We are at a turning point in the spa industry. As spas undergo more and more scrutiny in terms of development costs and economic performance, the focus is turning to growing the spa numbers rather than growing the number of spas. It is not enough for you to compare your performance against your spa's budget or against last year's actual numbers. You need to see how your spa is doing compared to other ones in your area or the spa universe overall. Regardless of what type of spa you own and how you have positioned it, there are several key metrics that need to be gathered, measured, and monitored if you expect to manage your spa as an economically viable business venture.
Throughout the years, I have been privileged to work with many highly knowledgeable financial experts, and Ben Campsey, director of finance for The Umstead Hotel and Spa (Cary, NC), is truly exceptional. He has created business management and metric tools that help spa and hotel/resort managers operate properties that are profitable, as well as economic contributors to the core business of room and real estate sales. Here, Campsey defines the terminology that will help you measure your spa's performance and shares some of the metric tools that have the greatest impact on managing profitable spas.
Average Treatment Rate (ATR): ATR is the measurement of revenue per occupied room. This is greatly influenced by your spa's mix of offerings, the duration of each service, and the pricing structure of services. (e.g. Is service charge or gratuity applied automatically?) This metric will become more meaningful as fluctuating pricing becomes more prevalent in the industry.
Treatment Room Utilization (TRU): TRU is a critical measurement of demand against your maximum available inventory—think of this as occupancy. A 1 percent increase or decrease in room utilization can be worth about $50,000 to $75,000 in revenue per year in an average size spa. Most spas operate at 35 to 40 percent TRU, with the best performing spas offering discounts, longer services, upgrades, and added value at low demand periods.
Therapist Productivity: Therapist Productivity is calculated by service hours performed divided by therapist hours available and can be used as a measurement of demand. Therapist Productivity below 70 percent signals overstaffing and can have a significant financial impact if therapists receive any kind of hourly compensation. A high (greater than 85 percent) Therapist Productivity rate over time generally means that there is not sufficient availability. Unfortunately, this results in you having to turn guests away. Management should not assume that higher Therapist Productivity is better. Maximizing Therapist Productivity requires a delicate balance to ensure that you have staff available for short lead bookings but are not overstaffed. It generally takes only a single treatment to justify the hourly payroll for an entire day of a staff member.
For example, assume the following:
- 14 treatment rooms
- Opened 12 hours per day, 365 days per year
- 40 percent TRU (12 hours per day x 365 days x 14 treatment rooms x 40 percent TRU = 24,528 service hours per year)
- The spa pays therapists $10 per hour for all hours worked plus a productivity incentive (commission) when a service is booked
- Payroll taxes and benefits are 30 percent of the spa's payroll
- ATR is $100
If we targeted Therapist Productivity at 80 percent, we would allow for 30,660 payroll hours (24,528 divided by 80 percent target Therapist Productivity) per year. If we did not manage effectively and only achieved Therapist Productivity of 70 percent, we would have used 35,040 hours for the year. This is an increase of 4,380 hours and $56,940 in gross operating profit (4,380 hours x $10 per hour x 1.3 payroll taxes and benefits).
Revenue per Available Treatment Room (RevPATR): RevPATR can be used to easily understand the revenue impact of building a spa, adding additional treatment rooms to a property, and helping developers and asset managers compare their property to the competition.
Gross Operating Profit (GOP): Understanding the fixed and variable expenses of the spa can help calculate the GOP contribution per treatment room (GOP is revenue minus the Costs of Goods and Services and Direct Operating Expenses). For example, assume 14 treatment rooms are generating a gross operating profit of $300,000 per year. We forecast that adding two rooms will generate an additional $250,000 in revenue per year, and we believe our variable cost on this revenue is 50 percent. Therefore, our gross operating profit on these rooms is $125,000, or $62,500 per room.
Revenue Per Guest: Hotels and resorts calculate the average Revenue Per Guest for all outlets on a property. This helps evaluate the average amount each guest spends and, over time, helps determine whether adding new outlets will result in new revenue or displacement (guest spends the same money they would have otherwise, just in the new outlet).
Revenue Per Square Foot: Revenue Per Square Foot is used to understand the revenue contribution of different assets to the property on a square foot basis. For example, a developer would evaluate the cost per square foot to add a spa and the ongoing revenue per square foot versus a restaurant, retail outlet, etc. When using this measurement, it is important to define whether or not this is an indoor, air-conditioned space.
Spa Revenue Per Occupied Room (SRevPOR): SRevPOR is calculated by taking direct spa revenue divided by occupied hotel rooms. For the basis of this calculation, spa revenue should only include revenue derived from treatments, product sales, facility fees, and other ancillary sales (spa revenue should not include any allocations from room revenue, resort fees, or membership dues). SRevPOR in the spa industry generally falls in the range of $40 to $70. However, it can vary greatly depending on the size of the spa and magnitude of local business, among other factors.
We, as an industry, have developed to the point where optimal growth can only occur by fully understanding the specific factors driving the spa business model. In order to evaluate performance, we must adopt a uniform set of performance metrics. The metrics listed above can be used by investors, asset managers, and hotel operators to assess the performance of their spas, as well as determine areas to focus on to reach their maximum profit potential.
The spa industry requires more economic accountability. Spa directors need to be able to accurately and consistently measure, monitor, and manage their spa's performance and see how it compares to that of other spas within their chain and the spa industry, just as asset managers, lenders, hotel operators, and others need reliable and realistic information regarding their spa's economic viability as a business and its contribution to the core business. Accurate spa metrics can help many spas go from being underperforming lazy assets to business-oriented profit centers. If the spa industry is to grow in terms of increasing development or contributing more economically, it is necessary to debunk the mystery of spa metrics and to focus on the business of spas.
Judith L. Singer, Ed.D., ISHC, is the president and co-owner of Health Fitness Dynamics (Pompano Beach, FL). This international spa consulting company specializes in the planning, marketing, and management support services of spas for fine hotels and resorts, day spas, and mixed-use developments. She can be reached at [email protected] or visit www.hfdspa.com.