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Thriving Stylist Podcast
#374 - Salon profit margins and stylist compensation
00:23:03
Are stylists truly getting what they deserve, and are owners protecting their bottom line? Compensation is always a hot topic, but right now especially everyone wants to make sure that they are getting what is appropriate. Today, we’re diving deep...
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- [00:03]
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Do you feel like you were meant to have a kick ass career as a hairstylist? Like you got into this industry to make big things happen? Maybe you're struggling to build a solid base and want some stability. Maybe, you know, social media is important, but it feels like a waste of time because you aren't seeing any results. Maybe you've already had some amazing success but are craving more.
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Maybe you're ready to truly enjoy the.
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Freedom and flexibility this industry has to offer. Cutting and coloring skills will only get you so far, but to build a lifelong career as a wealthy stylist, it takes business skills and a serious marketing strategy. When you're ready to quit just working in your business and start working on it, join us here where we share real success stories from real stylists. I'm Brit Siva, social media and marketing strategist just for hairstylists, and this is the Thriving Stylist Podcast.
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What is up? And welcome back to the Thriving Stylist Podcast. I'm your host, Pratceva, and this week we're talking about salon profit margins and stylist compensation. And this is kind of a fun hybrid because, yes, I do think owners will get takeaways, but I think stylists will get takeaways as well. I think compensation is always a hot topic, but right now especially I think everybody wants to make sure they're getting theirs. And I think that's totally fair. There's a lot of economic pressure, you know, as it relates to inflation, and there's a lot of shifts in what it's looking like to build a clientele right now. And I think concern over keeping as much of the pie as you possibly can is so fair and it goes both ways, right? So something that I think a lot of maybe stylists, but maybe everybody doesn't understand is there's a lot of salons in crisis. Right now. I'm hearing about this kind of at scale that a lot of salon owners are holding onto models that were fragile at best when times were good. And now where business is getting harder, they're really feeling the pressure. And so I want to talk about how to properly compensate, how to keep stylists motivated, how to make sure that stylists get the most that they possibly can, how to make sure that your salon is never running in the red, like all of those things. So one of the things, not one of the things, the thing I'm going to talk about a lot in this episode is called Profit of Profit Method. It's a compensation model we teach in thriving leadership. And it's unique in the sense that with this model, the Stylus gets the split of anywhere from 65% to 80%. So the stylus is always making the most. Very transparently. The Stylus is making the most by far. And then the salon keeps anywhere from 20% to 35% profit. And why I love this is it respects the fact that the stylist should be making the most, and in these instances, they make the most by a long shot, that it's impossible to argue that they don't. That's just the way it works out on paper. The nice thing is, too, the salon's profit margin is always protected. So it would be if you use the model, and I'm not going to lie, the model makes you make some tough decisions as an owner, for sure. But if you use the model, it would be fairly challenging to run in the red because your profit margin is protected and your team is still making the vast majority of the profit that is generated from the business. So often when an owner goes in and uses one of these calculators for the first time, they have, like, an oh, shoot moment because they realize that their current compensation model is overpaying underperformers and underpaying high performers. This is very common in our industry. In any other business, like a traditional business, that would never be the system that one operates from. But in our industry, salon owners feel like the way to keep the team happy is to bribe them with a high split. And so what we do is we try and have a. I hate this word, but a fair split, that's. I call it fair. The F word. Like, fair is so subjective. Nothing in life is truly fair. And when things are fair, let's say something is fair, like, well, they won the game. That was fair. No, they didn't win the game in a fair way. Someone's gonna blame the ref. Somebody's gonna have their feelings hurt. Like, even when things end fair, somebody is sad. And so I think when we try to make compensation models fair, and then somebody is sad, it's like, well, what did you expect? Fairness is fake. Like, there's. There is no such thing. You each get half the cookie, half is fair. But then the big sister's like, well, that's ridiculous. I'm the older sibling. This kid weighs 25 pounds and is a toddler. Why should we split at 50? 