We first heard about product cost deductions in the early 1970s. Over forty years later, the product cost deduction pitch to staff hasn't changed ... but the industry most definitely has.

The pitch typically sounds like: "We're going to raise service prices ten percent. The increase will be deducted from your service total before your commission is applied. The increase is to cover professional product cost. You will still make the same money."

This is what service providers typically hear: "We're doing the work. We're not making commission on the price increase. We got a pay cut. Product cost is the salon/spa's problem ... not ours."

Here’s the truth:

• Professional product cost IS a cost of doing business.


• It is a line item on the Profit & Loss Statement that should fall between four to six percent of service revenue.


• As product and operating costs in a commission salon/spa increase ... profits shrink.


• Any attempt to lower commission rates to offset increasing product and operating costs is an open invitation for a walkout.


• To avoid lowering commission rates, a price increase that is not commissionable is initiated.


• The result ... using a smoke and mirrors tactic ... commission rates are lowered ... less staff feel cheated.

Math tells the truth

Service provider’s weekly service revenue = $1,000
Commission rate = 45%
Service provider’s gross pay = $450

Service provider’s weekly service revenue = $1,000
Price increase of 10% for product cost = $100
Service provider’s service sales plus increase = $1,100
Minus product cost deduction of 10% = $110
Commissionable service revenue = $990
Commission rate = 45%
Service provider’s gross pay = $445.50

Service provider’s service sales plus increase = $1,100
Actual commission rate on total service revenue = 40.5%
Service provider’s gross pay = $445.50

Truth ... Commission rate was lowered by 4.5%

For owners and staff to figure out gross pay ... without the funny math ... simply multiply service revenue (with the price increase) by 40.5%

• It’s about controlling costs: Each and every business cost will eventually rise. A business must be able to both adjust prices and control costs to protect profit. Professional product deductions were tagged because it is a cost that service providers could relate to. They need professional products to do their work. But just about any business expense, like water, electric and rent, could be tagged as being essential to do their work.
  TRUTH: Implementing a product cost deduction in conjunction with a price increase was an easy explanation that disguised the fact that a non-commissionable price increase actually reduced commission rates across the board. It was also the least likely tactic to avoid a potential walkout. Whether owners understood or not ... the intent of product cost deduction is to lower commission rates.


• It’s about a price increase ... not pay raises: So ... the business needs to increases prices to adjust for increases in operating costs and to protect profit. The problem in a commission-based business is that service providers instantly receive a pay increase along with a price increase.
  TRUTH: Too often, the price increase doesn’t go far enough to offset increased operating costs ... and commission staff rarely if ever say, “Thanks for the raise.”


• It’s about a line item on the Profit & Loss Statement: With the salon/spa professional product cost benchmark of four to six percent of service revenue ... it’s actually pretty easy to budget and manage professional product cost. It’s just a discipline that too many salons/spas don’t embrace.
  TRUTH: The focus and effort should be on controlling the professional product cost line item on the Profit & Loss Statement - not the product cost deduction. Why? Because without budgeting discipline, the product cost deduction alone cannot control spending or profit.


• It’s about eliminating smoke and mirrors: Even though product cost deductions are a common practice, they are consistently a point of contention with commission employees. The math presented above is truth. One is smoke and mirrors to disguise the commission reduction. The other is a straight forward and honest business conversation.
  TRUTH: It’s better to clarify the price increase as non-commissionable and educate staff on the commission adjustment. Heck, show them both formulas and tell them you’re going to use the short math formula. If they feel better using the funny math approach to avoid accepting a lower commission rate ... so be it. Truth, openness and honesty is always the better approach.


• Product cost deductions don’t go far enough: TRUTH #1: Most owners are not that good at following budgets. With all the turmoil that accompanies a product cost deduction ... the reality is that the deductions rarely go far enough.
  TRUTH #2: It can get pretty ugly if you need to increase the deduction at a later date because the initial deduction didn’t go far enough.


• It’s about feeding the independent contractor mentality: Independent contractor relationships are about “parts and labor.” The growth of booth rental and suites is being fed by thinking that sounds like, “If I’m paying for product and getting a commission ... what’s the difference if I’m an employee or renting a suite or chair?”
  TRUTH: Commission and product cost deductions feeds a relationship that has little differentiation between being an employee or renting a booth or suite.


• It’s about leading an employee-based salon/spa AND differentiation: The traditional commission, product cost deduction ... and request rate clientele building ... is, by design, more relatable to the independent contractor rental/suite model than an employee-based business model. It is no wonder why so many service providers defect to rental and suites. Factor in few, if any, benefits and life as a column on the salon/spa’s appointment book ... and it’s easy to see why rental and the proliferation of “be free - lease a suite” has owners of employee-based salons/spas feeling so vulnerable.
  Strategies' Team-Based Pay system is alternative, true employee-based business model which eliminates product cost deductions, commission splits and the “who gets the credit” mentality. LEARN MORE: Download our free Team-Based Pay Fact Sheet here.