Day: February 4, 2022

Salon Pricing: How to Effectively Price Your Services and Maximize Your Profitability!!

A professional hair stylist owning her own business at Allure
One of the Hardest parts of our Career is putting Value on our work….read on to find out how to create an Effective Price List and earn what YOU are worth!!

How to price your salon services to ensure maximum profitability?

Pricing strategy is an integral part of any business and the right one should satisfy both your costs and your customers’ expectations. That said, it’s pretty clear that your salon pricing list has the potential to make or break your business

If it’s too low, you won’t be able to generate enough revenue to cover the cost of selling the services. Alternatively, if it’s too high, there is a huge risk of you losing your customers to other salons.

To know how to get your salon’s pricing right, you need to be aware of certain factors that can impact your costs and profitability. 

So, let’s dig in!

1. Understand what factors impact your pricing

The factors listed below are extremely important and should be taken into account when you are figuring out your salon service prices. 

I. Location 

Analyzing the location quotient (LQ) of the area you want to run your salon business in can be helpful to understand how many salons operate in that particular region.

LQ>1 = The occupation is more prevalent in that area as compared to the national average

LQ<1 = The occupation is less prevalent in that area as compared to the national average

Hence, the higher the LQ, the higher the concentration of that business in the said area.

For instance, as of May 2020, the LQ of New Jersey for hairdressers, hair stylists, and cosmetologists was 1.80, whereas the LQ of Pittsfield was 0.68. 

This metric will help you understand the actual competition you’ll face in the area you want to operate in, and this can have a direct impact on the pricing strategy you should adopt (we talk in detail about pricing strategies in the next section).

II. Local economy

Adding to the location factor is the identification of the socioeconomic status of your target market.

The price set for a salon based in a big city like New York City, targeting a premium clientele will be completely different from a salon based in, let’s say, Vermont. 

III. Demand

The demand for advanced salon services continues and will continue to rise, and the age-old service demand curve applies to the salon prices as well

You need to be aware of the services that have higher demand and adjust the prices of those accordingly. 

Additionally, researching about the competitors in your locality will also provide you with useful insights into what’s popular and what’s not so that you can price your services accordingly.

IV. Competitor’s pricing list

Salon business is a competitive market and everyone in this business tries to adopt various pricing strategies from time to time.

Hence, watching your competitor’s pricing techniques and being aware of the average salon service prices becomes all the more important. This will help you understand the local demographics, their disposable income, and also the acceptable salon charges in your locality.

You need to consider this factor just to know what’s realistic and to get a few salon pricing ideas, hence, make sure you don’t copy.  

2. Choose a pricing strategy for your salon business

Many industry experts have designed standard pricing models/strategies that you can use to optimize your salon’s pricing.

A carefully considered pricing strategy is vital as this lays the foundation based on which you can set the prices for your products and services. 

Your pricing strategy can vary from time to time depending on the service demand. Listed below are some of the pricing strategies that you can adopt to run your salon business effectively:

I. Skimming pricing

This strategy involves charging the highest initial cost for a service that customers are willing to pay and then successively lowering the cost over time to cater to price-sensitive customer segments.

If you are introducing a new product/service, you can adopt this salon pricing strategy to charge for that at a higher price point over a short period of time. 

This strategy can help you break-even faster because setting a higher price would not only be accessible upmarket but will also attract the ones who are referred to your service by those early adopters. 

II. Penetration pricing

According to this strategy, the services are priced low such that they appeal to customers for whom price is a major factor in their buying decision. 

If you are new in the salon business, this strategy can help you penetrate the market quickly and maximize the results of your marketing strategies.

However, you also need to be cautious about implementing this strategy since it may be difficult to raise prices later on once customers have familiarized themselves with your low prices. Additionally, extremely low prices may also indicate low quality of services. 

Hence, make sure you shift your pricing strategy once you have a stable client base.

III. Value-Based pricing

Value-based pricing is more customer-centric and accounts for the customers’ willingness to pay for a service. This involves pricing the services based on your customers’ perceived value of the service. 

This strategy can help in building a loyal customer base because you are in sync with your customer’s preferences, which is reflected in your pricing list.