50? It doesn't make sense. There's always somebody who will feel like they were taken advantage of when you try and make things fair. And that's the problem with fair compensation models. Instead, compensation should be appropriate and high performers should make a significantly higher share and low performers will have to make less money, which is how it works in every other business model. But in ours, we really struggle with that, I think, because we, the owner, feel like if I don't pay a high enough split, nobody will want to work for me. I disagree for a lot of different reasons. One, when you look at any study on employee behavior, the reason for choosing to work somewhere and the reason for leaving is not money ever. You can look at the studies for that. Like, there's a lot of other reasons that would motivate a stylist to decide to leave your business. Money is probably reason number three, four, or five, because if everything else was going phenomenally and they felt like they were really well cared for, and would they like to make a 3% higher split? Of course. But things are so damn good that it's not really worth rocking the boat for. They're going to stay. The reason why stylists leave, and they'll always tell you it's to make more money. But then also, when you talk to studio suite owners and booth renters, most will tell you there's at least a temporary financial dip when you first go out there. So, yes, over time, you can make more money. And by the way, there's some people who do make significantly more money working booth rent than they do commission. But what if it didn't have to be that way? Because I don't believe it does. Like, even just thinking with that logic, if a studio suite owner can run their suite at a 61% margin, why can't a commission stylist be paid at 61%? Like, if it's possible to do it while they're working independently, why wouldn't it be possible when they're an employee? Question mark, and I'll explain the reason why. I know the reason why. But we should be able to offer comparable compensation models so that nobody's reason for leaving is I'm not being paid enough. When you look at salons that are operating really well and highly profitably, everybody is compensated appropriately. And when you look at the reasons why high performers stay, yes, they're well compensated. The reason why low performers stay is there are so many perks and benefits to being a part of this salon team that they would never find anywhere else. So, yeah, could they be making a 40% split at the salon down the street? Sure. But the trade off for that would be so massive that they'd rather stay working for you to make $17 an hour. And that's where some salons are really, really winning right now. So let me math this for you for a minute. So let's look at a high split on a low performer. Because some of. For some of you, you're like, I don't want the 17. I'll take the 40%. Yeah, but listen to this for a second. When we look at a high split for a low performer. So let's say a stylist is doing $2,000 a month in services. That's a pretty low performer in most salon standards. Only because most salons overhead is quite a bit higher than that. So $2,000 a month in services. And let's imagine you're not doing this profit of profit thing I'm going to talk about. You're doing a very traditional split. So let's say the split is 40, 60. Very typical, right? So the stylist gets 40 and the salon owner gets 60. That stylist would be taking home $800 a month. If you increase their commission split to 45%, they're going to feel like landslide victory because now they're making an extra hundred dollars a month. And we have stylists who are fighting for that extra hundred bucks because they need it. The problem is the salon can't afford it. So now nobody is happy. And for anybody who's like, a salon can afford an extra hundred dollars, I have a story that's coming up that's going to make you rethink that. Now, what if instead of doing that, instead of taking this underperforming stylist, the stylist who's doing $2,000 a month in services, and instead of increasing, they're split to 45%, we market them and they increase their monthly service dollars by 500. We keep their commission split at 40. That same stylist is going to take home $1,000 a month. So while we're arguing with this stylist who wants to make 5% more in commission, we're arguing about the wrong thing to take somebody who's doing $2,000 in services and increase their revenue by $200 a month. It's not about the commission split, it's about the service dollars. And this is part of the reason I'm really feeling passionate these days about. Let's focus on building up our stylists that we have. There is not a single stylist I talk to today who doesn't tell me, man, if I worked For a salon that built up even just 50% of my clientele. For me it would be such a game changer. If you are building up your team, it is not about commission percentage. They just want to see their take home pay coming higher and higher all the time. And when you do a profit of profit model, they'll be earning commission increases all the time as the service revenue grows. So let's do story time. So every once in a while I get lucky and a salon leader shares their real numbers with me that I can share with you. And then we can play and troubleshoot together and you can see in real time what a real salon owner is experiencing. So this leader said that she has five stylists and as a collective team of five, they're producing $7,964 a month in services. So five people and production for the month is under $8,000. That's extremely low production for a team of five. So keep listening. She pays a 46% commission because that's the going rate in her area. So that means commission going out is $3751. Plus she pays a 20% retail split, so that was 220. Contributes 2% to 401k. So that's 135.54. She pays 21% in employee tax, so that's $1039. And 15% in employer tax, which is another 526. So the total going out the door for this team is 5671. So they're producing 7, 964 and she's paying out 5671. So her profit left over is 2002, 93. So then we say wow, that's good. No. So she hasn't paid for anything else in the salon yet. So she goes to pay for the salon rent, which is 4, $300 a month. Cost of services, which is color and retail. 