Chapter 5: Operating Costs and Revenues
It is important for a business to set a budget for each aspect of the
business and account for each separately. This will check the relative
profits of each part and illustrate where improvements and adjustments
must be made in the merchandising plan. Here are some of the expenses
that must be considered in your salon operation: rent, utilities, professional
services, telephone service, insurance, advertising, labor and equipment.
The big cost for many tanning salons is the equipment. Some salons prefer
to lease equipment because of service contracts, convenient terms, tax
advantages and rapid technological advances that tend to date equipment
quickly. Equipment is a major expense to many salons and the cost is
a major drawback to entering the business. However, the manufacturers
of tanning equipment have come a long way in terms of offering enough
models to satisfy nearly every budget.
Salon owners should project expenses and income before they even begin,
hereby avoiding the possibility of unwelcome surprises later. The following
is an example of an outright purchase of eight tanning beds, based on
a slightly higher than average cost of a medium priced bed, along with
many of the necessary start-up costs.
Below it, the chart showing approximate income is based on operating
12 hours a day, 25 days a month and 300 days a year. By projecting these
figures month by month, you'll start to see an accurate picture of what
to expect from the business.
A large share of your income will be derived from your tanning services.
The amount is based on how many sessions are given and what is charged
for each session. Another portion of your total income will be derived
from retail sales and from other services you provide. These too should
be added into both the expense and income projections.
Of course, all of these costs and income projections are estimates and
they will vary, depending on your locations and suppliers. Let them serve
as a guide when considering what kind and size of salon to open. Research
the actual costs in your area and adjust the tables accordingly. Then,
once you've been open for a month or two, get in the habit of comparing
the month's bills and receipts with your projections and see if you need
to make any adjustments. Also plan to set aside some money every month
to cover the cost of maintenance and equipment replacement down the road.
Living off of the depreciation of your equipment can give the illusion
that you are making money, when in actuality, you're just taking it out
of the business.
When possible, give yourself time to get the job done. The plans take
at least three weeks to do correctly if the designer does not already
have a backlog. The fixtures can take up to six or eight weeks to come
in, so order early. Construction will range from three to eight weeks,
depending on size, complexity and many other variables.
Costs have an incredible range. Many designers maintain that they have
been involved with 1,000-square-foot installations that cost $200 per
square foot, and others four times the size that came in at only $5 per
square foot. Design, material and labor are all factors that make every
job a unique situation.
Tanning Operation With Eight Tanning
Income Retail Products
|Monthly Income Statement (based on eight beds,
12 sessions per day, 25 per month)
Less Cost of Goods Sold
Utilities for Cleaning
Accounting and Legal Costs
Advertising and Promo Costs
Net Income Before Taxes
The simple picture presented above is made more complex by the addition
of retail products to the salon business. A new level of expenses and
profits must be factored into the calculations. The simplest way to visualize
the scenario is to view the expenses and profits for the salon and retail
operations separately and add them together at the end.
The costs are somewhat different in every situation, but from the foregoing,
the salon operator can see that a retail operation will create many more
challenges for his business than will an operation that is geared strictly
to service. Still, most salon people can get some idea of what the total
profit/cost analysis would be for each operation independently by figuring
the following equations for both the salon and retail sides of the business.
The simplified equation tells the salon owner how much it will cost to
provide a product or a service and this is how much must be charged to
make a profit. At times, the figures are startling and revealing.
|Salon Service Expenses, Including Profit ·
equipment and supplies · labor · utilities ·
rent · advertising · profit · cost of service
|Retail Operation Expenses, Including Profit · goods
· labor · utilities · rent · advertising
· profit · cost of goods sold per month
In tanning, expenses tend to be continual while business is seasonal,
making realistic budgeting even more important. The retail side of the
business may or may not have a seasonal base. It would be better if it
didn't have a seasonality to it, or if it did, one that was opposite
the tanning business so that one could carry a positive cash flow during
the weak months. If, in computation, the salon owner figures expenses
by the month for the salon operation, it is given that he knows how much
he must charge for the tanning services during that month (no matter
how many customers he has) to make back that month's investment and a
profit. Unfortunately, many salon owners cannot just consider their expenses
and needs in this business. They must consider their enterprise against
the face of competition and the market demands for their tanning services.
The picture for determining profits for retailing is a little different.
Here the price of goods is not tied to the number of buyers, but to the
number of units. A retail operation has to move so many units during
an accounting period to make a profit. Whether there is one customer
or 50 customers isn't the issue. Volume of goods determines whether the
operation can be successful or unsuccessful. If the salon owner or retailer
doesn't feel he or she can move merchandise at the rate needed to make
a profit, the salon owner should not consider the retail operation without
further planning to maximize profit.
The process of incorporating a retailing operation into a service operation
requires an accurate knowledge of the retail sales world and how it works.
Presented here is a fundamental analysis of retailing and its most important
aspects. Obviously this is not a complete study of the subject, but it
does give the tanning professional an insight into the complexities of
this exciting and often lucrative field.
