pay, for example, transforms production payroll into a fixed cost, providing owners with much greater flexibility to compete in today’s market.

Three Fast and Easy Productivity Fixes

1) Fill the gaps in appointment books. A few 15-minute gaps in the appointment schedule each day can add to a lot of lost hours each month. Book appointments back-to-back and allow for lunch breaks for maximum efficiency and energy.

2) Streamline service times. Many techs who claim a full appointment book admit to a 15-minute cushion for most appointments to prevent them from feeling rushed Set time standards for each service and provide intensive training for those who don’t meet the standard Consider the standard practice of booking 45-minute fills on the hour. If you were to trim those appointments to 45 minutes, each nail tech could accommodate two additional fills in each eight-hour shift and still allow for a 30-minute lunch or two 15-minute “breathers.”

3) Let client demand drive staff scheduling. The desire for a 9-5 job is understandable but unrealistic in a service industry. While you should try to accommodate requests whenever possible, make sure you aren’t sacrificing clients in doing so.

“I’ve seen salon owners tell everyone that they have to work on Saturday and be in by 9 a.m., but the customer rush doesn’t start until 10:30-11,” observes Jim Davis, president of The 3md Group (Irvine, Calif) “You end up with staff members just sitting around for two hours, but then when the after-dinner spurt on Thursday shows up, there aren’t nearly enough people to cover it so you lose customers.”

Look for patterns in client demand by logging phone and walk-In requests for a few weeks, and then adjust schedules accordingly.

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