1500 laundry and cleaning 1200 utilities 700 credit card fees. Boulevard and Vish 1500 marketing 1500 education fund 250. I mean this salon owner is trying to do it so right. And like that's the part I can deeply emphasize with is like she's literally trying to do the damn thing. And I so feel her on that. So that her overhead is 10,950 and her team is producing 7, 9, 6, 4. And after she pays the team, she only has 2002, 93 to go towards that $10,000 bill. So it's not even like the $7,000 that the team does goes towards the 10,000. Not even close. After she pays the team, she's only left with 2,200 bucks to pay for the $10,000 in expenses I just rattled off. So who's paying for that? She is. In the services she's doing behind the chair. Right. And by the way, with her service dollars and that 2,000 that's left over as profit from her team, the salon is losing $1,200 a month. This is so real. So is there profit from the team? Kind of. Until this salon owner goes to actually pay any bills, like keep the water and the lights on. And now, despite the fact that she herself is a high producer and is doing the most, there is no profit left in the salon at the end of the day. So this owner said, please help me understand what I'm doing wrong and how to fix it. So what I did is I pulled up our 8020 split calculator. So it's the most generous calculator to the stylist, and the owner takes the smallest percentage, but it's still a very. She'd be able to run her salon on this percentage and be fine. So I ran her team through the calculator, and there is not a single person on the team who could be paid more than hourly minimum wage right now. Like there is. I mean, you could offer something like 6% commission, but. But no one's going to work for that. Right. So. And the 6% commission, by the way, less than minimum wage. Let's actually work out what that would be. So on $2,000, let's see what it is. Oh, perfect. On $2,000, a 6% commission is $120 a month. Like, no one's going to do that. And by the way, it would be illegal employment. So the best this salon owner can do is pay her team minimum wage. She will still be running in the red. She will still not be profitable. But to give these people commission split, it's just not there. The money's not coming in. So let's take a step back from our example for just a moment. The problem with most compensation systems is they look at high producers as the key to success. Right. The sun rises and sets on all of the high producers in a salon team. I. I've worked in a salon that operates like this. I get it. The challenge is there's two big issues. One, high producers are often undercompensated, and I feel a type of way about that because they're covering the cost of the low performers who are being overpaid. Truly. That's usually what it boils down to, is like, well, if it wasn't for Jacqueline's revenue, we wouldn't be able to pay Joey, who just started last week. Okay, but not Jacqueline's problem. Now difference if Joey is assisting Jacqueline. Okay, then we're talking about something totally different. I'm not talking about that. I'm talking about two independent stylists. Joey's not doing enough, and Jacqueline's doing the most. And Jacqueline, we can't pay her more because Joey is bleeding the salon dry. How does that motivate Jacqueline? It doesn't. And this is why salons lose really good people, because eventually she's going to learn. Like, I feel like I'm carrying too much weight around here. When you see senior stylists say things like that, this is where they're coming from. This causes resentment. Even when high producers aren't 100% sure why they feel resentful. Have you ever had a high performer say they feel like they reached their glass ceiling? It's like this. It's like an undercurrent that they don't realize is happening, but it's there. It also causes a power imbalance and an unhealthy reliance. Has anybody ever worked in a salon where there was, like, a diva person, like, somebody who just had a little too much control, a little too much power, felt like they could get away with whatever they wanted and nothing could be done about it because they knew that the salon rose and set on them. So if they were gone, everybody's lost their job. And that's not good either. Like, that's a tricky power dynamic, and that's how toxic stylists can end up staying in a space too long because the salon can't function without them. And that's not good either. So what we do in this model is instead of looking at people as the profit centers, which is what a lot of compensation models do, right? They're based on high performers and high performers carrying the weight and then low performers kind of hanging on. Instead of looking at the people as the profit centers, I look at each chair as a profit center. So each chair is a potential profit center, just like the way you would look at a traditional business. So it's not the person. It's the square footage. It's the chair. It's the opportunity that is our profit center. Because at the end of the day, it is. Your entire team could walk out tomorrow, and all you've got left is these six chairs in the building, Those are your profit centers. And that's a huge part of the mindset shift. So going back to the salon owner, I was like, how do I help this person out? How can we make this work? So I looked at, she's got these five stylists, and on average, between the five of them, they're doing about $8,000 a month in services. So it boils down to around $1,700 per month per stylist in services. So when we run them through this calculator, the cool thing about it is it shows you the cost to host each profit center. And what we found out was based on this salon owner's overhead, which was about $10,000 a month, it costs her $2,100 a month to have each of those team members just in the building, in the space, functioning. So if they're producing 1700 and they're costing her 2,100, she's losing $400 a month. Like, the person is in there working and just draining her dry. Like, she's actively losing money. So that team member who's doing $1700 a month in services will cost the salon $4800 a year. It's