Understand Product Markup to Retail for Profit

 

Of the two main opportunities for a nail salon to generate revenue, the sale of retail products perhaps has the most potential for profit. Services, while the chief moneymaker for most salons, are by necessity limited because of the time factor. Physically, one can only perform so many services within a given span of time.

On the other hand, the movement of retail items is much less limited by the same time constraints. A salon can move as many items in an hour as they can ring up on the register and thank shoppers. Obviously, a higher volume of dollars can be moved in the same time frame.

Just selling those items is not all it takes, however. To be profitable, many factors have to be taken into account before the retail side of the business can be fruitful.

MARKUP

Before all else, individual items must be priced to be profitable to the particular salon, and if not profitable in themselves, as, for instance, in loss-leaders, they must be priced to lead to the scale of other items in such quantities to make certain even the loss-leader pays for its space on the shelf.

From a sales point of view is important in assessing a price to a particular item is the perceived value; namely what the average customer perceives to be a fair price for the value charged. Many factors enter into how the market judges prices, not the least of which is the salon image (budget-minded, middle-of-the-road, or upscale). Keep in mind competitor’s prices. If the same brand of polish remover can be obtained elsewhere cheaper, it will be difficult to move in any quantity.

In most salons, the price charged for products is based on the manufacturer’s suggested retail price. This may or may not be profitable for the individual salon. In a start-up situation, the suggested retail may be the best price to use, at least until a sales history can be created.

As Jim O’Donnell, Backscratchers, Inc.’s creative director says, “Like most reputable manufacturers, we try to keep our suggested prices sharp for the salon. Remember we’re on the same page as the salon. If they don’t make money, we don’t.”

In most cases, selling at suggested retail prices will be profitable. However, this is not always the case. It is advisable to perform profitable studies periodically. (once a sales history has been accumulated) to determine if the prices charged are sufficient to render a reasonable profit.

There are three basic factors that influence the profitability of retail sales: gross volume sales, gross profit margins, and overhead expenses and gross profit margins – can be controlled.

Overhead expenses can put their broken down into expenses that are fixed or variable. Fixed expenses are those cost that go on whether the door opens that day or not, and include such items as rent, debt service, and insurance premiums, among others. Variable costs are those cost that are incurred in the act of selling, such as labor, supplies, and the majority of utilities. Gross volume sales are influenced by your marketing efforts. Planning, therefore, should be based chiefly on overhead and gross profit margins.

Knowing the difference between markup and profit is important, too. If you by an item for $1.00 and sell it for $1.43, you have a 43 percent markup, but your profit margin is only 30%, because although $.43 is 43% of $1.00, it is only 30% of $1.43.

Several formulas can be used in arriving at profitable retail prices. Here, we’ll use a bottle of nail strengthener as an example. Using it as a model, you can then extrapolate it to apply to all products.

BUILDING A COMPLETE LINE OVER TIME

Most successful retailers agree that the best way to build a line is to begin with the basics.

A good philosophy, according to O’Donnell, is to build a line by problem solving. For instance, if the chief problem clients experience is cracked nails, begin by stocking a product that alleviates that particular problem. “Reinvest the income from that item into another product that solves another common problem. You can build incrementally this way, choosing retail items either by universal popularity or by the prevalent problem seen in the individual salon. The key in this strategy is that a nail salon doesn’t have to buy the whole shooting match at once, but can build one or two items at a time – giving the advantage of having a retail item or items that the technician can sell to almost everyone.”

Matrix’s Stacie Halpern says pretty much the same thing. “Retailing works best in any salon when it is a logical extensions of the salon’s service business. In this way, the salon ‘services’ the client’s at-home beauty needs.”

To build a successful line, she adds, “The salon should begin with the basics: base coat, nail color, top coat, nail treatment cream, hand and body lotion. The items should offer a professional level of quantity that can’t be duplicated in retail outlets.

HOW TO DETERMINE YOUR PROFIT PER SQUARE FOOT ON RETAIL SALES

Merely selling products is not enough. It is important to know if a profit is being realized. It is a relatively simple procedure to determine the profit per square foot of retail, and from that to determine future strategy to boost profit margins.

Glen Allie, C.P.A. of the firm Del Principe & Allie, Certified Public Accountants in Rensselaer, Ind. gives the following formula: “First, determine income to be received from the square footage realized. This would include total sales minus sales tax, discounts, returns and allowances. Next, add the direct cost of products to the allocable overhead. The direct cost is the cost of the product itself (less any discounts) and any commissions paid. Allocable overhead is all of those costs incurred in maintaining the business space such as rents, insurance premiums and utilities, the net sales figure minus the direct and allocated overhead costs equals gross margin. Gross margin divided by the square footage of the retail area is the profit per square foot.”

This can be figured for any time period desired: monthly, quarterly, or annually. Below is an example of an annual determination of profit per square retail foot for a fictitious salon. XYZ Salon has 2,000 square feet (total), of which 200 square feet contributors for retail goods, and during the year the cost of discounts and commissions paid was $500 and $2,800 respectively. (XYZ sell at a 50% markup and pays 10% commission.) During the year, the salon realized $30,000 in net retail sales.

The value of knowing your profit per square foot is to see if you need to change your retail strategy. If you make less per square foot than you would by investing a similar amount of capital into a conservative investment instrument, then you need to rethink your strategy. In the beginning stages of retail, this is not as important as later on. To introduce retail items, train your staff, and get a retail program off the ground may initially involve a lesser return on investment. This can be viewed as an investment in the future, but after a year or two the return should begin to show a higher rate of profit than say putting the same amount of money in a Certificate of Deposit or other similar investment. If such is not the case, it is time to consult resources such as your accountant, retail sales experts, and the suppliers and manufacturers of the products you have chosen, for their input and advice as how to increase sales and profitability.