Spa managers need every relevant tool available to them, in order to make sound business decisions regarding cost containment and profitability. It is vital for managers to know how to measure and evaluate each spectrum of business performance in order to strategically and logically ensure success and sustainability. In this age of discounting, there is one formula that will serve as a timely reminder that before you can enjoy profits, you must understand performance.
Know the costs of maintaining Revenue & Profits when Discounting
If you discount products or services, you need to know how many discounted units you will need to sell in order to realize the same revenue and/or profits you enjoy when selling those items at full price. The first step is to calculate what your gross profit margin dollar ($) is when you sell the item at the full price vs. what your gross profit margin dollar ($) is when you sell the item at the discounted price.
I have used a 90-minute facial service to demonstrate how to calculate gross profit when selling a service at full price vs. selling it at a discounted price. This sample shows that we make $103 gross profit selling this 90 minute facial at full price; vs. $73 gross profit selling it at a 20 percent discount.
Here’s the number one formula you must know
Now you will want to calculate how many facial services you will need to sell at the discounted price, in order to enjoy the same revenue and profit dollars that are generated when this service is sold at its full price. That formula is:
Gross profit margin dollar ($) at full service price ($103.00) divided by gross profit margin dollar ($) at discounted service price ($73.00)
Looks like: $103.00 ÷ $73.00 = 1.4
So for every 90-minute facial service you sell at full price, you will need to sell 1.4 facials at the discounted price, in order to enjoy the same amount of revenue and profit. For example, if you were able to sell 10 facials per day at full price, you would need to sell 10 x 1.4, or 14 facials per day at the discounted price.
Considerations:
- These examples are hypothetical numbers only and may not resemble your real-life business scenario.
- Staff scheduling requires even greater finesse when you are trying to maintain revenue and profits when discounting. You do not want to over-staff in an attempt to service those desired 14 facials, because over-staffing will result in even further gross profit erosion, whereby you are paying staff wages when no revenue is coming in.
- Your COGS may decrease in the discounted price scenario shown above, because you may choose to reduce employee wages when your services are being discounted (even though this may not be the most popular or reasonable choice).
- Add-on sales will become even more important when discounting service prices. Discounting only those services that are retail-driven may be the best idea.
- Know your seasonality and what may be going on in the hotel/resort that could negate the need to discount, before you decide to discount. Discounting can be effective when it is looked upon as a yield management technique.
- You can also re-create this template and do the same with each of your Retail Products, by assigning those costs that are more associated to selling retail items. For example: Substitute Employee Wages with Employee Commission paid on retail sales; exclude Payroll Burden; and Miscellaneous costs may be more accurately referred to as shipping, merchandising, and display, etc.
What if you don’t sell those additional 4 services?
You may have many reasons why you choose to discount and don’t consider it a priority to maintain revenue and profit levels, in every case. Some examples would be: you wish to grab attention and boost your spa’s exposure; you want to attract a new demographic; you are introducing a new service, etc. Maybe you are willing to absorb this lost revenue as a part of your budget in this particular marketing/promotional initiative.
But once the discount offer has expired, make certain to assess whether those goals were actually met. If they were not met, you’ll need to seriously consider if discounting is providing any kind of real value to you. Discounting just to increase sales dollars, may not be the most logical approach.
There are many strong and conflicting views on discounting. You will need to determine whether it is right for your business and if so, when, why and how much. I do believe there can be true value in discounting under certain circumstances, and that the occasional sacrifice can be warranted.
Just remember that as a Spa Manager, you must always know why you’re doing what you’re doing.