But for this to succeed, you need to have a very clear understanding of your ideal customer profiles, their pain points, needs, and change prices according to their varying preferences.

IV. Prestige pricing

As opposed to value-based pricing, prestige pricing (or image pricing) is more about establishing a superior business’s brand image compared to your competitors

If you’ve established a strong brand image in your locality, your ideal target market – the high-spending customers in this case – will opt for your services regardless of the price or quality.

So, you can charge a high price for your services due to the perceived value that your brand possesses. 

3. Determine the correct pricing for your services

Step I: Calculate your overall budget (running costs) per month

This is the number that will tell you the monthly amount you need to earn so as to keep the lights on in your salon.

Running costs = Product costs (beauty supplies) + Operating costs (rent, tax, utilities, insurance, and other regular expenses) + Employee salaries (payroll, bonus, commission)

Note:

  • If you are buying your products for 3 months, make sure you divide the product costs by 3 to get the product cost per month. 
  • Additionally, don’t forget to add the salon marketing costs in this pricing formula! Although setting the budget for marketing is really up to you, salon owners spend anywhere between about 3 – 7% of total sales on marketing activities.

1. A simple yet effective calculation to get you started

Step I: Calculate your overall budget (running costs) per month

This is the number that will tell you the monthly amount you need to earn so as to keep the lights on in your salon.

Running costs = Product costs (beauty supplies) + Operating costs (rent, tax, utilities, insurance, and other regular expenses) + Employee salaries (payroll, bonus, commission)

Note:

  • If you are buying your products for 3 months, make sure you divide the product costs by 3 to get the product cost per month. 
  • Additionally, don’t forget to add the salon marketing costs in this pricing formula! Although setting the budget for marketing is really up to you, salon owners spend anywhere between about 3 – 7% of total sales on marketing activities.

Step II: Calculate the overall working hours per month

Determine the number of days your salon is open each month and also the average working hours per day.

Multiply both the numbers to get the average working hours per month per employee.

Avg. working hours per month = No. of days your salon is open * Avg. working hours per day

Based on the number of employees, you can calculate the overall working hours per month.

Overall working hours per month = Avg. working hours per month * No. of employees

Note: 

  • The overall working hours should only include the working hours of employees who are actively involved in providing chargeable services. It should not include the working hours of support staff like receptionist, salon manager, cleaning staff, etc. However, their salaries, bonuses, and commissions should be counted in the employee costs that you added while calculating your running costs above. 
  • Remember that the average working hours of any staff are not equal to their logged-in hours. For ex: A hairstylist might punch in at 10 and leave by 6, but the actual time that they spend providing services may be less than 8 hours. It may vary depending on several factors like customer no-shows, cleaning of workstations, etc. 

Step III: Calculate your cost per hour and cost per minute

Cost per hour = Running cost per month / Overall working hours per month

Divide this by 60 to get the cost per minute: 

Cost per minute = Cost per hour / 60

The cost per minute is the cost incurred per minute for providing your services. This is the direct cost of your time, labor, and skills that are put in for every service.

Step IV: Calculate your per minute rate

The per minute rate is the amount you should charge per minute for your services.

Now to earn a profit, your per minute rate should be greater than your cost per minute. 

Consider the profit you want to earn and calculate the per minute rate using the formula given below: (On average, salon service profit margins can range from 2% – 17%) 

Per minute rate = Cost per minute × (1 + Profit Margin)

Do remember that different services may have different profit margins. So, make sure you calculate the per minute rate of each service individually based on the pricing formula above with their respective profit margins in mind.

Step V: Calculate your service cost 

To calculate the cost of a service, multiply the per minute rate with the average service time. If you were to charge the customer this service cost, that would be enough for you to earn the set profit amount every month. 

Service cost = Per minute rate × Avg. service time (in mins)

While you might want to start right now with a pen and paper to find out your individual service costs based on different profit margins, it will be much easier if you do it in a spreadsheet.

And just so that you don’t have to go through the trouble of creating one from scratch, we’ve created a salon pricing calculator with all the above pricing formulas pre-fed, so that you can focus on crafting your perfect salon price list!

