Everything You Want to Know About Margins (But Were Afraid to Ask)

Budding beauty businesses run on wire-thin profit margins — here’s how to boost yours

Many beauty businesses are the result of the owner’s passion, but that doesn’t excuse them from the cold, hard economic realities of the industry. Whether you’re new to the biz or making the transition from stylist to CEO, you’ll need to carefully balance the payments coming in with expenses going out — after all, you can’t keep your doors open if you’re always in the red.

It seems like simple math, but the reality is much more complicated. With a potential recession on the horizon, now is the time to hone your financial strategies so you can increase profits without alienating your client base. Don’t panic — we’ve rounded up everything you need to know, from target margins for the self-care industry to advice on how to boost your own profits.

Margins 101

First, some good news: After taking a tumble during the COVID-19 pandemic, the salon industry grew to about $53 billion in 2022, marking a second straight year of improvement. With clients more readily investing in self-care, new salons can take advantage of that renewed interest — if they play their cards right. According to Startup Opinions, salon owners should expect a profit margin of about 8% on salon services. Of course, you’re not one to settle for average, so you should aim for a margin of about 10%.

That said, you can’t get there by unilaterally increasing service prices across the board. Because clients overwhelmingly prefer to book appointments online, it’s likely that they’ll be comparing your prices to those of other salons in the area based on the information on your website. If your prices are too high before you’ve even proven your value, you’re going to have a hard time getting clients in the door.

Instead, look for low-hanging fruit: Smart, simple ways to increase margins without upending the client experience. This might include using better software, upping your retail offerings, or increasing your marketing efforts, just to name a few. Just don’t consider this process to be a one-and-done strategy; as the market fluctuates, you’ll likely have to make adjustments here and there.

Types of margins

You can’t improve profit margins without first knowing about the different types and how to calculate them. Here are the main types of margins self-care business owners should know:

• Gross profit margin: This is a simple metric that calculates profitability after removing the cost of goods sold (COGS). Essentially, gross profit margin compares gross profit to total revenue and reflects the percentage of every dollar retained as profit.

• Operating profit margin: This metric, which is slightly more advanced, accounts for overhead costs — in other words, the operating, administrative, and sales expenses needed to keep your doors open.

• Net profit margin: This one is your bottom line, taking into account revenue, cost of goods sold, operating expenses, interest, and taxes. This also takes into account any other expenses, such as one-time costs for maintenance.

5 ways to maximize margins without alienating clients

Use comprehensive reporting tools

First things first: You can’t hope to keep track of your salon’s finances without solid reporting tools. The right software should provide a granular breakdown of the numbers, allowing you to analyze them as accurately as possible. And while investing in new technology might feel like an avoidable expense on top of the cost of getting your business up and running, this is not the time to skimp. Good reporting tools are worth every dime.

No matter what method you use to track your data, make sure that it’s meticulously organized. It only takes one missing file or duplicate entry to mess up the entire system, and you don’t want to spend your time buried in digital paperwork.

Encourage repeat visits

Getting a new client in the chair is just the first step. You want them to make your salon their destination of choice, turning a single appointment into hundreds or thousands of dollars of revenue a year. Needless to say, this starts with impeccable service and skilled stylists, but that’s not where your loyalty efforts should end.

Loyalty programs are an effective way to boost retention and ensure that clients keep coming back again and again. These programs often offer perks like discounts or a points system that clients can redeem for products. If you’re wondering how giving out discounts helps profitability, think about it like this: By discounting an add-on service (like waxing) or retail products at check-out, you’re still getting your client to spend more money than they intended to. Even better, clients are already familiar with the concept of earning points; most track their credit card rewards and have multiple retail memberships.

Offset fees

These days, it seems like every transaction comes with additional fees not reflected in the original price. Business owners are all too familiar with the extra charges that come with processing credit card payments, but going cash-only in this era is simply not an option. This is one instance where the fees can be passed on to the client, provided you’re as transparent as possible about it.

It might seem counterintuitive, but a small fee for using a card is unlikely to make a client back out of the appointment entirely. In general, consumers have come to expect extra fees as the cost of doing business — just look at the food delivery industry, which grew significantly during the pandemic in spite of delivery and service fees. Again, the key is transparency; if you’re upfront with clients about any additional costs, they’re unlikely to balk at the thought of a slightly higher bill. Just make sure your software can handle this automatically; no one has time to do math at the register.

Use retail add-ons strategically

While the average profit margin for salons might be 8%, it’s much higher for cosmetics and beauty products — in the neighborhood of 53% to 58%. However, for salons, only 5% of revenue typically comes from retail sales. Boosting that number takes some work, but it’s an effective way to get those margins up.

It all starts with proper training. Your employees should know the benefits of your products and be able to help clients find formulas that are right for their specific needs, rather than trying to push add-ons with every transaction. It helps if your stylists let clients know what they’re using throughout the appointment, as they can later refer to it: “If you want to achieve this look on your own, I recommend using this serum at home.” Lay the groundwork early and your products will sell themselves.

Reduce overhead with smart scheduling

If your salon is open from 8 a.m. to 10 p.m., but is usually a ghost town early in the morning and in the last few hours before closing, you’re wasting a lot of money by keeping the lights on and paying staff to be there when clients aren’t. Instead, reducing hours but having more stylists on hand during busy periods makes everyone happy — clients can find appointments, while your staff continues to bring in revenue for you and tips for themselves.

But it’s not just your business hours you should be evaluating. If you find yourself spending way too much time organizing appointments and staff schedules on your calendar, that’s a sign that you’re in need of a better solution. You also don’t want to leave huge gaps in the schedule or overbook your stylists, as that’s also going to affect your bottom line. Scheduling software can take this load off of your shoulders, going far beyond what a typical calendar app can do to automatically optimize your appointments for the best possible business outcomes.

Operating your own business is never easy, but by implementing smart revenue-boosting tactics early on, you’ll build a foundation for profitability in the long run. If you feel like your current strategy isn’t working, it’s time to reevaluate and make some meaningful changes to boost your margins.

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FAQs:

What are some specific examples of low-hanging fruit strategies mentioned in the article that beauty businesses can implement to increase profit margins without alienating clients?

Some specific examples of low-hanging fruit strategies mentioned in the article include using better software for comprehensive reporting, increasing retail offerings strategically, and optimizing scheduling to reduce overhead costs. These strategies focus on leveraging existing resources and operations to enhance profitability without significantly changing the client experience.

Can you provide more insight into the potential impact of implementing loyalty programs on client retention and overall profitability for beauty businesses?

Implementing loyalty programs can have a significant impact on client retention and overall profitability for beauty businesses. By offering perks such as discounts or points systems, businesses incentivize clients to return for repeat visits, increasing their lifetime value. Additionally, loyalty programs can foster a sense of belonging and appreciation among clients, leading to stronger brand loyalty and positive word-of-mouth referrals.

How can beauty businesses effectively navigate the issue of passing on transaction fees to clients while maintaining transparency and ensuring customer satisfaction?

Beauty businesses can navigate the issue of passing on transaction fees to clients by prioritizing transparency and communication. By clearly communicating any additional fees associated with credit card transactions upfront, businesses can manage client expectations and minimize potential resistance. It's essential to frame these fees as a standard cost of doing business rather than an unexpected expense, ensuring that clients understand the rationale behind the charges. Additionally, leveraging automated software solutions can streamline the process of calculating and applying transaction fees, minimizing friction at the point of sale.