More than ever, salon and spa owners have to compete with the internet for retail sales. What makes this even worse is that sometimes your competitors are the very businesses that you’re buying your professional products from.  And when this happens, it means that your clients, whom you’ve spent valuable time educating about these products, can purchase directly from your supplier. This leads to you being bypassed and can result in a substantial loss of revenue.

Your beauty business is not a hobby.

While it’s important to enjoy what you do, it’s actually more important that you make a decent living, and this can only happen if you are making sales – service and retail. Recently, a salon owner commented to me that she always thought of her retail sales as being the cream on her income cake. But the truth is that retail sales are not your cream on the cake, they are actually the cake itself – your revenue-fueled, deliciously profitable cake. Income from retail sales is hugely profitable – don’t doubt it. And if you’re not clear on just how important they are to you, then you’re probably leaving a truck-load of money on the table in your business. Given that many professional retail products now return a 50% margin (that’s 100% mark-up), and most services return nowhere near that %, you need to take retailing seriously in your salon or spa.

Here’s an example of what I’m talking about.

Let’s say you provide a 1 hr basic facial service for the price of $85 (excl. GST). Once you deduct the product cost (conservatively $8.50) and the wages, super and bonus expenses ($37.50), you’re left with a $39 gross profit. Sounds pretty good so far, doesn’t it? Now, let’s look at a retail sale that takes ¼ hr. The product selling price is also $85 (excl. GST). The cost of the product is $42.50 (50% margin) and labour is $7.56 (1/4 hr), and bonus commission is $8.50. This makes your gross profit $26.44 for 15 mins of time invested. Now, when you consider that $26.44 was earned in 15 mins, that makes the gross profit for 1 hour $105.76. What do you think about those 2 figures? Service profit of $39 per hour or retail profit of $105.76 per hour? I think it’s fairly obvious that retail profits are easy profits with a powerful impact on your bottom line. With the same amount of time invested, that makes retailing nearly 3 times more profitable to your business than providing a basic facial that has minimal product cost. So, do you still think that retailing is the cream on your business cake, or perhaps now you’re thinking it’s the other way around? Okay. Now we’ve established how important retail sales are to your financial health, what can you do to protect them?

Do your research.

The first thing, of course, is to choose your product suppliers with great care. Become a Sherlock Holmes and do your research. Google the product range that you’re considering stocking to see where else your clients can purchase it, and for how much. Keep in mind, even if the price works out about the same as what you sell it for, people tend to opt for the ‘easy solution’, which is a quick online purchase with the products delivered to their door. Don’t rely on client loyalty to protect your retail sales, because for 99% of clients it doesn’t exist when it comes to price or ease of purchase. So, if your products are readily available online, and you want to protect your retail revenue, then you’ll need to look for an alternative range that caters strictly to professional salons and spas. Let’s face it – the internet is here to stay and no amount of wishing or hoping is going to remove these product competitors from your universe, so it all comes down to the actions you take to protect your business income.

Online purchases by your spa clients.

Another problem that salons regularly face is one where the client comes into your salon with a bag full of online purchases, and expects you to spend your time providing advice on how to use these products. This is happening regularly, and I’ve spoken to many frustrated salon and spa owners who’ve been put into this awkward position by un-thoughtful clients. Here’s my solution to this problem. Create a new service in your salon called Professional Product Consultation and charge for it – not a pittance, but as if you were supplying a service in this time-slot – because you are. This way when a client wants you to spend your time explaining how to use products that they’ve purchased elsewhere, you can simply book them in for a paid Professional Product Consultation to provide them with the full benefit of your knowledge. This isn’t going to prevent the client from purchasing products online again, however, you’ll at least be paid for the time invested in teaching her how to use them; and this, in turn, will help to compensate you for lost sales revenue.

Motivate your spa clients to purchase from you.

