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The Truth About Salon/Spa Product Cost Deductions

October 10, 2016 | By Neil Ducoff | 7 Comments

The Truth About Salon/Spa Product Cost Deductions

I 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

Example A: Before implementing the Product Cost Deduction …

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

Example B: With the smoke and mirrors tactic …

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

Example C: No smoke and mirrors …

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%

Why the truth about product cost deductions is important to know:

  • 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 white paper report here.

Here’s my challenge to you: It’s time to pull the curtain back on product cost deductions and identify the tactic for what it is … a way to reduce commission rates. It’s also time for owners to understand that there are 100 pennies in a dollar and that every penny has its place on the Profit & Loss Statement … especially professional product cost. Without question it is a cost of doing business. Whether you’re a commission business or on TBP … your challenge is to differentiate your business from independent contractor, booth rental and suites. Do it now. There is no reason to be vulnerable or to be held hostage by business practices that are out of sync with the times.

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Categories: Financial Literacy , Monday Morning Wake-Up

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Comments

  1. Fantastically outrageous and out of touch with real world business from a site that proposes to give business advice. There are so many complexities to this. You don’t discuss deductions based on service and product cost, but show overall %. You are hurting the industry with this article.

    1. Hi Paul. With all due respect, product cost deductions have done more damage to the industry than any one article, mine or otherwise, could do. Product cost deductions are nothing more than a way to lower commissions with smoke and mirrors. Yes, if you’re paying commission and dread the “we need to lower your commission a few points to cover product cost” conversation, then product cost deductions make sense — but the result is the same. The percent of the total service price the employee earns is reduced. Like it or not, professional product cost IS a line item on a salon/spa’s Profit & Loss Statement. Product cost deductions feed the independent contractor mentality (parts and labor) … that plays right into the hands of Suites looking to lure the busiest stylists from employee-based salons/spas.
      As you said, “there are so many complexities to this.” You’re disrespecting response to my article and my company was unnecessary. We have different points of view on the same topic. There are better and more open ways to control professional product cost.
      Neil Ducoff
      STRATEGIES

      1. As an employee paying $30k in product charges annually, can I write that off on my taxes? If i don’t pay it, I cannot preform my job.

        1. If it’s a “product cost deduction” before commission … and not an expense you paid directly to a supplier with receipts … it most likely is not a write off. Check with your accountant.

  2. Is it fair that an hourly based employee that only received commission after doubling weekly pay in service sales should have to pay for their own products? Also keeping in mind that when it is slow..the employees are asked to leave and go home, this not meeting consistent weekly hours? Should they be looking to move elsewhere to practice under more fair standards or does this seem fair?

    1. Hi Rachel. Product-cost deductions — before commissions are paid — have been around forever in commission salons/spas. As for sending employees home when it’s slow, it’s usually a sign of low productivity and/or over-staffing. The short answer is, if sending employees home when it’s slow is routine business practice, it is not fair nor does it help with employee retention. I would suggest that you have a conversation with the owner to see what can be done working together to end this practice.

      1. I have enjoyed reading this article and responses to it. I have been a salon owner for 15 years and have a hybrid salon. I am progressive and value the suggestions received by my staff. It is complicated, I agree. Honesty works best. I have deducted product costs, shared products and fully covered them. The beauty industry changes continually and you have to move quickly with it or your out. Smart business practices, structered materials to be handed out works wonders, and keeping a close eye on your budget is imperative. When I can, I give back. When people are starting out, its a great incentive to not deduct product cost while they are building. Have a review with your staff and see where they fall within product cost and decide when to incur them, together as a team. This has worked nicely and I am respected for it. I have booth renters and emloyees and being cohesive is important for Salon growth, nobody wants to plateau, fruitfullness comes to all those who bear it!
        Jennifer

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