Rethinking Salon & Spa Service Pricing and Profit

As far back as I can remember, industry professionals have been saying that salon and spa pricing hasn’t kept pace with inflation. Few if any argue against it.

There’s another battle cry that goes with the “we’re not charging enough” thinking that sounds like, “Salon/spa net profits of +/-5% is pretty dismal.” In fact, too many salons and spas are notoriously unprofitable. Again, few if any argue this fact.

With service prices lagging behind and profitability looking bleak, it makes one wonder why anyone would want to open a salon/spa.

The service PRICING challenge

Charging what “you ARE worth”: There is an apparent self-esteem/personal worth issue that tends to get in the way. If one has the passion and perseverance to go through school, take countless advanced education courses and work hard to hone the skills of his or her trade, why not charge for your expertise?

If you’re an owner that bet the ranch to build a beautiful salon/spa, deal with all the stresses of being an employer, juggle finances and create a viable and unique brand, why not charge a price point reflective of this?

Fear of raising prices: Ask owners what’s the best way to raise prices and you’ll get a bucket full of responses such as posting signs that prices are increasing, telling clients prices will be higher on the next visit, and a host of other tactics.

After a so-called price increase, what really happens when a client goes to checkout? Was the new price communicated and added to the ticket? Is the “tell the client the new price” responsibility left to front desk and guest services to handle? How many visits after the actual price increase will the client pay the correct and current price?

We’d like to think that everyone knows clients are “clients” and not “friends.” But the fear of charging what you’re worth and raising prices to maintain profitability is problem that owners and employees must overcome.

Clients wouldn’t have that beautiful salon/spa facility to come to if operating expenses weren’t covered.

Clients wouldn’t have consistently great technical work and service experiences if payroll costs weren’t covered.

Clients would have that great looking hair color, skin, nails if professional product costs weren’t covered.

Clients wouldn’t have a fine salon or spa to go to if it wasn’t profitable.

The salon/spa PROFITABILITY challenge

Profitability is one of the Four Business Outcomes we teach and coach at Strategies. (The other three are Productivity, Staff Retention and Customer Loyalty.)

Profitability is planned outcome. It rarely if ever happens by accident. Creating Net Profit means budgeting and cash-flow management. The real key is knowing how to turn Net Profit into cash.

A quick lesson: Profit isn’t cash. Just because your Profit & Loss Statement shows Net Profit, it doesn’t mean that “profit” exists as cash in the bank. Yes, you can be profitable and broke at the same time.

The pace of business is faster, more relentless and massively unforgiving than ever. To succeed, owners must embrace financial literacy; understand every line item on their Profit & Loss Statement and Balance Sheet.

But the only way to make your financial reports look their best is to lock into monthly revenue projections and detailed monthly expense budgets. This is non-negotiable. Got it?

A couple of pricing and profitability facts

You can have your pricing dialed in …

But compromise profitability, low productivity (hours for sale versus hours sold), low first-time and existing client retention rates, low pre-book and weak retail sales.

But have payroll costs that are too high and unsustainable.

But fail to manage expenses and cash flow.

You can have your payroll and expenses dialed in …

But service providers that haven’t been skill certified to complete services within time standards will compromise profitability.

But service providers who are not charging the proper/current price and/or not charging for add-ons will compromise profitability.

The Service Pricing and Profitability connection

The intent of this post is to pull back the curtain on service pricing and its interconnection with Profitability.

Here’s my challenge to you: Digest what you’ve read and then consider the following six strategies.

Before you mess with your pricing, get your financial house in order. If there is anything on your Profit & Loss Statement or Balance Sheet that you don’t understand, it’s time for some financial literacy training. And, if you don’t have a monthly Cash-Flow Plan to manage revenues and expenses, you’re flying financially blind. It’s time to get serious about numbers. No Excuses.

Are your service prices based on your salon/spa’s “Cost per Hour + Desired Profit Margin”? If not, or if you don’t know what this means, you don’t know if you’re making or losing money on services. You know what each retail product costs and what its profit margin is. You should know what it costs your company to deliver one hour of service and if the profit margin is making you money.

What are your critical numbers telling you about the efficiency and consistency of your salon/spa? Productivity, monthly new client count, new and existing client retention, pre-book, retail recommendations all tell you what’s working and what needs leadership attention. Higher service prices can fix issues with critical numbers.

Are your service payroll costs in line with financial benchmarks? For salons and spas, service payroll should be 30% – 35% of Total Revenue (Service + Retail = Total Revenue). Because of product and equipment costs, Medspa’s should be under 30% of Total Revenue. If you’re on commission, higher service prices won’t lower your payroll percentage. You need a new system.

Are clients being charged the right price for the services they’re getting? I’m not trying to be funny when I say, “Charge all clients the correct service prices and you’ll see higher revenues.” Take a really hard look at your hair color business, both in product usage and pricing. You’re going to find lost revenue and missed opportunities.