The Costs of Doing Business
Do you know the cost of doing business?
Cost of Goods Sold, cost of sales, cost of revenue, or cost of services are all referred to as the direct costs associated with services completed during a period of time at your salon.
In a salon setting, the cost of goods sold would be the materials used (i.e. hair color, bonder, bleach, etc) that go into helping to achieve the desired outcome for that service.
Understanding the costs associated with your services helps you to predict your bottom line.
These costs do not include any indirect costs, such as marketing, utilities, tools (i.e. scissors), and rent. These costs are not directly related to the creation of a service.
However, your direct costs would include: hair treatments, hair color, extensions, and retail products too.
If you want to know if an expense is a cost of service or good sold, ask yourself, “Would this be an expense if no sale was performed?” Therefore, at the end of your client’s appointment, the hair color and everything used is considered a cost of goods sold or a cost of service at the end.
COGS is a line that can be found on your income statements near the top. It is important to know your cost of goods (or services) is because it determines your gross profit. It’s also important to note that as your cost of goods increases, your net income decreases.
COGS helps us to determine our pricing.
So when you’re doing consultation with a client, you talk hair goals. But you also talk budget too! Let’s say your client wants to go lighter for the summer but doesn’t have the budget for a full highlight (which is totally fine!). Likely, you will suggest doing a partial highlight instead as it costs less. You know this service takes less time and color than a full, therefore they are priced differently.
But can you still guarantee that this partial highlight will be the same as your previous one on a different client? No, you cannot. For this example let’s say your client has really thick and she wants a money piece too, requiring you to use more products than normal!
Tracking and charging for the color used during that service will ensure that not only do you know what your COGS are, but you can also guarantee that these color products are actually covered. So when the time comes when you need that extra bowl of color or second toner, that they’re paid for. When you know your COGS you can set the right price! It also guarantees you are leaving a healthy profit margin!