To encourage your clients to purchase retail from you, rather than online, consider including your retail product sales into your Rewards Program. Once your client realises that she is missing out on valuable rewards points which she could have redeemed for salon services, she may reconsider whether or not buying online is such a great idea. But at the end of the day, the real issue lies with the fact that your clients can purchase their professional skincare products online in the first place. To my mind, every supplier to the professional skincare industry should be bending over backwards to ensure their products are not being sold by anyone other than salons or spas to ensure the end-user is using the right products on her skin, and therefore, achieving the best possible outcome. And that’s why, as a salon or spa owner, it’s up to you to ensure you choose the right range of professional only products to protect your valuable salon revenue.

In any line of business, knowing your break-even point (BEP) is critical. Contrary to popular belief, it is not just essential knowledge for startups, but for all stages of business.

As a salon owner, this information is essential, as it will assist you in your day-to-day operations, as well as assessing opportunities that may come your way very quickly.

Have you ever wondered what your most profitable service is (It’s not always the most expensive)? Or how many new recurring clients you need to attract to hire another staff member/do those renovations? Knowing your BEP and monitoring it closely helps you keep your finger on the pulse of your business, without having to sit down and wade through reports every time.

 

What is a Break Even Point?

Google “Break Even Point” and you will find a lot of confusing information about complicated formulas for calculating the BEP, and different margins and ratios for assessing business research. This is because BEP is used by investors a lot, to assess the viability of a business prior to investing money or buying shares.

While fascinating reading for financial types, it can make a quite simple concept appear extremely confusing to small business owners (very common in my industry, and a HUGE bugbear of mine, but we will come back to that another time).

Simply put, your break even point takes into account ALL fixed and variable costs associated with providing your product/service, and calculates how many sales you need to make each day/week/month/year before you make a profit.

 

How is it calculated?

The formula for calculating your BEP is Sales = Fixed Costs + Variable Costs.

Sales is pretty obvious, the total amount of income received.

Fixed Costs refer to those costs that do not fluctuate depending on how many customers you have, and are therefore fixed.

Eg: Rent, Insurance, Electricity, etc.

Variable Costs include expenses that rise, the more customers you service.

Eg: Products, Consumables, Wages

Steps to calculate your BEP:

In this example, I will assume you are currently in business and have a month’s worth of financial data to look at and use for calculation. If you are in the planning or start-up stages, please feel free to contact me for specific information regarding projecting costs and sales.

You can also, for more accurate numbers, use an entire year’s worth of data, and then break down to the time period of your choice at the end. This is preferable, as the numbers will reflect seasonality, but can be more time-consuming.

If you have a good computerised accounting system, you should be able to find this information fairly quickly, if not, using your Profit & Loss Statement from your previous years’ financials will suffice. It is important to remember when running such calculations, the more up-to-date your data is, the more accurate outcome results.

1. Grab two pieces of paper, and write down all of your Fixed Costs on one, and all of your Variable Costs on another. Include a value for each which is comparable when thinking about time. (For example, if I pay electricity quarterly, but insurances monthly, I would need to break down the electricity costs by dividing it by 3).

2. Now, grab your appointment book, or run a report from your software for the same period, which shows total sales amount, and total customers serviced. If you use a book, simply count up how many appointments you have had over the past month.

Don’t be too concerned over differentiating between retail sales and service sales at this point, we can delve deeper into that area later. Using the steps outlined here will simply apportion the retail sales across your clients, which is usually pretty close to accurate anyway.

3. Divide the total Sales amount by the number of appointments. This will give you your Average Sale per Customer.

4. Total all of your Fixed and Variable costs for the same month, then divide by the Average Sale Per Customer amount.

5. This is the total amount of customers you need to service each month to break even.

Do I include my wages?

I see so many salon owners not including their own pay when completing a financial analysis of their business. More than any other industry, actually!

Remember, any reports or financial analysis of your business should show the realistic position of your business. Imagine you were looking to buy a salon, if the numbers showed a profit, but assumed you would work 40-50 hours for free each week, is it really a profit? Would you want to buy that business?

