Salon/Spa Pricing: Charging What Your Services are Worth
The industry’s long-term challenge has been keeping pace with the rising costs of doing business. This is especially so with the skyrocketing costs of prime lease space.
Every salon/spa owner knows the importance of “location, location, location.” But being in the right location with the wrong pricing is business suicide.
That’s why in these economic times, getting your service pricing right is so critical.
In its most simplest form, salons and spas sell increments of time in exchange for professional services. The key word is “professional.”
“Professional” means the assurance of specialized knowledge, skills, creativity and experience. It also means location, ambience, amenities, marketplace, brand recognition and other key factors.
So the big question is, if your salon/spa meets all the criteria for “professional,” are you charging what your services are worth? And if not, why not?
FACT #1: Charging what your services are worth has nothing to do with personal ego and status. It has everything to do with setting a price that covers all service and operating costs plus sufficient margin to ensure desired net profit.
FACT #2: The worst and most flawed approach is to base your company’s service pricing on what another salon/spa is charging. Why? Because your costs of doing business may be very different.
FACT #3: The only way to accurately price salon/spa services is to know your cost to deliver one hour of service, based on your current productivity rate, and add a profit margin that assures profitability.
Use the following checklist to ensure you’re not only charging what your services are worth, but selling those services at a profit:
- Know your Cost per Service Hour: You know how much a bottle of shampoo costs. Most salons and spas mark that cost up 100% (buy it for $15 and sell it for $30) which represents a 50% gross profit margin. But with 75% to 90% of your revenue coming from services, do you know what it costs to deliver one hour of service? Sadly, most owners don’t know. That means service pricing is based on guesswork and what competing salons/spas are charging. There are three key elements to cost per hour:
- All variable and fixed costs per month — not including retail product cost.
- Divide that number by the total number of service hours sold per month. This is your cost per hour for one month.
- Add your desired profit margin. For example, to add a 20% profit margin, divide the cost per hour by 80%. If your cost per hour is $100, the selling price should be $125. A 30-minute service should sell for $62.50. Each 15-minute increment should sell for $31.25.
- Productivity rate is key to service pricing: Any increase in your productivity rate lowers your cost per hour and increases profit margin. This is especially so for companies on Team-Based Pay. Likewise, if your overall productivity rate starts trending down, your cost per hour increases and profit shrinks. Productivity rates below 75% means your salon/spa is has too many hours for sale and is operating inefficiently.
- Know when to increase service prices: Monitor cost per hour monthly to determine if or when a price increase is necessary. If you set your service prices properly, you should be able to go a year or two between price increases. However, by monitoring cost per hour monthly, you will be able to identify if service prices should be adjusted sooner.
- Don’t complicate price increases: The anxiety associated with price increases is nothing more than self-inflected pain. If prices need to increase — increase them. A simple post on your website and sign at your front desk is all that’s needed. It’s impossible to give every client advanced notice. Most clients will be fine. Some will complain. That’s business. Costs go up. Prices go up. End of story.
- Skill development is non-negotiable: Service time standards don’t exist to frustrate service providers. Service time standards exist to ensure that the price set for services, based on cost per hour + profit margin, are in sync. KEY: It doesn’t matter if the price for a service is set right if one or more service providers can’t complete that service within the time standard. If it takes 1:15 minutes to complete a service that should have taken one hour, that service lost the company money. Employees must be trained to work within time standards.Click here for hands-on help building a comprehensive internal training program.
Here’s my challenge to you: There are many factors that contribute to tight cash flow and weak or no profit. Spending that’s out of control and not controlled by a cash-flow budget is the most common. Raising prices won’t fix a spending problem.
Underpriced services and productivity challenges require more understanding and leadership attention. Again, your pricing may be pretty much on target, but low productivity rates make it harder to cover payroll and operating costs.
Dig into the five points presented here beginning with an ongoing system to monitor your cost per hour.
Need help figuring out your cost per hour? Strategies can help you! Schedule a free coaching session here.