For most business owners, rent and labor account for the largest portion of fixed monthly overhead. Combined, they often equal up to 50 percent of total expenses.
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Fluctuating costs, such as the cost to operate each tanning system or spa device on a per-session basis, vary with actual usage and are typically less than ten percent of all monthly expenses. And, logically, if you are seeing more traffic and selling more packages and memberships, you can easily handle any increase in such expenses.
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Rent and labor, however, are constant regardless of how many customers actually pass through your doors every month.
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Fixing Your Fixed Expenses
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To ensure that you have sufficient funds each month to pay your bills and generate a profit, begin by creating a realistic forecast of how many sessions, monthly packages, memberships (EFT) and products must be sold every month to cover each expense category.
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Further, discipline yourself by compartmentalizing each expense starting with the highest to the lowest amounts.
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Next, determine your best-selling tanning and spa service packages and retail products, as well as the profit margin on each. For example, if the cost on your best-selling bottle of lotion is $25 and the product retails for $50, you have a $25 profit. This equates to a 100 percent mark-up and a 50 percent profit margin.
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If your monthly rent is $2,500 you would need to sell 100 bottles of this lotion to cover rent. Obviously, the higher the margin, the fewer bottles you need to sell.
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Next, let’s assume that your best-selling tanning package is a monthly membership that sells for $39.95 and includes sessions in systems that feature 48 full-body lamps and 4 high-pressure facial lamps. You can calculate your adjusted gross income on each monthly package sold by deducting the equipment operating cost (lamps and electricity) from the gross selling price.
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For example, the cost to operate a 48-lamp tanning bed with four high-pressure facial lamps is typically about 65 cents per one-minute session. And based on industry averages, tanners who purchase such a package will actually use seven (7) sessions per month.
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Accordingly, your operating cost per package sold is $4.55 (7 x 65 cents) and your adjusted gross profit on each package sold is $35.35. ($39.95 – $4.55).
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To cover a monthly labor expense of $3,500 you would need to sell 99 of these packages every month ($3,500 / $35.35). Using this calculation will also help you to budget for the cost of lamps and electricity.
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Review each product and package on your menu and determine your true costs for each, as well as your adjusted gross profit in both dollars and percentages. Then, compare your findings against what you are actually selling. If you discover that your best-selling products and packages provide lower margins as compared to other items offered, you should develop sales strategies to move more of the higher-margin products and packages.
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Do not get hung-up on profit margin calculations alone. The profit dollar contribution can be of equal, if not greater importance. For example, in some cases (depending on potential volume) you would be better off selling a $100 product with a 30 percent profit margin than a $5 product with a 50 percent profit margin.
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Yes, to achieve your financial goals, your business will sell a myriad of products and services. However, you need to drill down into that mountain of sales information to determine how much of each product and service you are actually selling – and then compare this data to what you NEED to be selling.
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To achieve your financial goals, you need to drill down into that mountain of sales information to determine how much of each product and service you NEED to be selling.
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Increase Sales & Profits Immediately!
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I realize that all the analysis in the world won’t help you unless you are actually increasing sales. So, I will share with you a sales strategy that I implemented earlier this year that lead to a 20 percent increase in sales and profits within just 30 days – and didn’t cost the salon owners a penny!
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Recently, a chain salon operator asked me to develop a sales strategy that would help increase their sales and profits immediately. This was a daunting task, as they wanted something that could be rolled out seamlessly to their 75+ employees and require very little financial investment.
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I asked the business owners if they would be willing to try something truly radical; something that would hyper-motivate their staff, require no cash outlay and could be stopped immediately, if not successful.
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Having trusted me before on several unorthodox but highly successful campaigns they were anxious to hear the details: Each employee who came to work on time every day would be allowed to sell one (1) bottle of lotion and keep 50 percent of the selling price as their commission.
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The sales program was set for 30 days. At any time during that 30-day period, the salesperson could select which bottle of lotion to sell and generate the 50 percent commission.
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For example: If on Day One, she sold a $50 bottle, she could select that as her target sale and earn a commission of $25. She could also elect to wait, in the hopes of selling a higher-priced product during the remaining promotion time. However, by doing so, she could not go back and claim commission on the previous sale. She had to make the decision by the end of the business day whether to claim a sale, or try again the next day for a larger commission.
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This strategy had an immediate and positive effect on every salesperson. They began talking about lotions and skin care products to every customer who walked in the door – and they almost always presented the highest-priced products first. The competition among the staff further fueled the fire, as no one wanted to be out-done, out-sold or out-commissioned.
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The commission promotion was so successful, the salon owners are now doing it monthly – and also adding salon and spa services to the mix.
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If you would like to receive a free Equipment Operating Cost Calculator free from IST Magazine, write to jerry@istmagazine.online.
