The million dollar question you'll hear among business owners is "what should my profit margin be," and spa owners and operators and not excluded from asking themselves that question. Here we are in December, about to close out another year and welcome a new one, but we have to ask ourselves: how was 2017 for us? Did we achieve double digit profits? Ask yourself: What should my profit line be?
Profit margins vary tremendously; they depend on which business model you have. It’s different for resort spas, medical spas, and day spas. In resort spas, the spa normally has no major expenses. The hotel or resort operates the spa and, in most cases, it is not a standalone business model. Therefore, the spa does not pay rent, laundry, electricity, maintenance, etc. The main cost the resort spa has is product cost and human capital payroll. The reality is it’s easy to earn 40 percent in profit when you don’t have to pay for major operating expenses.
Medical spas connected to a dermatology center or operated by plastic surgeons are in a similar situation as with resorts. Again, in most cases, the practice pays the bills, so the profit margin should be around 40 to 50 percent. Med-spas and day spas that operate as stand-alone businesses are responsible for all operational expenses, compensation, product cost, and marketing. Therefore, the profit margin is significantly smaller. Depending on your spa’s operating expenses, payroll rate, and overhead, an acceptable profit margin is 10 to 15 percent.
This is when you need to ask yourself, "what are my financial ratios?"
The other main differential is spa marketing. With most resort spas and med-spas, clients are on location already, so all you have to do is motivate them to visit the spa. Stand-alone spas have a broader challenge. They have to be very creative in driving traffic into their spa and generally have larger marketing expenses. The day spa business model is the most challenging. The biggest challenge facing day spa owners is compensation rate. This is the number one concern we hear about all the time. Most day spas are running 50 percent and higher compensation rates, leading to minimal or no profits.
Reality check: if you operate a stand-alone spa business, it’s time for a financial check-up. You need to identify your financial ratios and set a goal to trim your compensation, while increasing capacity and volume, in order to improve your profit margin. Do you know your financial ratios? To know your ratios, you need a budget to use as a financial blueprint to guide you. You can’t maximize your business without a budget.
There are a number of ways to draw up a budget, financial blueprint, or financial ratio. Brands like Insparation Management offer spa budget templates, complimentary financial assessments, and financial coaches to help get spas on the right track, just in time for the new year. Visit www.insparationmanagement.com for more info.