THE 30% MARGIN RULE ON ROI

Esthetics is an incredibly booming industry in 2021, with consumers getting back to business amidst the pandemic and caring now more than ever before about health and wellness. Spa owners have a unique boost in a world focused on more self care than ever before to ensure client satisfaction – and ensure a positive return on investment within the industry they love. The fundamentals of longevity in the spa business lie within understanding the 30% margin profit rule: Ensure the company is turning a 30% profit margin, at a minimum, on every single service and product in order to be sustainable. Esthetics practitioners must spend quality office time at least quarterly to dive into three categories within their spreadsheets: Vendors, Disposables, and Human Resources.

Managing your vendors before they manage YOU.

For each product or service within your offerings, perform your due diligence in understanding what it means to work with the vendors you’ve chosen. Smart business owners do not make equipment choices on the fly – or order esthetics equipment without doing responsible research and ensuring warranties, as a small example. Does the company offer bulk discounts if stocking equipment for multiple treatment rooms within your space? Would the company potentially waive freight and shipping fees? The main questions lie within you. Have you carved out the time to put your business hat on and really ask the hard questions? Vendor relationships take time that many service providers, like us, simply don’t have. However, your long-term profit depends on time management and carving out the necessary actions to ensure quality investments.

If you are working with a manufacturer for a product line or working with a company that provides your backbar and retail products, ensure you are performing the mathematical equations it takes to ensure that 30% minimum profit margin. Will these vendors increase their prices annually? Will you take the time to follow up and launch your new price points quickly after a price increase? Are you making the time within your schedule to ensure this is happening?

Creating intentional time to create best practices within your company in the vendor relations department is paramount. This could be the difference in overspending versus finding someone that meets your core values and can help propel your company to the next level. Equipment and skincare products are the backbone of the results you offer to your clientele. Overspending and under-delivering are not an option.

If the disposables cost almost as much as the service, don’t offer it.

One of the big items that can really hurt spa owners in 2021 are the cost of disposables. For example, does your hydradermabrasion machine cost more to operate it per service than it’s worth? This is a hard pill to swallow and is the difference between being a smart business owner and someone that simply believes in industry hype. When purchasing equipment, the ultimate goal is to keep the cost of performing services with that equipment as low as humanly possible. This is where the return on investment comes into play. If there are multiple disposable products having to be utilized with a device, it simply is not worth your time.

In a world where PPE is more important than ever before, ensure you are not doing yourself a disservice by purchasing gloves, for example, on the fly. Spend the time to research manufacturers and vendors that provide bulk discounts for a year’s worth of nitrile gloves and make that investment. The dollars you will save at the end of the fiscal year are completely worth it. The amount of money you may spend in shipping every week or month adds up quickly. This kind of irresponsible spending is the difference between wasting your hard earned money and investing in your company’s future.

Becoming a wizard in the math equations required to operate on all cylinders with low disposable costs are part of the magic sauce that will keep you in business for years to come. You will have more time to spend with clients overall when spending more quality time in the office being intentional with your ordering, instead of allowing consistent disposable ordering to take over your weekly schedule.

Human resources should elevate your business, not put it under.

Another part of the equation lies in the funding it takes to employ individuals to perform service and sell products, even if this only includes paying yourself if you’re self employed. The percentage involved here is very important to master, as employees are important enough to pay a fair wage – but also can be the detriment to your business in the long run if not properly managed in payroll expenditures.

If the return on investment must be 30% or higher and the cost of the disposables runs at least 10% of each service, what is there to put towards human resources? My rule of thumb for business owners is between 20-40% of each service, which can be equated into an hourly pay amount or hourly plus commission. Whichever structure you choose, provide fair wages for your employees, but also be fair to your company. Think of your business as an individual that must be paid also. The business has overhead to pay – specifically, equipment loans, lease payments, internet bills, marketing costs, and much more. The final 20% is hopefully a cushion to propel your profit margins per service to 50% – which allows more payoff of loans and other liabilities the company may have.

Being transparent with your employees is also important in business. Making sure individuals understand what you are paying for and where funds are being allocated will make it a lot easier on daily operations and give team members an understanding of why they are being paid what they are paid – and where their wage increases cap out. This is a small tip that I find very responsible for business owners everywhere. Communication is always key and can really inspire your team if implemented correctly.

Sample Equation for Spa Owners:

Double Exfoliation Facial | Menu Pricing $95.00

Disposable Costs (No more than 10%; 20% maximum) = $9.50 (10% of $95.00)
Inclusive of gauze, 2 pumps of cleanser, 1-2 droppers of marketed chemical peel, 2 pairs of gloves, 3 pumps massage oil, 1 pump of mask product, 1 dropper of serum, half pump of sunscreen.

Human Resources (20-40% of the marketed service price) = $19-$38
I suggest breaking this out into one of two ways:

1. Pay your service providers hourly at $25 per hour. This leaves a cushion for an HR savings account to provide bonuses and wage increases annually.
2. Pay your service providers hourly plus commission. The example could be $15 per hour plus 20% commission. This would almost cap out your budget, however, at $34 per service – which would cut into the ability to offer annual wage increases and/or bonuses.

30% Profit Margin = $28.50

The remaining 20% of $19 may go towards paying off loan balances and other financial obligations.

Overall, breaking apart all income generating services and retail sales can be time consuming, but will assist business owners in being able to sleep at night knowing that they are spending their time working towards something sustainable. Esthetics practitioners in today’s market do not have time or dollars to waste. Being intentional in both the treatment room and behind an Excel spreadsheet can be equally rewarding. Put your beauty boss hat on and rock the esthetics world. Success is yours with the right amount of time investment – to ensure your financial investments are reaping rewards!