Owning a small business is hard. Figuring out how to increase your business's revenue and profit can either put you on a trajectory of a significant income or require you to make cuts from your personal budget.
A few years ago, we started a salon business.
We've learned a ton since we launched the business. We've had many ups and downs.
Before I get into what we are going to do, I'll provide a quick summary of how salon businesses usually work. Hopefully, this info should give you some context in the changes we are going to make to our business.
Typical Pricing Structures of Most Salon Businesses
Most beauty salons are using one of the below options or a hybrid model.
An employee salon is similar to most types of businesses. You bring on W2 employees and pay them to work for your business.
In this setup, you 100% control everything about the business. What products people use, the quality of the service, and when people work. But it also requires more upfront capital to make sure you can cover the inflated business expenses, which increases based on how much you are paying people and all of the products/supplies you have to provide.
If you work at this kind of salon, you have a more reliable paycheck, but it probably means you will make less money as most of your services' profits go back to the business.
It is also worth noting that this business model is more expensive than the other options. But it can generate more profit if you can keep people around and fill the salon with appointments.
Depending on your state laws, most commission salons decide on a base hourly rate (maybe up to a certain point), and then the stylists would get a commission of each sale (services rendered or retail).
The business owner has more control in defining their stylist work, what they use, and quality. From what I found online, most commission salons pay a 30%-40% commission.
What the business provides each stylist and what they have to bring themselves varies quite a bit. But in all cases, the business is covering the costs of all products used for the services and the retail inventory.
This business model requires keeping accurate records to calculate commissions, and if the salon is slow, that could drastically affect the business's profit. Like an employee salon, the business will have to keep a closer eye on each stylist.
Booth Rental Salon
A booth rental salon is basically like a landlord situation. The business has booths that stylists can rent.
Each stylist is 100% on their own and is their own independent business. The booth rental contract outlines salon policies, but the products they use, services they provide, how much they charge, etc., is up to each stylist.
Most booth rental salons offer two main options: full time and part-time. Part-time restricts when they can use the booth. And in some cases, a full-time booth renter is limited to using their booth when the salon is open (but some allow them to come in at any time).
A booth rental salon has a defined contract length. Some are month-to-month contracts; others are 6-12 month contracts that limit when each stylist can leave the salon.
The Type of Salon We Run
We run a booth rental salon. This salon business model is prevalent in our area.
We went with the booth rental business model because the upfront costs are mostly dealing with setting up the booths and room(s) that can be rented out.
Right away, we decided to set our booth rental agreement to be month-to-month. We figured that we only want people around that want to be there, and we didn't want anyone feeling like they were bound to staying because of the contract.
When we first started, the goal was for the business's salon side to break even with 100% of the expenses tied directly to the salon. This plan worked for us because Andrea was a hairstylist and brought in revenue, completing these services in the salon. Since then, she switched to doing eyelash extensions full time.
Within the first year, we had enough booth renters to break even on the salon side. We started generating a small amount of profit every month.
Difficulties in Increasing Revenue
Live every business; our goal is to make a profit from our salon business. Several factors have proved to make this difficult with our salon.
Limited Amount of Space
We only have around 1,300 square feet of space to work with. This means we don't have a lot of options in adding a whole bunch of booths.
We also have to work around the layout of the space when we started the salon. Some walls and layout issues don't work well with what we want to do and limit our options.
Regarding a booth rental salon, increasing revenue is all about renting as many booths as you can. So you either have to add more booths or increase how much it costs to rent each booth. Neither of these is an excellent option for us.
Even if we were to 100% fill each booth, our salon's potential revenue would not generate a significant amount of profit. This revenue limit puts us in a hard position, such as being limited in the number of benefits we can provide and separating ourselves from the competition.
Dealing with Drama and People Leaving
Any time you have people working together, there is a good chance of personality conflicts. The more people you have at the salon at any given time, the this risk increases.
And if you don't have a well-defined booth renter contract that clearly outlines your expectations, it can be difficult to get rid of toxic people. You'll determine that what you thought would work for most people ends up getting abused and causing problems from one toxic person in the salon.
We are realistic in understanding that not everyone will be best friends with each other or agree on everything. But this shouldn't prevent people from being professional and successful at the salon.
Conflicts can't be ignored; otherwise, they tend to become massive issues.
We have learned over the last two years that we need to re-do our booth rental agreement and make sure we spend more time onboarding potential booth renters. Even if someone does great work, if they can't get along with others or making anyone feel uncomfortable based on their words or actions, they are not worth keeping around.
More Income Streams Provides Flexibility
We are lucky that if Andrea did not complete services in the salon, we probably would not be owning a salon business.
The fact that she can bring in a large amount of revenue from doing eyelash extensions means we have some flexibility in absorbing expenses from the salon.
The perfect scenario is we learn to optimize both her eyelash business and salon business at the same time. She would be able to work less, and the salon would provide a healthy income stream.
