We in the Product Sales Business or the Service Sales Business?
By Skip Williams
business are we in? What a great question, and who do we look
to for the answer?
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.
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.
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, doesnt it?
service sales are unprofitable then we MUST fix the problem, not
add a NEW business!
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 Im making it up in volume".
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).
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.
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
demand DOES NOT EQUAL profits"
fix what is broken?
profits are our goal, and they should be, we must find a profitable
way to perform services, else why be IN the Service Business?
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.
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?
know I may be over simplifying this a bit but stay with me here.
What Im 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.
truth is, there ARE profits in Service Sales, huge profits if
done correctly. Far more profits than in the retail!
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.
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 elses business (the retail vendor) and
not to our own.
"Retail Dollar" vs. a "Service Dollar"
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.
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.
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.
lessons here are:
must calculate overhead on everything that you sell
both Retail and Service have a similar profitability
Service has a far higher "cash profit" potential
Service deserves far more of your effort
we must learn to control the cost of "labor" when selling
Service and control the cost of "product" when selling
you are not making the kind of money you think you should be,
your problem is not that "youre 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.
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 its 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.
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
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:
fixing the wrong part of our business
never make up for a broken Service Business model
spend our resources where it has the greatest potential for
me know what you think, write me at email@example.com