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 "nonrevenue
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 nonrevenue 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
NonRevenue 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 selfuse, 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
