Are you tracking how “gross” you are? - tanTALK

House of Tan · 01-28-2012, 12:52 PM

I thought I would share something that I was recently discussing. Gross margins and how they relate to your bottom line.

First, Gross margin is defined as the gross profit left over from providing a service or good after deducting its direct costs. IE: A tanning bed session would have direct costs of: lamps, starters, depreciation and/or repair, acrylic replacement, energy consumed, bed cleaner solution and so on. You could also include direct labor costs to this (3 min to clean the room at a labor rate of $8/hour would be .40 cents). I prefer to not include this as many salons operate one employee per shift and I would rather see labor considered an ‘Overhead” cost.

So as I see it, the cost to offer a 15 min session on a VHR would have a direct cost around $4 per session. Remember that I include pro-rated repairs and equipment replacement funds so that a salon can stay current as the years pass by. HP units will have a higher direct cost and 100w beds will have a lower direct cost.

So if you are averaging $12 per VHR session and your direct cost is $4 per session, you have a gross profit of $8 per session or 67% gross margin.

Okay, now let’s establish a reasonable overhead for an average salon and a reasonable gross profit average across the board of a typical 10 bed salon, no HP.

Let’s say we have an overhead of $7,000/month of mainly fixed, and some variable costs (remember we are not including costs related to the production of the tan). And we are averaging a gross profit of $6 per tan (base & VHR). We would have to do 1,167 tans per month to break even and pay all bills.

Let’s say we are doing an average of 1,300 tans a month; we are netting $800/month.

What if we increased prices by 20%, what would that do to the bottom line? Fixed costs will stay the same and let’s say we are only doing 1,170 tans a month now because we lost 10% of our clients due to the price increase. We would increase the net (bottom line) to $1,424/month; a 56% increase in net profits.

What if we were going to drop prices by 20% to keep up with the “other salon” in town and their low-ball prices? Fixed costs stay the same and we are still doing 1,300 tans a month we would now be losing $760 a month.

But we lowered our price to keep the heads coming in the door and/or increase the volume. Let’s say that we accomplished that goal of increasing volume by 10% and we are now bringing in 1,430 tans a month. We would still be losing $136/month; a 117% decrease in net profits.

What are your thoughts on gross margins and how they relate to your pricing strategy and/or bottom line?

Do you know what your gross margins are? Your PPA? Are you tracking your P&L monthly and looking at each line item? Do you know how many people you must average daily to cover overhead?

House of Tan · 01-28-2012, 02:07 PM

Let’s examine the 2 different (re-pricing) scenarios from a different point of view.

If the 20% price increase brought the salon to a bottom line (pre-tax) profit of $1,424/mo with 1,170 tans; how many sessions would the 20% decrease salon need to do in order to hit the same (pre-tax) bottom line per month?

2006/tans a month; to hit the same bottom line number! That is 836 more tans a month. Do you think that is possible? Would you have to advertise to increase the salon’s volume by 71% monthly?

I believe you would have to advertise, and that takes more money from the bottom line (ads to the overhead). Plus you would have increased the variable costs related to overhead; things like payroll, toilet paper, office supplies, general cleaning supplies, and much more.

If my math is right, and based on ad prices in my area; this salon would be back in the red and working harder to go out of business faster than before.

House of Tan · 01-31-2012, 10:54 AM

No comments?

01-28-2012, 12:52 PM	#1 (permalink)
House of Tan Team TanTalk Join Date: Oct 21 2003 Location: The Fort Posts: 942 Rep Power: 21	Are you tracking how “gross” you are? I thought I would share something that I was recently discussing. Gross margins and how they relate to your bottom line. First, Gross margin is defined as the gross profit left over from providing a service or good after deducting its direct costs. IE: A tanning bed session would have direct costs of: lamps, starters, depreciation and/or repair, acrylic replacement, energy consumed, bed cleaner solution and so on. You could also include direct labor costs to this (3 min to clean the room at a labor rate of $8/hour would be .40 cents). I prefer to not include this as many salons operate one employee per shift and I would rather see labor considered an ‘Overhead” cost. So as I see it, the cost to offer a 15 min session on a VHR would have a direct cost around $4 per session. Remember that I include pro-rated repairs and equipment replacement funds so that a salon can stay current as the years pass by. HP units will have a higher direct cost and 100w beds will have a lower direct cost. So if you are averaging $12 per VHR session and your direct cost is $4 per session, you have a gross profit of $8 per session or 67% gross margin. Okay, now let’s establish a reasonable overhead for an average salon and a reasonable gross profit average across the board of a typical 10 bed salon, no HP. Let’s say we have an overhead of $7,000/month of mainly fixed, and some variable costs (remember we are not including costs related to the production of the tan). And we are averaging a gross profit of $6 per tan (base & VHR). We would have to do 1,167 tans per month to break even and pay all bills. Let’s say we are doing an average of 1,300 tans a month; we are netting $800/month. What if we increased prices by 20%, what would that do to the bottom line? Fixed costs will stay the same and let’s say we are only doing 1,170 tans a month now because we lost 10% of our clients due to the price increase. We would increase the net (bottom line) to $1,424/month; a 56% increase in net profits. What if we were going to drop prices by 20% to keep up with the “other salon” in town and their low-ball prices? Fixed costs stay the same and we are still doing 1,300 tans a month we would now be losing $760 a month. But we lowered our price to keep the heads coming in the door and/or increase the volume. Let’s say that we accomplished that goal of increasing volume by 10% and we are now bringing in 1,430 tans a month. We would still be losing $136/month; a 117% decrease in net profits. What are your thoughts on gross margins and how they relate to your pricing strategy and/or bottom line? Do you know what your gross margins are? Your PPA? Are you tracking your P&L monthly and looking at each line item? Do you know how many people you must average daily to cover overhead? __________________ Startbucks

01-28-2012, 02:07 PM	#2 (permalink)
House of Tan Team TanTalk Join Date: Oct 21 2003 Location: The Fort Posts: 942 Rep Power: 21	Re: Are you tracking how “gross” you are? Let’s examine the 2 different (re-pricing) scenarios from a different point of view. If the 20% price increase brought the salon to a bottom line (pre-tax) profit of $1,424/mo with 1,170 tans; how many sessions would the 20% decrease salon need to do in order to hit the same (pre-tax) bottom line per month? 2006/tans a month; to hit the same bottom line number! That is 836 more tans a month. Do you think that is possible? Would you have to advertise to increase the salon’s volume by 71% monthly? I believe you would have to advertise, and that takes more money from the bottom line (ads to the overhead). Plus you would have increased the variable costs related to overhead; things like payroll, toilet paper, office supplies, general cleaning supplies, and much more. If my math is right, and based on ad prices in my area; this salon would be back in the red and working harder to go out of business faster than before. __________________ Startbucks Last edited by House of Tan; 01-28-2012 at 02:10 PM.

01-31-2012, 10:54 AM	#3 (permalink)
House of Tan Team TanTalk Join Date: Oct 21 2003 Location: The Fort Posts: 942 Rep Power: 21	Re: Are you tracking how “gross” you are? No comments? __________________ Startbucks

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