Look ahead towards change and improvement
Understanding which of your services have a good level of profitability and which ones do not is paramount to the success of your business. This information can be included in the development of your yield (revenue) management system, providing you with information that will uncover ways to boost your revenue and help control your costs.
When calculating service profit margins, you need to consider both the a) Gross Margin % and b) Bottom Line Impact.
- Gross Margin is the excess revenue that is generated after subtracting the cost of goods sold or the costs directly related to only services, from the service sales. The easiest way to think of cost of goods sold is to evaluate the costs that the business had to incur in order to provide the service to the client. The Gross Margin is then converted to a percentage, as the formula below will demonstrate.
- The Bottom Line Impact may be explained this way: Even though a service may calculate out as having the highest Gross Margin percentage, this may not necessarily mean it is the most profitable. For example, Option #1 has revenue of $100, a cost of $50, for a GM of $50. This represents a GM% of 50%, but is only delivering $50 in profit. Option #2 has revenue of $1,000, cost of $800, for a GM of $200, or a GM% of 20%. This is a lower GM%, but one sale adds more profit to the business’ bottom line.
Develop a Chart to Calculate Service Margins:
Column 1 – Categorize and list your Service Titles (Facials, massage, body, etc.)
Column 2 – Record each of the Service Times in minutes
Column 3 – Record each Service Price
Column 4 – Calculate Average Hourly Service Prices for each service. (See formula below)
Column 5 – Enter appropriate Product Costs to administer that service
Column 6 – Enter any Miscellaneous Costs you wish to include (linens, studio, etc.)
Column 7 – Calculate what the Service Price minus Costs is.
**After you have backed out all of your costs, this is the figure you may want to consider using to determine staff service commissions or fees for service.
Column 8 – Calculate your Average Labour Costs to conduct the service (fixed & variable)
Column 8 – Enter Cost of Good Sold/COGS (Total of columns 5, 6 & 8 )
Column 9 – Enter Gross Margin (Service Price – COGS)
Column 10 – Enter Gross Margin % (Service Price – COGS ÷ Service Price)
Column 11 – Rank your services.
Once you know your service margins, use this information to improve on every business outcome, from your rooms layout, to marketing initiatives, to staffing up.
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