Business Tips

Want to know the Biggest Flaw in the Salon Industry?

By Michelle Fergusson | 

Want to hear a secret?

Well first, let’s shed some light on the facts about the salon industry. Over 80% of salons fail before they even reach their second year of operation.

So, do you want to know the biggest flaw in our industry?

A lot of these flaws have to do with the way we’ve been taught to price over the years. To be honest, we don’t color the same way, so why do we still price the same way? Our old, traditional pricing technique hasn’t empowered us to charge our worth or allow our salons to grow. Now, this “new” pricing system is something a lot of other industries use.

Let’s break it down, together.

The traditional pricing method: The one you’re likely using:

Your stylist is doing a color service on medium length hair and it takes them 2 hours. Based on your current pricing, the client is charged $130 and of that, $10 is allocated for color used in the sessions for one bowl. You pay your stylist 50% commission; therefore the stylist takes home $65 from the service.

Question, do you notice anything off?

Answer. You’ve been paying your staff’s commission on top of the color costs.

So how do you fix this? Well, first we have to remove the color service charge from our initial revenue line.

When you don’t take out the $10 color charge from your revenue, you end up losing money. Your color charge isn’t $10; it’s also an additional $5 that you’ve now paid out on top of the commission. For every single tube that’s included in that top-line revenue, you’re paying an additional percentage off of that at a 50% rate. And what if you find out the cost of color used was actually $18, not $10? So now you’re actually at a $23 of loss, because color costs were not accurately accounted for and color was not deducted before commission payout.

Color should be placed under the line on your Income Statement called Cost of Goods Sold also referred to as (COGS). COGS are crucial for you to know and understand that you can ensure your business is profitable and they can lower your taxable income, lowering how much tax you owe. COGS also helps you to know the health of your business. Even though you provide services, you still use a variety of products and amounts to provide your services.

Now go back to our first example using the SalonScale Advantage method, by separating our parts (product costs) from our labor!

If you’re unfamiliar with the Parts and Labour pricing method we have a webinar and blog which will be linked to at the bottom of this blog page.

So, Say your stylist has a base rate of $60/ hour.The color products they weighed using your SalonScale app are valued at $18, and the service takes them 2 hours. Making the total charge to the client $138.

So this is What you give your client:

And on an Income Statement You would see…

You can also mark-up your product charge, allowing you to generate more profit and cover the expenses for foils, PPE, bowls, and other supplies!

One of the reasons Salons have a 4-8% profit margin is because they aren’t calculating the parts from labor. So when we separate parts from labor, you can analyze which parts of your business are profiting and empower you to invest back into your business.

Know your worth, then add Tax.

So, you charge a lot for your hair service? When you boost service charges to increase your salon’s revenues in your top-line, you’re going to get chewed up in your taxes because taxes are gathered from your top-line earnings. That’s why you need to separate your parts from labor. Taxes can be scary. Business is good, then suddenly tax time comes and we owe the government money.

As mentioned above, stating your Cost of Goods Sold can help to lower your taxable income. When you don’t deduct color immediately from your revenue on your income statement you end up paying a commission on the product, but you’re also indicating that the product is the service revenue too. Because your showing that you have higher revuences, you can to be put into another tax bracket or your stylist may be put into a new one too with price increases, ultimately, you’re setting yourself up to paying a larger portion of their holiday pay, OAS, CPP, EI, etc. Remember everything is gathered from the top line!

But, on top of that, you’re paying corporation tax on earnings, and that “mysterious $23 loss we mentioned” is factored in there. Stating your COGS helps you to understand your business’s profitability and could heavily influence your taxable income. By utilizing a salon inventory management software or app, like SalonScale, can help you to know the exact cost of color products being used in your back bar.

The Salon Industry isn’t what it used to be. We color hair differently than we used to. When you look at how business was taught to salon owners and stylists, it’s the color manufacturers that taught how to charge. The good news that here SalonScale is we’re here to empower you and all stylists they’re worth and then add tax!

Michelle Fergusson

Michelle Fergusson is the Content Manager at SalonScale Technology Inc. With over 3 years of experience in the marketing field, she has worked with multiple tech companies and non for profits to help them grow their brand and optimize their profits.