The hair care services industry is competitive, and it looks to become even more so. There are about 80,000 beauty salons and barber shops in the U.S., which generate a combined revenue of $20 billion, according to a 2014 Dun & Bradstreet First Research report. The Department of Labor Bureau of Labor Statistics projected in a 2017 report that the employment of barbers, hairstylists and cosmetologists will grow 13 percent from 2016 to 2026, which is faster than the average for all occupations, which indicates an in-demand and potentially lucrative industry. But revenue is not the same as a profit margin. Understanding the difference is key, if you want to know how your hair salon is faring amidst its competitors, and how to stay a cut above the pack.
What Is a Profit Margin?
A profit margin is a percentage of your profit to sales. A gross profit margin is useful when determining the profitability of a service by, for example, subtracting the total labor and supplies costs involved in completing a special event up-do style from its total sales. A net profit margin determines your business' overall profitability, because it takes into account your total revenue minus all of your expenses. For example, if your salon generated $600,000 in sales last year and accrued $500,000 in expenses, the difference of $100,000 would equate a net-profit margin of 16 percent. You will use both figures in evaluating your salon's financial health.
What Does a Profit Margin Do?
Revenue shows how much your salon has earned and profit shows how much it has made in absolute terms. But a profit margin tells you how much you're actually putting into your bank account, compared to your revenue. This makes it a more helpful tool in determining how stable your salon is, while outlining where your time and resources may be better spent. Is it worth it to offer the signature double-process hair color or Keratin straightening treatment that requires pricey products, and is time-consuming yet rarely requested? Or, should you add another blow dry station to accommodate the flood of requests from clients -- some of which you turn away because you can't keep up with demand?
The Impact of Growth
Believe it or not, your profit margin could be at its greatest when your salon is just starting out. You've got a small staff, low overhead and a streamlined menu of services. In the service and manufacturing industries, in particular, profit margins decrease when sales increase. These businesses could see a 40 percent margin, until they hit around $300,000 in annual sales, which is approximately the time when businesses start hiring additional people. Typically, success also leads to bigger facilities, upgraded equipment and expansion of services. All of these factors contribute to a declining margin, despite an increase in sales.
Pricing
Take a good look at your prices and determine whether or not they accurately take into account all of the expenses required to make each service happen. If labor, supplies, effort and other materials needed to execute your full-length extensions service aren't adequately represented in the price for that service, then your salon could be in trouble, even though it appears to be thriving. Raising prices even slightly can make a difference. Try to plan ahead to organize a set timeline for increases; for example, you could increase prices by 3 percent every quarter on all treatments, products and services. Explain this decision and the reasoning behind it to your employees, so that they are in agreement with the changes and will be prepared to explain the price increases to inquiring clients.
Overhead Costs
When the price of the product line you use increases, so do your expenses, bringing your profit margin down. If you gave your employees a 2 percent raise or granted them more overtime during extremely busy seasons, that would also cause some shrinkage. On the flip side, if you downsized your staff and adjusted pricing and services that allowed your revenue to remain stable or increase, your margin would see a boost.
Trends
You can't control when more women decide to embrace their gray, white or silver locks and aren't coming in for their regular color service. You can, however offer clients something that has nothing to do with color, such as a scalp treatment or moisturizing mask, which will give them a reason to see you. Offering a pre-paid package for cut-and-style services at a bulk discount rate may persuade clients to keep coming in for their six-week trim, in spite of a lagging economy. Just remember to keep an eye on your margins to make sure you're maximizing revenue on the sale of those services.
Tip
If you're looking to stimulate your profit margin, consider a few moves:
Try to increase product sales, by asking every client if they need to purchase shampoo, conditioner or a styling product used in their visit. Product sales often have profit margins that are two or there times higher than beauty or hair treatments. Salons are also 30 percent more likely to retain a client who makes a retail purchase.
Give clients the option to book and pay for services on your website. It's convenient and will encourage brand loyalty.
Reduce overhead by negotiating with suppliers for discounts, eliminating products that aren't selling and having staff members perform cleaning and laundry tasks, instead of outsourcing these tasks to others.
Expand your menu to give clients additional reasons to book another appointment with you.
Develop a loyalty program. Whether it's a "Buy Nine, Get Your 10th Haircut Free" card, or offering rewards for referrals and free gifts of salon products -- when your clients are happy, they're more likely to recommend you to others.
Give out pre-planning, multiple-service package deals for clients that are scheduled for one service or treatment will tempt them to spend more, while feeling that they are saving both time and money by getting a cut, a deep conditioning mask and highlights in one sitting.
