Avoid Promotions that Lose Money!

January 22, 2016 Lisa Starr

The late winter period can be slow for some beauty businesses, unless you’re lucky enough to be located in a resort area. While you may still be flush with cash from holiday gift card sales, your bookings may be on the slow side. When you are setting up a promotion to fill the books, ensure that your goals are clear and your calculations take into account the margin erosion you may be causing, both now and in the future.

Here’s a typical scenario: Spa Sheba has average utilization rates of 40%, and pays its technical staff a straight commission of 45%. The costs for management & support staff and wage taxes consume another 16% of revenue. Rent and other overhead expenses comprise 35% of revenue, fairly average.

Service Sale        $100

Technician           $45

Other Staff           $18

Overhead             $35

Profit                       $  2

Not bad. Not the highest of margins at 2%, but at least profitable. Now, management decides to run a promotion of 20% off for unsold appointments on a particular day, and the technician will be paid commensurately less. But none of your other costs of doing business change:

Discounted Service Sale                $80

Technician                                               $36

Other Staff                                               $18

Overhead                                                 $35

Profit                                                           $ -9

So Spa Sheba filled the book, but offering that treatment at a discount actually COSTS the spa money. Certainly, it’s better to have your staff be busy than idle, and there is always the argument that the client will give a gratuity to the technician, and perhaps even purchase a retail product. But you can’t assume that the retail is throwing off profit either. Remember, every dollar you bring in has to contribute to overhead and the costs of operating the business, so let’s look at the anatomy of a retail sale:

Branded Moisturizer      $42

Wholesale Cost                 $21

Retail Commission           $  4

Overhead                              $15

Profit                                        $  2

So if the promotional customer does, in fact, purchase a moisturizer, your $2 profit on that item brings your loss on the visit down to $-7. Still not in the positive range, however, the fact that the client purchased a retail product does increase the likelihood that they will return. But will they return to pay full price for their service? That is the question.

What we see happening is that even regular clients, who profess to love your spa and your treatments, are disinclined to pay more than they need to for a visit. Once they learn that you have regular promotions, they’ll wait for those before booking.

The lesson here is, be careful when planning promotions, and consider the various leverage points that will help you to preserve your profit margins.

  • Consider a smaller discount than the standard 20%; a promotional discount of 12% will only lose you $5 instead of $9
  • Better yet, make your promotions targeted, rather than an across-the-board discount. This will allow you to discount only higher-margin or slow-moving treatments, preserving your margins on the high sellers. Create promotions on particular treatments, or with particular technicians, but not for everything on your menu.
  • Your bread-and-butter treatments like a 50-minute Swedish Massage should NEVER be discounted!
  • Consider value-added promotions; throw in a retail product, or service enhancement, rather than discounting the price. You may even be able to get support from your vendors for this type of initiative.
  • Evaluate your branding and marketing; if you are having trouble filling your appointment books on a regular basis, you may not be appealing to the right demographic. Discounts bring in discount-hunters, not regular clients. 

About the Author

Lisa Starr

Lisa Starr brings over 30 years of industry-specific experience as a consultant, educator and writer to Booker through GOtalk. Lisa also works for Wynne Business, a leading spa consulting and education company. Among other things, Lisa’s expertise lies in business operations and finances, sales and marketing, inventory management, human resource development, and business process improvement. She is a well-known speaker within the trade show circuit and is a frequent contributor to industry

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