Also, here is an example to help you understand the entire calculation better:

Let’s assume you own a hair salon and your running costs per month are $7500. 

Let’s say it is open 25 days a month and the average working hours per day are 6 hours, so the average working hours per month will be 150 hours (25 × 6). Assuming that the number of stylists working at your salon are 2, the total working hours per month will be 300 hours (150 × 2). 

Considering your running costs per month were $7500, the cost per hour should be $25 (7500/300). The cost per minute will be $0.42 (25/60). 

Let’s assume a profit margin of 10%. Hence, the per minute rate will be 0.462 (0.42 × 1.1). 

If the average service time of a service is 45 minutes, the average service cost will be $20.8 (0.462 × 45). 

II. Advanced pricing considerations 

2 additional factors to consider while determining your salon pricing:

a) Variable product quantity

Many salon services are often priced upon the quality and quantity of the consumables used in performing that service. For example, facials done with the facial kits of different brands are usually priced differently.

Or, the price of keratin hair treatment might vary depending on hair length since the quantity of product used on longer hair would be more compared to shorter hair.

In such cases, you can add the product value as an additional factor in the last step while calculating your service cost.

b) Stylist experience 

Salon experiences are extremely personal and customers prefer getting the best of services. That’s why the stylist’s level of expertise and seniority plays a major role in how much you can charge for their time.

Every stylist can have a different pay grade based on their experience, brand value, and quality of service provided.

The easiest way to accommodate this is to add the additional cost to the final service cost to get the different pricing tiers. For example, a haircut by a senior stylist could be priced at $65 whereas a haircut by a junior stylist could be priced at $45.

Make sure your Service Menu is clear and concise!

4. Four underrated pricing mistakes you MUST AVOID to increase your profitability!  

I. Making your salon service price list too complicated

Be it hairdressing or any other beauty service, coming across a widely segmented price list with dozens of sub-options – which is extremely confusing in itself – is very common. 

Make sure you keep your prices simple and realistic.

For example, you don’t need to price every haircut customization, like dry, wet cut, blow-dry, etc., differently. This will help make the list of services simple for your clients as well as your team.

Besides, your clients pay for your expertise. Keeping your salon’s service price list minimal by avoiding extremely similar services at different prices isn’t going to make them pay you less. 

This will also help in reducing undercharging as the chances of choosing the wrong service price or suggesting a cheaper service to the client is high when your employees have a huge list of services to pitch from. 

To avoid any confusion around pricing, online booking becomes all the more important. The thing with a tool like this is that you can have a standard price list that both your customers and staff can choose from.

This ensures that there is no miscommunication around pricing and you are able to maintain transparency with your customers.

II. Undercharging your salon services

Don’t get disappointed if the initial customer turnover isn’t what you expected.

This might lead you to underestimating the value of your services and eventually, you might start charging way less than the actual value of your services. Hence, say a big ‘NO’ to this.

You need to bear in mind that you need to pay the bills. And for that to happen, you need to gain back the true value of your time, effort, and skills. 

III. Going overboard with discounting

The amount of time and skills required to provide your services at special rates still holds the same value as any other service at the normal rate. 

Hence, carefully strategizing and planning out your discounting strategy is extremely important.

Provide discounts for salon products that are outdated and need to be cleared out. In case you have a new product or service that you are planning to offer, you can smartly offer introductory discounted rates to stimulate its demand. 

If you feel the need to not discard discounts fully off your plan, you can consider offering discounts on services that have a high profit margin. 

You can also consider providing discounts on your slowest days. This way your rush days are filled with customers who pay the full price and at the same time, you can drive traffic to keep your schedule full on slow days. 

IV. Not communicating the price raise to your clients the right way

Increasing your revenue per customer is a vital part of your business’s growth. Well, it goes without saying that in addition to this, you need to announce your price rise to your customers effectively. 

The key to communicating a surge in your salon prices is transparency! Be transparent with your clients as well as your team. It would be even better if you break down the pricing and the services so that they can understand easily. 

You can send emails to your existing clients, announce the change on your social media accounts, or write an announcement on your salon’s website.