Service Pricing for a New Reality
Apr 30, 2020
These have certainly been interesting times for the beauty industry since COVID-19 turned our world upside down.
Now that a few provinces are talking of allowing salons/spa to reopen, the next challenge is implementing the new sanitizing and social distancing guidelines such as:
- Screening and how to allow clients to enter the salon/spa.
- Occupancy based on square footage.
- Clean and sanitized capes and gowns for clients.
- Face masks and face shields for service providers.
- Single-use rubber gloves … and lots of them.
- Face masks for clients … and supplying face masks (free or for a fee) if clients don’t have one.
- Shampooing and protecting the face.
- Blow drying restrictions.
- Sanitized tools, combs, brushes, etc.
- Sanitizing work spaces before and after each client.
- The list goes on, and on, and on.
Next comes operating logistics that include:
- Station separation.
- Client appointment scheduling.
- Scheduling of service providers.
- Extending service time standards to allow for sanitizing between clients.
- Preparation of sterilized tools and implements.
- The cost of a massive increase in laundry.
- The cost of disposable PPE.
Finally, there is the challenge of generating sufficient revenue to meet increased operating expenses due to COVID-19, fixed costs (rent, utilities, insurance, etc.), and the reality that your salon/spa has fewer service hours to sell because of social distancing guidelines.
Historically service pricing is always a sensitive and emotional challenge for beauty professionals.
Here’s just a sampling of what we often hear echoed by our clients:
- We’re afraid we will lose clients if we raise prices.
- Raising prices at reopening is not the right thing to do. Many clients are on or just coming off unemployment.
- Clients will wait longer between visits with a price increase.
- We are nervous to discuss price increases with clients.
- Some clients should be grandfathered and never pay the new pricing.
REALITY CHECK: Costs are going to increase during the reopening process and may continue to increase over the next few months and years. If revenues do not quickly exceed all payroll and operating expenses, the reopening will be short lived.
Simply put, it’s going to get financially uglier than where you’re at now.
Please don’t shoot the messenger — you probably need to raise your service prices.
You know exactly how much you pay for a bottle of shampoo and all other retail products you sell. Generally we add a desired profit margin, usually 50%, to arrive a selling price to cover your retail business’s share of handling, fixed costs, and contribution to profit.
- That 50% gross profit isn’t all keepers. Retail doesn’t get to live in your business for product cost alone. It contributes to overhead and fixed costs.
The challenge is that the majority of salon/spa owners set their service prices randomly based on competitor pricing, perceived value, demand — everything except the true cost of delivering services.
FACT: Service pricing begins with knowing your cost per hour. Once you know the cost to deliver one hour of service, you can add your desired profit margin.
How To Calculate Your Business Costs Per Hour
Step One: How many revenue producing hours does your salon/spa have?
- This is the total number of scheduled hours you have available in one month. You can only count service hours if there’s a service provider scheduled to perform those services.
Step Two: What is your current average monthly productivity rate?
- # Revenue producing hours ÷ # Hours booked = Productivity Rate
Step Three: Using Profit & Loss Statements prior to COVID-19, calculate your total average monthly Cost of Sales (professional product costs, credit card processing) and your total average general expenses (guest services payroll, owner pay, rent, utilities and each and every other operating expense).
- Point 1: Do not include any retail product cost in your calculation.
- Point 2: Add in the approximate monthly costs you expect to incur due to COVID-19 including PPE, laundry, sanitizing products and materials, etc.
Step Five: To arrive at your cost per hour, divide total expenses, by average hours booked per month.
You now have the exact cost to deliver one hour of service.
It’s simple. The higher your booking rate — the more efficiently you’re utilizing your resources — the lower your cost per hour and the higher your profit margin. Likewise, if your bookings decrease, your cost per hour increases and the lower your profit margin will be.
How much profit do you want to take home after all your costs?
EXAMPLE: If your cost per hour is $85, and you want a 15% net profit (best to build in margin for error), the math looks like this:
$85 cost per hour ÷ 85% = $100 selling price for a ONE hour service
A 90-minute service would sell for $150
A 45-minute service would sell for $75
KEY: For each additional 15 minutes a service requires, add an additional $25.
It's beyond important to know your worth, and make sure you are making your time behind the chair worthwhile. Although its tough for many of us to look at the numbers and the reality of what we are actually making after expenses, there is no better time than now to hone in on the changes that will be necessary before we are given the all clear to get back to business.