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Resources & Development - Retail Vs. Service

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Are We in the Product Sales Business or the Service Sales Business?

By Skip Williams

Which business are we in? What a great question, and who do we look to for the answer?

If we listen to our Clients I believe they would tell us they come to our facility for "services". If we listen to our Vendors they might tell us that "the money is in the products". We do both types of business, are we are in both businesses, and if so, to what ratio? The correct answer may depend on what your mission, your survival mode and what your profitability is.

Let me say at the outset if we compare two spas/salons one doing only $1000 per day in services and the other doing $1000 in services and $300 in retail, the second business obviously has more profit potential. How much additional profit will that second business earn? The answer may surprise you.

Most of us went to school to learn how to perform services. Why then do we put such an emphasis on selling products? Is it because after spending 50%-70% on commissions and 40% on overhead that there is little profit left when we perform services? Maybe we look toward "Product Sales" save the day and keep the wolves from the door. Sometimes it seems we are working for our employees and vendors, doesn’t it?

If service sales are unprofitable then we MUST fix the problem, not add a NEW business!

As I consult I see this syndrome all the time. The Service Business Model is upside down; it has little or no profit left at the end of each service performed. I am reminded of the "simple man" who sold hot dogs on the corner for half the price of his competition. He had a line around the block and the other vendors had no business. So one of the competitors pretended to be a customer and asked him how he could afford to sell his hot dogs for half of what everyone else sold them for. His answer was "I am loosing money on each hot dog, but I’m making it up in volume".

Well it does not take a math major to see that his business model would never work. In our own businesses however we sometimes do not realize that "we are loosing money on each hot dog". We are too close to the problem to see it, and need to stop, backup and evaluate the cost of each service we sell (look for an upcoming article on how to do just that).

After we tabulate what the cost of each service is, we can look to see if there is enough profit left over to pay the overhead. We can also weed out the services that are not profitable or less profitable and then make the hard decisions as to elimination or change of prices on these treatments. Some facilities use a "Loss Leader" to draw in customers, I promise to write soon on this subject but for now please make sure all your Service Offerings are profitable.

The lesson here is: Just because we are capable of performing a service, and just because there is a customer demand, does NOT insure that we/it will be profitable. Let me repeat part of that because it may fly in the face of everything that you have thought in the past:

"Customer demand DOES NOT EQUAL profits"

Let’s fix what is broken?

If profits are our goal, and they should be, we must find a profitable way to perform services, else why be IN the Service Business?

If you have read my articles or have attended my seminars you know that I am passionate about finding ways to squeeze more profit from each facility. You have heard me talk about changing pay systems, reducing labor costs, automation, profitability, and making your facility run efficiently. Today I will not go into how to make those treatments profitable; instead I am simply saying that they MUST be profitable.

If we do not have profitable treatments, would it not be better to be in the "Retail Sales Business" only. If the profits are in the products, then why do the services? Why not open a store and sell beauty products only? Or rent a booth or two in the back so that we can say that we are a skin care clinic and turn the rest into retail?

I know I may be over simplifying this a bit but stay with me here. What I’m about to say will make me a "Heretic", I may never be able to write for another magazine that carries product advertising again, and will probably contradict everything you have been lead to believe.

The truth is, there ARE profits in Service Sales, huge profits if done correctly. Far more profits than in the retail!

If we take a retail item, it usually costs about 50% of what we charge the customer right? Wrong, it costs 50% raw cost, plus 10% commission, plus about 5-10% shipping, plus the time it takes to sell it multiplied times the hourly rate of the person who sold it, plus overhead.

Yes overhead must be taken into account; we still have rent, salaries, insurance, and advertising to pay whether we are selling products or services. Many accountants and "experts" will tell you differently, but I insist that if we only calculate overhead on services and not on retail then we are LYING to ourselves in favor of someone else’s business (the retail vendor) and not to our own.

A "Retail Dollar" vs. a "Service Dollar"

Let’s do some math; If we add the shipping costs, commissions paid, additional labor, and overhead we may find that selling profits is roughly as profitable as service sales, possibly less profitable. Depending on how we control our labor costs, our product costs and our overhead we are probably earning somewhere between 5 – 15 cents on every service and retail dollar.

If we are making a similar percentage of profit on Retail and Service, and we have a higher cash profit potential on Service Sales, because the amount of dollars received for service is so much higher. Then we have a far higher "profit potential" in the service side of the business.

Technical note: To the extent that ANY dollar sold goes to help reduce our overhead percentage, then selling a more service or more retail makes us more money. So retail does contribute to more profit. However, if it takes a similar effort to increase service sales as it does retail sales, and service sales (usually) translate into a higher dollar amount, then it would contribute far more to the bottom line.

I do not mean to imply that there is no profit in selling retail products, what I mean to impart is that there is NOT as much as most people think. There is FAR more opportunity and value in spending more of your time building the service side of your business, and let the increased retail naturally follow automatically.

The lessons here are:

  • You must calculate overhead on everything that you sell
  • Therefore both Retail and Service have a similar profitability
  • But Service has a far higher "cash profit" potential
  • And Service deserves far more of your effort

Further, we must learn to control the cost of "labor" when selling Service and control the cost of "product" when selling Retail.

If you are not making the kind of money you think you should be, your problem is not that "you’re not selling enough retail" it is that your profitability model for Service is broken and needs to be fixed. As you read my articles, attend my seminars and possibly use my services you will learn that there is plenty of money to be made in this business if you just know where to look.

Having said all this, which business are we in? To which I would say "the customer is always right" (refer to 2nd paragraph). They come to our Spa/Salon for service that is what we should be selling them. Does that mean we should get out of the "Retail Sales Business"? Not at all, each is a leg of the (business) chair and must stand on it’s own; if one leg of the business is not working (not profitable) we should not be in that business or must be fix that leg.

Just because we are in the Service business does not mean we can not also sell products, as a service to our customers and a profit center (albeit a smaller one) for our business. I would caution you however to be careful, when a front desk person is spending an inordinate amount of time closing a Retail sale with one customer it is easy for them to miss a Service sale. This happens all the time; we are selling a $10 bottle of something to customer A and meanwhile had to put customer B on "hold". Customer B might have bought a "day of beauty" but got tired of holding.

The XYZ Company would love you to believe that by selling their product you will make up for all the "losses" on Service Sales. Some go as far as saying that your service business is just a vehicle to sell products. I believe if we look at selling products as "an additional service to our clients" then we probably have the right emphasis on "Retail". But if we are banking on Retail Sales to be our panacea we:

  • Are fixing the wrong part of our business
  • Will never make up for a broken Service Business model
  • Should spend our resources where it has the greatest potential for return

Let me know what you think, write me at skip@vom.com

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