Ms. Borgman

Spas, Health & Fitness

Are Your Spa Services Really Driving Profit?

By Peggy Borgman, President, Preston Wynne, Inc.

One obvious direct cost is the supplies used in treatments. We like to see service supply costs around 5% on average.

Let's see how gross profit can fluctuate based on the cost of the supplies we use.

Price of Swedish Massage: $100.00

For example, your hotel spa may have fixed costs that run at about 50% of revenues (overhead numbers are not always fully extractable, depending on how your expenses are allocated to the spa on the property's P & L) Let's see what happens if, with that same hour, in that same room, we sell a body treatment, with a higher supply cost, at a bit higher price.

Price of Jasmine Body Bliss: $105.00

Ouch. We have just 5% net profit after we pay our fixed costs (-50%).

Then there's waste. The Jasmine Body Bliss uses one cup of crushed rose petals and three drops of jasmine oil. What if the therapist, who's in a hurry, uses twice that amount?

Audit all your services to understand your exact supply costs. Use precise written protocols and provide adequate measuring tools. Staff members known as dispensers, and dispensaries, have long been in use in hair salons, and many large spas do a version of dispensing by pre packaging "kits" of materials for treatments. Reviews and refresher training sessions pay off in reduced waste.

Don't forget to factor in the additional overhead created by costly equipment or an elaborate buildout for a treatment room used to perform specific specialty services. Examples of "higher overhead" services are microdermabrasion, body wraps and treatments incorporating Vichy showers and hydrotherapy tubs. To perform such services, the spa must invest additional equipment. (Use as your baseline a basic treatment room setup for facial or massage.) Estimate your expense by considering the useful life of the equipment, and the number of treatments you expect to perform with it.

Let's say you've determined that you need to get X dollars of profit per hour from your Ultron Luxe machine treatment. You paid $20,000 for the Ultron Luxe machine, after all! Now you can "back in" to your service price by adding the service's material cost, additional overhead expense, and labor cost.

Another tremendous profit drain in nearly every spa is "swollen menu syndrome." More services are not necessarily better. Many spas grasp at every passing trend in hopes of luring in clients. An encyclopedic menu can actually confuse and put off clients. It also comes with big training and supply costs. Dealing with lots of different vendors increases your complexity and drives up expenses. As well, quality management challenges mushroom when your spa menu is massive. Less-popular services are rarely performed correctly since they're performed infrequently. This means you'll be dealing with comps and adjustments on services on a regular basis. A better strategy is to have a meticulously edited menu of "just enough" services. When you're tempted to add something, it must either replace something else, or offer an outstanding new business opportunity.

We are rarely "early adopters" of new spa technology. We prefer to see how the latest and greatest plays, and then add the service when it is well established. The service can then be more profitable for us because we don't have to educate the marketplace and create demand.

Having said all this, labor cost is still the primary factor in determining whether your services are profitable. Many spas utilize pay-for-productivity plans such as commission and hourly wage-plus-commission, which is a great way to manage cash flow. But commission pushes up service prices without increasing your service profit. That's because you have to mark up costs like overhead and supplies, which end up getting "commissioned" as well. That forces guests to pay more.

I'm not a huge fan of pure hourly compensation, which is much less motivating than a pay-for-productivity plan. Hotel spa employees, contrary to popular belief, have an enormous opportunity to influence guest behavior and drive income for the spa and for themselves.

A fee-for-service system is the best way to make services more profitable. We call this a "treatment rate" compensation plan. Treatment rates are simple: for the amount of time, effort, skill, and knowledge required to do this specific service, the employee is paid X dollars. There are usually no more than three different rate levels within a department. For example, pregnancy massage is priced higher and has a higher treatment rate. The therapist must be certified to perform this service in our spa, so it commands a higher treatment rate. Advanced peels provide a higher treatment rate for our estheticians. Additional skill and knowledge is required to perform the peels, and there is additional effort in working with the clients, guiding them through the process and communicating constantly about what to expect and how to deal with any adverse reactions that may occur. We call it "hand holding", and there is value to it, thus it impacts treatment rate. While the price point of a service is reflected in the treatment rate, the relationship is not direct, as it is with commission.

Treatment rates go up every couple of years for employees who meet the spa's blend of performance measures. In a hotel spa, these can include home care retail sales, customer retention, and guest satisfaction ratings. Yes, gross profit diminishes modestly as compensation moves into these higher seniority levels. But net profit actually improves because successful senior employees are inherently more profitable-fully trained, highly productive, adept at retaining new customers and winning referrals.

How do you determine treatment rates? In this example, let's set a gross profit target of 63%. Labor cost is the "X Factor" we are working toward in the formula below.

Price of 60 minute Ultra Facial: $100.00

This produces a treatment rate of about $26.00 for an hour of service, plus the opportunity to earn retail commission through home care sales. (Depending on the type of spa, retail should account for 30 to 50% of an esthetician's revenue.)

To improve gross profit to 68%, the service price of our Fabu Facial can be increased. In a treatment rate system, a $5.00 price increase drops directly to the bottom line.

Profit is never just a happy accident in a spa business. Despite the seemingly lavish price tags for services in resort and hotel spas, our expenses and overhead are equally lavish. Spa directors must be constantly monitoring the actual expenses of producing their services, as well as looking for opportunities to simplify their menu and their operation, while adding value. Profit-producing spa directors master the balancing act between simplicity and innovation. Most of all, careful control of labor costs is the factor that determines if your spa will be viewed as a costly amenity or a full-fledged member of the property's profit-driving team.

Peggy Wynne Borgman is President and founder of Preston Wynne, Inc., which operates day and hotel spas as well as Preston Wynne Success Systems, a spa consultancy and training organization. PWSS seminars train management employees for the top tier of the international hospitality industry, as well as independent salons and spas throughout the US and Canada. Ms. Borgman is a frequent speaker at events such as the IESC and ISPA conferences and author of Four Seasons of Inner and Outer Beauty (Random House). Ms. Borgman can be contacted at (408) 741-1750 ext 30 or pwb@prestonwynne.com Extended Bio...

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