Pricing is an ongoing issue that many salon/barbershop owners and beauty independents grapple with — as in, how much to charge, when to raise prices, and by how much.
When setting service or retail pricing, small or micro-business owners often tend to rely on emotions or on what competitors are charging. That can lead to financial disaster.
Adopting a black-and-white, non-negotiable formula to determine profitable pricing can be the single most important step toward a business’ success.
An ideal analysis requires a review of 12 business months, so the end of the calendar year is the best time for it. (Rolling out new pricing also comes as less of a surprise to clients when done at the beginning of the year.)
A Not-So-Secret Sauce for Pricing: The Break-Even Point
A business' break-even point is the juncture at which its operations go from red to black; that is, start turning a profit.
A break-even analysis not only determines the correct pricing for goods and services, but can also help uncover any hidden expenses that are quietly draining a business.
It can also be a useful tool when trying to secure funding, as a break-even analysis illustrates how the business is operating now and what an owner’s plans are for the future.
Every business has a different break-even point, which is why it’s especially important not to look to competitors for pricing guidance. If they can charge less than you for the same products or services you offer, the answer is not to lower your prices to match theirs, but to scrutinize your own costs of doing business and figure out how to reduce them.
How to Do a Break-Even Pricing Analysis
A: Categorize all monthly expenses except retail — every single dollar spent in the pursuit of keeping your business running. Include taxes, commissions, fees, interest, maintenance, licensing — everything.
Do one for each month of the calendar year. Average it out by 12 to come up with a median dollar figure.
- B: Calculate how many service hours your business books per month. Average it out by 12 to come up with a monthly median figure.
- Divide A by B. This is your break-even figure. (Ex. If A = $30,000 and B = 950, your answer is $31.58.)
- Determine the percentage you want your profit margin to be, and divide your break-even figure by its inverse. (Ex.: if you want a 15% profit margin, divide by .85. If it’s 20 percent, divide by .80.) This is your hourly rate.
Ex: Building on the example above, a 15% profit margin = $31.58 / .85 = $37.15.
For 20%, $31.58/ .80 = $39.46.
When reviewing business costs and determining where and how to cut, this is the best time to bring your brand values into play. If necessary, review and restate those values, if only for yourself.
A savvy business owner knows that sacrificing their salon culture to save money is a decision that’s likely to backfire.
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