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Dear Spa Business Colleague:
If ever there was a time to
audit your spa business operations, it's
Right Now!
After reading these 5 points, you'll know why
the Spas2b 2010 word of wisdom is
"TRUTH"
Business Audits have been a favorite of Spas2b for many years, and this year, for many, examining business processes is a must. As always, we work in the realm of 5 basic categories: Finances; Marketing; Staffing; Customer Service; and Operations. In order to uncover your business "truths", each of these areas need to be scrutinized. But beware! This process is tedious; time consuming...and eye opening!
And consider that uncovering your businesses truths is only the first step in the process. The second step is to implement and execute change with a formal business plan. The rewards however, can be life-changing. Dramatic? Yes!
Here are our Top 5 Truths to a Successful Business Audit:
1. Examine Staff Compensation
If you're seeing red, the first place you need to go is your Cost of Goods (COG) to review your service staff compensation. Consider this: to see some profit, total service staff payroll, including wages, incentives, benefits, insurance and taxes may ideally need to be 35-40% of gross revenue, or even less for some, depending on what your COG look like, and what your fixed Operating Expenses are demanding of you. As you strive to meet that %, consider that: Total average payout per service, whether you are paying hourly, fee for service, commission, or a combination, should ideally not exceed 25-30% of the service price, minus costs - this may allow you to come in at the 35-40% of gross revenue mentioned above. So, remove all costs first, to arrive at the Gross $ Margin. It is from the Gross $ Margin that all forms of payout should be calculated. Consider that total Staff Payroll Burden (adding in Management & Administrative) might ideally hover around 50 - 55%.
Caution: Although there are many compensation adjusters to consider, including standards in your area; supply vs. demand, etc., perhaps the most important, is what you can afford to pay. You may have to pay more than the "ideal" in your area however, in order to get staff, but nothing guarantees results like diligent number crunching and knowing what works for YOU.
2. Streamline your Service Menu
Your service menu can leak a lot of profits. The complications of running an oversized service menu are numerous, including: cost of cabine and retail products to support the treatments; equipment and studio requirements; staff expertise and training; space allotment; marketing and promotional decisions; staff and client choice confusion; etc. First, know which services are your highest % contributors to total service revenue. Next, analyze your gross margins on each service and rank them (that means removing COG like products and payroll); then analyze your hourly service prices on each service and rank them (service price divided by length of service multiplied by 60 minutes).
Ideally your highest % contributors to total service revenue will also be your tops in both gross margin and hourly service price... But often this is not the case!
Hint: Price services at $1.50+ per minute, I.E. A 90 minute service should be $135 and up (while still considering what your market will bear). Price packages even higher if possible, due to higher costs to administer.
Those services that don't make the list must be kept only if they are a strong client draw; have a prominent place in your spa packages; or act as an effective gateway service.
An (extreme) Question: What would you do if Manicures were top in your highest % contribution to total service revenue, but they had the lowest margins and lowest hourly service rate? Do you hear any alarm bells going off?
3. Rank and cull your Retail
Same thing with retail; knowing your top 20-30 sellers is great, but what is their individual unit dollar value and % contribution to total retail revenue? So, analyze which products you sell the most of; then rank them to determine where they sit with unit dollar value; and finally, know what their % contribution is to total retail revenue. Once again, the three should line up in as many instances as possible. Remember that excess inventory does the very same damage that excess services on your menu do, but even more so.
Excess retail ties up your cash flow and depletes already slim margins, because you'll probably have to discount them
to clear them
Speaking of slim profits, retail is NOT more profitable than services (unless it is private label), but the thing is, you can sell a lot of retail in a short period of time, so in order to survive with basically only two revenue streams in the spa, you must sell high volumes of retail. Volume helps make up (somewhat) for lower margins. How are you doing? And watch your service commissions, try not to exceed 10% retail commission, and of course, reduce commission when on promotion.
4. Handle Staff according to Stat Reports
Now you need to look at your staff performance. Know their retail and service sales combined for a total sales figure; know the number of hours they worked in the year and divide that by their total sales to arrive at their sales per hour figure; calculate their % productivity to determine if you are over or under staffed (75-85% is ideal, still allowing for short lead time services to be booked); know what their %contribution to the bottom line is (in their department and the spa as a whole); calculate both their request and retention rates; know their retail sales to service sales, which should be 25% or greater. Study all of these figures and make sure you are certain who your top performers are, and that you are rewarding them with compensation based on their ranking. Now that you know your top services and your top employees, match up the two, having only your high performers administer high level services. And while you're at it, cap your low performing services; leaving lots of room for bookings of your high performers and therefore sales and profits.
5. Analyze Marketing & Customer Service Initiatives
Study your online and offline initiatives. Know which ones are paying off and which ones you should dump. That means tracking - how are you doing? Know how much you are spending annually in Marketing (5% of gross sales is low impact; 10% moderate; 15% high); do a cost analysis on every promotion that you run, to determine worthiness; rank your clients with Recency; Frequency; and Monetary value (RFM) to determine your VIPs. Ideally, your best clients have come in recently; they come in frequently; and they spend a lot of money when they're there. When these three line up, you have your VIP list, all others must be ranked and handled accordingly. Have numerous methods to track the guest experience...and then ACT on your findings! Know your staff's stats on upselling and cross-selling - is there room for improvement? Are they pre-booking appointments and upgrading services for your clients?
Just like your services; products; and staff, once you know where your clients rank, you can determine their handling
It's all the same thing - you must know who and what
is contributing the most to your bottom line.
And once you uncover your business "truths", you must enlighten your staff so they can help you move in this new direction. Sound easy? Well, it's not, it's hard work, but it will change your life!
If you need help, call us - we'll do it with you. Or your may need to click on one of the links at the top of this page to order our Spa Financial Planning CD; purchase our Spa Management Distance Learning Package; or register for our Classroom Courses.
Good luck and enjoy the process!
Best Regards,
Leslie Lyon, President
Spas2b Inc.
1-519-585-0626
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