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Resources & Development - Calculating the Cost of Each Service

When last we met, we talked about Special Pricing (see "The use of "Loss Leaders" and Special Pricing" Dermascope Oct 2000). Before we can discount any services it is important to calculate the cost of that treatment. For that matter when we establish the menu price for each treatment we need to know what our costs are. So our question today is "what expenses need to be taken into account and how do we perform the calculations?" I will talk about each expense in the order of importance.

The Cost of Labor

The Spa/Salon business, as we all know, is VERY labor intensive. The cost of labor is our number one cost that must be taken into account. In some cases this is very easy to calculate if we pay straight commissions and nothing more, this number is a straight percentage of the treatment price. However if we are paying a more IRS friendly form of pay like: base rate plus commission, a guaranteed minimum, or an hourly rate for every hour on the premises, then this calculation becomes more difficult (look for an upcoming article on the benefits of Salary Based Pay System).

In a perfect Spa/Salon, every hour that a Provider spends in the facility they would be performing services on the Clients. The reality of the situation is different however, there is a percentage of a Provider’s time spent waiting, or performing other tasks, "not producing revenue" if you will. So when we want to know what our costs per treatment is we must also factor in these "non-revenue producing" wages.

For example: Let us say that our Providers are paid $6 for every hour they are "on the clock" and an additional $20 for every hour treatment they perform. We know for certain that our labor cost for the hour they performed the service is $26, but how much time was spent waiting or doing something that does not directly produce revenue. If he/she spent an additional non-revenue producing hour we must add that additional $6 to the $26 for a total of $32.

Labor:

 
Base Rate per Hour

$6.00

Commission

$20.00

Additional Non-Revenue Hours

$6.00

Total Labor per Treatment

$32.00

The Cost of Worker's Comp, Taxes & Benefits

For every dollar of labor, by law an employer must pay for "Worker's Compensation Insurance" the rate is usually stated in the form of so many cents on the dollar. This is an easy number to look up on your policy or you can get a quote from your insurance carrier.

Taxes and Benefits are an additional cost of labor, while the employer does not pay the income taxes for the employee it does pay a percentage of the payroll in FICA (Social Security) and usually State Unemployment Insurance, Medicare and others. While some taxes vary from state to state when added to FICA (7.65% employer’s share) you are usually looking at about 8.5% of your Providers gross.

If we pay for holidays, vacation, sick days, have health insurance or any other benefits we must put this cost into the calculation. If we then take the total dollar value of these benefits and divide that number by the total gross pay we will then have a percentage cost that we can add to our labor. For example:

WC, Taxes & Benefits:

 
Worker's Comp (4.5% x $32)

$1.44

Taxes per Hour (8.5% x $32)

$2.72

Benefits per Hour (10% x $32)

$3.20

Total Taxes & Benefits

$7.36

   

Total Cost per Hour Treatment (this example, so far)

$39.36

Keep in mind the numbers used are for the purpose of showing how the calculation is done. Please use your own numbers to get appropriate calculations for your Spa/Salon.

The Cost of Linen & Supplies

Calculating the cost of supplies used in each treatment is rather straightforward. Gather together all the products that are used in any particular treatment. Take your (wholesale) cost and divide it by the amount of treatments you can get out of each unit (or container). Do not forget to leave a little fudge factor because of self-use, over use and loss.

The cost of linen is a little more complex but very similar in concept. Again gather up all the linen used in any particular treatment. If we know the cost of each item and how many uses (washes) it will withstand we can again figure the cost of linen per treatment.

Linen & Supplies:

 
Supplies per Treatment

$5.00

Linen per Treatment

$1.50

Total Linen & Supplies

$6.50

   

Total Cost per Hour Treatment (this example, so far)

$45.86

The Cost of Rent & Utilities

If we know what our rent per foot per month is (let’s say $2.00) and we know how many feet our treatment room is (let’s say 100) then we know our rent for that room is $200 per month. If we then divide that number by the amount of treatments per month (let’s say 90) we now know our cost for rent per treatment is $2.22.

Likewise if we estimate the cost of utilities (electricity & water) for that one room which could be very low for a massage room but could be very high for a wet room and divide that number by the amount of treatments we can get a cost for utilities too.

Rent & Utilities:

 
Rent per Treatment

$2.22

Utilities per Treatment

$0.17

Total Rent & Utilities

$2.39

   

Total Cost per Hour Treatment (this example, so far)

$48.25

The Cost of Miscellaneous

For our example we will not have any miscellaneous expenses, but when you do these calculations try to think of any other expenses that could possibly be associated with rendering any particular service.

Add these additional expenses in to the mix.

The Cost of Equipment & Setup

Cost of equipment, construction, furnishings and décor, believe it or not, is almost insignificant. While one treatment can be costly to setup when compared to another the amount we allocate toward each treatment is so small that I would consider this calculation to be optional.

Let me use an example to show you what I mean. If I take a $15,000 Micro dermabrasion machine or Underwater massage tub and divide the cost by 7 or 10 years (the life of the machine). Then divide that number by 12 months. Then divide that number by the amount of treatments done per month (let’s say 90) the number becomes quite small ($1.39).

For those of you who are meticulous, as I am, you may want to add this calculation. Simply add up the total cost of any treatment room and use the same math as I have outlined above.

Equipment & Setup:

 
Cost of Equipment & Setup

$10,000.00

Amortize across 10 years

$1,000.00

Divide by 12 months

$83.33

Divide by # of Treatments

$0.92

   

Total Cost per Hour Treatment (Final cost, this example)

$49.17

This is our Raw Cost

We have now calculated the total costs that can be associated with a particular treatment. I am about to talk about "Overhead", but before I do I would like to say that some people when doing these "cost accounting" calculations would consider many of the expenses such as taxes & benefits, or utilities & rent as overhead. I prefer to work them into the cost of each treatment because as my volume of treatments goes up or down I find that including them will give me a more accurate picture.

There are some economies involved with some expenses that you should also understand. As we become MORE efficient, the cost per treatment of "waiting", equipment, and rent go down. Instead of dividing the cost of something by 90 treatments we might be able to divide that cost by 120 thereby reducing our cost per treatment. However for calculation of pricing we should use the worse case scenario.

From this "raw cost" number you can set your prices, and if it were not for a thing called "overhead", in our example ($49.17 raw cost) your could set your price at any number above $49.17 and make a profit. Unfortunately we must look at:

The Cost of Overhead

It takes a lot more than the costs that we have outlined to run a Spa/Salon. We have to pay the rent on changing rooms, hallways, broom closets waiting areas, and our front desk. We have Front Desk staff, Cleaning staff, Managers, and Sales people. We have Advertising, Insurance, Telephones, Credit Card fees, Office supplies, Amenities, Legal fees, Interest payments Education and Training. All of these expenses and many more can NOT be associated with any particular service and are therefore considered "Overhead".

When we look at our "Income Statement" a.k.a. "Profit & Loss Statement" we can calculate these expenses as a percentage of Revenue. Once we know the final percentage for overhead we can then use this number to subtract from our menu price and compare with our raw cost.

Let’s say for example that we were thinking of charging $60 for our fictitious treatment and our overhead was 30%.

Overhead:

 
Price for Treatment

$60.00

Minus Overhead (30%)

$42.00

Minus Raw Cost

$49.17

Profit (Loss)

($7.17)

We are loosing $7.17 each time we do this treatment at this price, I guess we will have to reevaluate our pricing on this treatment! I hope these calculations are of help to you. I use them all frequently and am often surprised by the answers I get. If you have any questions please feel free to contact me at: skip@vom.com

 

 

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