 

What now?

The above is a very simplified example of calculating your BEP, and should assist with getting your head around the number portion. Once we have this initial information, we can use it to assist in many ways. Calculating the FC and VC portion of each different service would be beneficial also, as then we can have a look at our most profitable services when deciding on marketing strategies and upselling.

It also helps to have a rough goal. If you know you need 60 appointments per month to break even, and midway through the month, you realise there has only been 20 so far, it can give us that little mental push needed to contact clients, put a facebook post up, or something else to stimulate bookings, rather than getting to the end of the month having done nothing.

Go to www.baspro.com.au/freeconsult to register for your free 30 minute phone consultation with April. As a special offer for SalonSavy friends, we are offering a 50% discount on BEP calculations. Have your calculations completed and receive a report on your salon for just $55.00.

 

About April

April Scott is Principal Director of BasPro, she is a qualified accounting professional, and practices as a BAS Agent, bookkeeper and software consultant.

She is passionate about assisting small business owners to simplify and automate the information flowing through their business to assist with compliance, and providing information to assist in achieving their business goals.

BasPro offers fixed fee affordable Bookkeeping, BAS, Payroll and Software packages. Find out more at www.baspro.com.au

Why is it that making a profit from your salon or spa is so elusive?

Is it because you don’t work long enough or hard enough?

Is it because you don’t have a passion for making others look and feel fantastic?

Or is it because you don’t deserve to be financially successful?

The response to all these questions is, of course, a resounding ‘NO”. As a salon owner, you probably work harder and longer than any of your team and are absolutely dedicated to your profession and clients.

In fact, if these were the only things that determined whether you were going to be profitable, then you’d be planning a fabulous Hawaiian holiday, instead of reading this article.

Making a profit goes beyond hard work, technical skills, passion and even dedication. It needs something more from you, and the great news is that you have what it takes to achieve it.

Basically, there are three things you need to change about the way you’re doing business:
1. First, you must bite the bullet, do the sums, and learn about which services offer your salon a worthwhile profit (and which ones don’t).
2. Second, you need to put all your focus on promoting and delivering these services in your salon.
3. And third, you have to change your mindset around receiving money for what you do.

Many salon owners struggle to determine which services they should specialise in, and so they end up drowning in a sea of zero or low-profit services – being busy but making no money. These services often take the same amount of time and skill to deliver but don’t return a decent profit to your salon.

But before you make the decision about which services your salon should specialise in, some knowledge is required.

Service Pricing

A no-compromise fact for greater profitability is that you must know for certain how much each service costs you to provide. No guesstimates permitted! Without this information, you can’t begin to define which services deserve your undivided attention, and which services are barely worth having on your service menu.

Unfortunately, not many salon owners go to the trouble of doing this, and that’s a big part of why making a profit seems to elude so many.

When asked, most of the salon owners I’ve spoken to tell me that they determine their service prices based on what their competitors are charging (sound familiar?). The problem with doing this is:

• They have no idea as to whether or not their competitors are actually making a profit from their services.
• It doesn’t take into account the difference there may be in product costs, specialised skills and equipment required, general expenses or time taken to provide the service.

You can’t price your services this way and expect to know for sure what profit you’re going to have at the end of it. There’s always a good chance that your competitors have used the same pricing methodology, and so in the end, nobody really knows which services are making a profit for their salons and which ones aren’t.

Yet everybody is copying the pricing structure of the salon down the road!

Let me give you a great example of why it’s important to know how much a service is costing you to provide. I was recently working with a very experienced salon owner who was resistant to the idea of calculating the cost of her services. She didn’t think it was really necessary and felt that she had enough experience to determine fairly accurately what a service was going to cost to provide.