Different Way in Renting Salon Booths
After talking to another salon owner, we realized a few key things:
- When someone rents a booth full time, they aren't working 12-hours per day for seven days a week. This means the booth is doing nothing for a significant amount of time.
- Our full-time stylists that rent full time are renting the booth for times when it doesn't get used. Most full-time stylists only complete services for 30-35 hours per week.
- Stylists who want to booth rent, but are not ready to commit to a part-time schedule, are priced out of coming to the salon.
Instead of renting each booth or room full time/part-time, we are switching to a model that has each booth + room available for rent using the below pricing model:
- Two shifts are available: the morning shift is whenever they want to start working, up until 2 PM, and the afternoon shift starts at 2 PM, up until whenever they want to stop working that day.
- Both shifts are available at every booth + room seven days per week.
The most significant benefit here is that this pricing model has the potential to 100% utilizing each booth. So you probably increase the total number of booth renters, but how many stylists are seeing clients at any point at the salon stays the same. This solves the revenue ceiling we are working against right now.
But it also gives stylists more flexibility in deciding which shifts at which booths they need. They can rent different types of booths, or rent the room when they need it.
All of this is to say that this pricing model increases the business's potential revenue by 4x! And if the salon gets close to being filled, a slight increase in the shift price will dramatically increase revenue.
Negatives in this Business Model
There are a few disadvantages, mainly from the stylist perspective, with this new pricing model:
- If they are currently renting a booth full time, they give up flexibility when they can book appointments. They are limited based on the shifts they are paying for.
- They no longer can permanently store anything in each booth since multiple stylists could be using that booth in the week.
The first issue is partly resolved in that they can change which shifts they have rented at each booth monthly. This issue also goes down if they can optimize their shift schedule to fit as many appointments as possible and communicate with their clients when they can book appointments.
The second issue was a hard one to think about because our stylists are used to storing their tools and some supplies at their booths permanently. We came up with a solution that works around this. If they rent a certain number of shifts per week, they get the following:
- They can use a backpack to transport their tools and what they need to bring to each booth during their shift.
- We will provide a dedicated locker in the dispensary that can be used for permanent storage at the salon.
At least in our area, we haven't heard about any booth rental salons using this pricing model, so it will require us to communicate how this works.
But we think the added flexibility in booth renters only paying for the shifts they need is a huge benefit.
In addition to increasing the profit generated from the salon business, this new pricing model allows us to expand the benefits provided by the salon aggressively.
At least for the first phase, until the salon starts filling up, these are the benefits we will provide:
- Someone will come in once a week to thoroughly clean the salon.
- Laundry service will be provided, which means booth renters don't have to worry about doing laundry.
- Provide beverages, like soda, to clients (in addition to coffee + water).
- Providing a stocked back bar with shampoo, conditioners, etc., they can access it free of charge.
In addition to these benefits, we will be doing a complex renovation of the space. We talked about renovating the salon in a previous post. This new pricing model changes what we will be doing and allows us to do better upgrades.
We will be adding four high-end hair washing stations, a dedicated space for doing eyelashes (with recliners!), and better hair booths.
This plan isn't 100% finalized, but this is what we are thinking at this stage:
We just started the process of getting estimates for all of this work.
Investing in Our Business
Before we decided to go with this new pricing model for our salon, the renovation we thought would bring in an extra $1,000 in profit every month (potentially).
But this new model changes everything in that that potential revenue is much larger. If we can create a more premium space that attracts more booth renters, this could be a game-changer for us.
Instead of the renovation cost closer to $20k, we are thinking about getting a business loan that is $50k to do everything we want to do. This is a ton of money, and going into debt makes me nervous.
A lot of this money will go towards optimizing the dispensary for the possibility of supporting more booth renters and becoming much more usable.
Also, since this new model makes each booth more profitable, having more rooms doesn't utilize the space as much (as far as revenue is concerned). Sure, we can still charge more to use the room. But a room takes up around four booths we could rent. So this model was built with that in mind.
Like how I am trying to look at our mortgage, I think business debt is not in the same category as carrying credit card balances.
We'll have to take on a large amount of debt to make this happen, and it might take a while for us to increase the salon's revenue. But this explodes the business's potential income and puts us in a better position to grow the salon in the long term.
Even if we can only afford to make the minimum payments on this loan for a while, we have the potential of generating a full-time income from the salon business.
If we can find and keep good people, this could work out exceptionally well. We can focus on making sure we only allow people who will fit in well at the salon and do great work.
We are excited about how much we can separate ourselves from the competition and how upscale space will look after the work is done. But just like anything, there is a risk doing all of this. Let's hope this risk pays off!
Chris is a financial blogger who loves to be transparent about money-related issues. He’s paid off massive amounts of credit card debt and is the blog author of Money Stir. His main focus on Money Stir is talking about how money relates to our relationships, personal development, and how to plan for the future we want. He’s been quoted on Market Watch, The Ladders, and other publications.