a lose lose. Like you. You can't financially pull it off. It doesn't make sense. The best thing to do for that person is to pay a reasonable hourly wage, knowing you're going to lose money on them, but you're going to build their clientele. Like, you have to hire that person and be like, okay, this is going to suck for a while. It's going to take some of our profit mar. But we have an aggressive growth path and plan, and by the end of the year, they'll be profit positive. Great. I can totally get on board with that. So what I wanted to do was use the calculator to find the profit point for each of the profit centers, aka the stylus chairs. So we know that $2,100 is the break even. I just shared that with you. We just found out that it costs this salon owner $2,100 for each of her profit centers. That is the overhead that she's running for every single chair in her space. So we know her stylists have to be earning significantly more than that just to be paid hourly and for her to break even and for us to not be operating at a loss. But at what point can we offer a commission split? Because I do know most stylists want to make a commission, and I completely understand. So using the calculator we found that at $4,000 a month, the salon can offer a 32% split to these people. With that split, the stylist is taking home 80% of profit, and the salon is taking home 20%. So the salon would profit $1,200 per year on that sty. But this salon owner is currently paying 46% commissions. So then the question becomes, where do we need to get her stylist at in order to pay them 46%? Now, something I think you should know is I'm not a fan of reducing commissions. Good luck telling somebody. Like, it's been nice having you here. I'm gonna need to cut your pay. Like, very few people are gonna stick around for that. So I'm not a proponent of that in any capacity. But we found using the calculator, which is why we like to use tools like this, that the stylists in her space don't become eligible for a Commission split at 46% until they're doing $6,000 a month in services, which would take her annual salon revenue from around $90,000 a year to $360,000 a year. Now, it's no small fee. I'm asking her stylist to basically triple their production. But if she wants to sustain that 46% commission, that's what it would look like. So here's what this method gets. Cool. So hang with me. For you stylists who are skeptical, hang tight. So how could this salon pay top commissions with this method? Once a stylist is doing $10,000 a month in services, they would make a 56% commission split. If we're looking at traditional commission, which is still the 8020 split that I'm talking about, at $15,000 a month, the stylist would make a 62% commission split. So this entire model, if I wasn't clear, really relies on not overpaying underperformers, period. And a lot of salon owners feel like they don't have a choice. And I would ask you, how's that working for you? Like, are you retaining team members? Well, are they frustrated? Are you frustrated? Are you profit positive, or are you profitable, period? That's what I should ask. Are you profitable, period? Do you have a solid training program for a new stylist to understand how to build a clientele? Are you providing clientele? What are you providing? Getting beyond. So this salon owner, like I said, is trying to do all the things they have vish. They have retirement contributions. Here's what I have found, though, too. I Don't know who your stylists are. I've never met them. If they're Gen Z, like, they might not even care about retirement just yet. So I would just figure out, like, based on the team that you have, what are the things that you need to offer to keep them motivated? What are the things you need to offer to fill their chair? How do you need to show up differently as a leader to increase their demand? Because for this salon owner, you have two options. Significantly reduce your overhead significantly, or we need to figure out how to get these stylists to a place of high performance. So a lot of times, like, a coach will be like, I think you need to hire more high performers. That will not solve this problem. Now she'll have the high performer who's doing all the work and carrying all the weight, which is essentially her right now. Right? That's this owner. This owner is the high performer. And everybody's paycheck is reliant on her performing. Like, God forbid this owner gets sick or something. I don't even know what the plan would be. It would be really scary. So if you hire a high performer, it's just repeating the cycle of high performers being underpaid, low performers being overpaid. Like, that's not the solution. It's reduce the overhead or increase the demand. If looking at this business, I had to reduce overhead, it would be tough. I'd be curious. You're spending $1,500 a month on marketing. I'd be curious. Where is that going? You said $1,200 a month on laundry cleaning. That's high. I wonder if there isn't any margin there. I don't know, but that is a pretty high cleaning laundry cost. And even when I look at, like, Boulevard and Vish, $1,500 a month, I wonder if we could go with something a little bit more budget friendly just until we get performance up or we increase demand. So I hope this has been clarifying to salon owners who were like, I can't turn a profit, and I don't know why, and also to stylists who are still, you know, maybe thinking or feeling like, this is how much my owner is taking from me, or this is how much my owner makes off of me. This industry is one that's very difficult to turn a profit margin in unless you really have strong systems and structure in place. It's just expensive. So I hope this has been clarifying. As always, leave me a rating or review on itunes with any questions that you have. And as I always like to say so much love. Happy business building, and I'll see you on the next one.