She was keen to introduce a new whizz-bang, top-of-the-range facial, had looked at other salons top facial prices around the area, and settled on a selling price of $139. This was a substantially higher price than the other facials she offered in her salon, and so she felt sure that it was going to make her some nice profit.

Before she got too excited about it all, I suggested we do a quick calculation on the basic cost of the proposed facial by looking only at the cost of the product, consumables (throw away items), and labour. It took only a few minutes to realize that the cost of this new facial was going to be around $124 due to the very expensive products it required, plus the ninety minute delivery time.

So, once we took out the GST component of her facial selling price, (because you don’t get to keep that bit), the actual selling price was only $126.36. This means a gross profit of $2.36 cents after we’ve deducted the basic cost of $124. And of course, the remaining $2.36 had to contribute to the cost of all the other expenses to keep the salon running.

Who’d have thought that a $139 facial treatment wasn’t even going to make a profit – and it happens far more often than you might think!

Now you may be saying to yourself, ‘There’s no way that I’m not making a profit on my services’, but how do you know for sure if you’ve never calculated the cost of the services you provide?

I won’t argue with that fact that it’s time-consuming and not much fun to sit down and work out the cost on every single service, but it’s also very necessary if you’re going to grow your profits.

No long-term successful business guesses its selling price based on what its competitors are offering up, and neither should you. First, you must know what it’s going to cost you to provide.

But that’s only one part of the formula, so let’s take a look at how your focus contributes to your success.

 

How to use focus to get what you want.

A quote from Star Wars, Episode 1, from Qui-Gon to Anakin, “Always remember, your focus determines your reality.”

When you fully focus on becoming a more profitable business through increasing the sale of more profitable services, most of your future decisions will be based around achieving that outcome.

You’ll consider things such as:

• The image of your business. Is your image telling prospective clients that you are a specialist in those profitable services, or are you sending mixed messages? As an example, a salon wishing to be known for its cutting-edge technology-based treatments needs to project a modern image rather than something like shabby chic, or country charm. The right first impression to prospective clients is critical if you want to been seen as a specialist in certain treatments.
• The qualifications of the staff you employ. You may need team members with specific skills who can deliver your most profitable to the highest possible standard. If you want to build your business around these profitable services, you need team members who are qualified to deliver first-class treatments.
• The marketing promotions you generate. Once you’re clear on which services you need to promote to make more profit, you will focus on promoting those services more effectively and more often.
• Your product range. It’s important to align your product range to the most profitable services you intend to specialise in. The right products with the right mark-up equals better profits for your salon.
• Your equipment purchases. When you’re clear about the services you need to promote, you’ll also be clear about the equipment you need (and don’t need) to deliver those services. Spending money on dust-collecting equipment that you seldom or never use will be a thing of the past.
• The training you attend. Specialised services delivered at the highest standard will require on-going training to keep you at the top of your field. It pointless undergoing expensive training for services that don’t deliver a worthwhile profit. No more wasted days for training for your or your team members that won’t support your goals of making more profit.

Changing your money-mindset.

To become more profitable, you must first be comfortable with the idea of taking more money from your clients.

Many salon owners and their team members are uncomfortable with asking their clients to try a new product or service if it means asking for more money.

Perhaps they see themselves as being greedy or perhaps they feel that their clients can’t afford it, but in fact, that’s a decision that should be made by the client.

As a professional, it’s your job to recommend the services and products that will help your client achieve her goal, and it’s up to her whether or not she wants to purchase them.

It’s not your job to judge whether a client can afford a treatment or a product. It is your job to be able to deliver positive outcomes and let the client decide if she can afford it.

Making a profit is what allows you to stay in business, continue to deliver first class services to your clients, keep your team members in worthwhile employment, and make enough money for yourself to help your family enjoy a wonderful lifestyle.

You don’t have to be unscrupulous to make a great profit from your salon, you simply have to know your numbers and focus on the things that will return a profit in exchange for your hard work, ongoing education and determination to offer the best to your clients.