Rising Supplier Costs = Raising Spa Prices - Part 2
1. Retail Costs and Commissions Paid
Let’s say if a jar of cream sells for $100.00, you have probably paid $50.00 (50%) for the cream; you may also be paying $10.00 (10%) staff retail commission on the sale of the cream; and your miscellaneous costs could be $5.00 (5%), which might include samples, testers, shipping, receiving, merchandising, etc. This equates to $65.00 in costs for a gross profit of $35.00, or 35% on that $100.00 sale.
Now, if the cost of that jar of cream increases by 5% over a period of time, but you don’t reflect that price increase back onto your selling price, you are now paying $55.00 (55%) for that $100.00 jar of cream; you are still paying $10.00 (10%) staff retail commission; and say in addition to that, your miscellaneous costs have also increased 1% to $6.00 (6%), so your costs are now $71.00, for a gross profit of $29.00, or 29% on that $100.00 sale.
**With these already slim margins, you may want to consider fluctuating staff retail commissions with costs and profit margins, so a consistent, across the board 10% retail commission may not always to be fair to the business. For example: If you are discounting product prices by 15%, staff commissions might be discounted by 15% as well. So 15% off of the regular 10% commission would equate to 8.5% commission paid.
2. Skin Care Product Discounts
Let’s consider again, that 5% supplier increase as mentioned above. You absorbed that increase, yet you still decide to run your annual 15% spring discount on skin care products. So, at the top, your product costs are now 55%; factor in the 15% spring discount; staff commissions of 10%; another 5% for miscellaneous promo costs; and your total costs to run this promotion are now at 85%. This means you will make a 15% gross margin on any revenue that is generated from this promo.
An across the board discount of 15% on skin care is not a great idea to begin with, particularly if you continue this practice of absorbing price increases year over year. Based on the above hypothetical situation, you only have 15% left before you start to lose money on your annual spring promo. And a point not to be taken lightly, is that these are gross margins; you still have to pay your operating expenses and with these kinds of margins, it will eventually become impossible to profit.
3. Service Pricing and Staff Wages
In the spa industry, it’s very common to see staff being overpaid, even in normal circumstances. But in addition to that, if you are also absorbing supplier price increases on products, rather than reflecting those increases on your treatment menu, you may now not only be overpaying your staff; but you could be overpaying them on under-priced services. If over the years you continued to absorb those increases, and still gave your staff the occasional wage increase, you could eventually be responsible for seriously crippling your business.
Ignoring some or all of these three situations has the potential to cause a substantial erosion in profitability. Just as your suppliers have to increase their prices in tandem with their increased costs of doing business…so must you.
How to Increase your Prices
One of the best ways to stay in line with escalating business costs, is to have continually escalating prices.
This method can lower price sensitivity, allowing business to continue as normal:
· Begin with one product line and one service category. Slowly increase each product within that line and each service within that category on a gradual basis and in small increments. Move to the next product line and service category, slowing increasing them on a gradual basis and in small increments, until you have covered all of your product lines and service categories; and then begin again
· This ‘spiraling’ method can be discreet and often go relatively unnoticed. But you still need to ensure your staff understand your philosophy and can provide a clear and concise response to clients, should questions arise. Staff and clients must know and believe that these increases are warranted and that you are acting in the best interests of the business, as opposed to just being greedy
· If you make these perpetual increases small enough, they don’t need to be announced to your clients, but if you choose to make more profound increases, a short lead time announcement via signage may be a good plan.
**If you are currently paying your staff both product and service commissions and do choose to adapt this spiraling method, now may be a good time to consider other methods of compensation, because with commission, every time you have a price increase, your staff will get a raise whether they deserve it or not.
When you are handed price increases, it is the most legitimate reason for you to hand an increase down to your clients. No one likes it, but it is a fact of doing business. Remember that being a business owner is not for those who are afraid of the numbers. Successful business owners MUST do their math.