The salon owner has decided to market a product besides offering the
tanning service. Let's accept as a given that the owner already has selected
a suitable product that will work well with his or her established operation.
Now the owner must strive to know all he can about the process of selling.
This is important information because knowledge of the sales process
increases the retailer's success.
Distribution occurs when a product travels in some way from the producer
to the consumer. The means by which the product gets to the consumer
is called a distribution channel. These channels can be direct or indirect.
A direct channel of distribution bypasses the retailer and goes directly
to the consumer. This is a method used successfully by mail-order companies.
They send a catalog and the consumer orders directly. An indirect channel
of distribution requires the service of several intermediaries between
the consumer and the product.
The factory or manufacturer deals usually with a wholesaler or agent
that places the goods. The wholesaler works to the benefit of both the
producer and the retailer. Because the wholesaler deals with a number
of companies, the factory and the retailer don't have to. If, for example,
the tanning salon wanted to order a variety of tanning lotions from a
variety of different lotion manufacturers, the work of ordering would
be a time-consuming task. The wholesaler makes the job easier. This distributor
buys goods (in this case tanning products) from a number of factories/manufacturers
at a quantity price, that is a discount. Because goods are bought at
this low wholesale price, the wholesaler can afford to pass along some
of this savings to the little retailer who otherwise would probably end
up paying a higher price for the smaller volume. The wholesaler then
serves both the needs of the factory and the retailer.
In many cases, direct distribution is the preferred method. The flow
of technical information between buyer and seller in the industrial market
often makes it impossible to use a wholesaler. The high price of many
industrial goods--machinery and large quantities of raw materials, for
example--also makes it practical for producers to devote more of their
own staff's time to selling to individual accounts. Producers of industrial
goods usually have a smaller number of potential customers. This makes
it easier to deal with them without intermediaries. For these reasons,
direct distribution is popular in the industrial market.
However, some industrial suppliers do use indirect distribution. Expendable
supplies, such as paper, business forms, data processing supplies, as
well as office furniture are sold through wholesalers. Tools, small parts,
electrical and plumbing supplies are handled by industrial distributors.
The advantages for buyers and sellers are similar to those for consumer
goods. Other kinds of intermediaries also operate in the industrial market.
Brokers, agents and manufacturers' representatives may perform various
roles for buyers and sellers in setting up the final exchange of goods.
Once the product is passed on to the wholesaler, the wholesaler's mission
is to get the product into the hands of the retailer. The retailer then
will resell the product to the consumer at a price that allows the retailer
a profit. Retail units come in all sizes. Some salons can be classified
as small businesses while others are chains. If each salon in a chain
becomes a retail shop as well, then the chain can act as one entity to
buy and sell a variety of goods throughout all the locations. This gives
the salons some leverage in terms of volume buying and shared advertising.
It is not enough for a salon to adopt the new title of retail environment.
There are at least five different types and each has a different mission.
A salon that begins to retail without a sense of mission is liable to
struggle trying to find a product line that fits its clientele. Analyze
what kind of retailing is most consonant with the current ambiance of
the salon and the way will be much easier.
The prototype of all retail stores is the old-fashioned general store.
Here, people found a little of everything mixed together. Eventually,
the need for single-line stores evolved. These stores feature only one
or two limited and related lines of goods--food, stereos, clothing, etc.
Any shop that answers a specific need can be considered a single-line
shop. Within the single-line shops are specialty shops. This would be
where most tanning salons would want to concentrate their efforts. The
specialty shop limits the products it carries to a particular line within
a single line. Because the specialty store only carries that one sub-class
of goods, it usually provides a greater variety of those products. For
example, most hardware stores (single line) carry knives, but a specialty
shop would specialize only in knives, a sub-category of hardware. Here
the consumer can find a particular knife that might not be available
anywhere else. The same can be true of the tanning salon. The retail
operation might offer far more specialized and unique tanning products
than anything found in regular drug stores or department stores.
Another kind of retail environment is the department store. Here, the
accent is on upscale goods and continual service. Credit usually is extended,
and the store stocks a wide assortment of goods. Finally, the variety
stores exist offering large quantities of diverse goods but at a lower
Ways To Sell
As one can see from the variety of store styles above, different stores
have different missions. If the retailer or salon owner wishes to compete,
the owner needs to follow the established rules determined by the type
of store he seeks to emulate. Most stores naturally will want to emulate
the example of the specialty store, since tanning itself can be seen
as a specialty item or service. Three major trends dominate most forms
of retailing today and predictions point to these formats continuing
into the next decade.
Trend 1: Volume Buying. Most retail operations are anxious to
cut out the middleman and deal directly with the factory. The idea is
that if the retailer can buy in a big enough volume and obtain the same
types of discounts the wholesaler gets, he can pass the extra savings
along to the consumer. This buys him consumer loyalty. The trend seems
to be working with many stores slashing prices and fancy looks in order
to give solid financial discounts to the consumer. The danger is that
an operation that buys on volume could be stuck with a lot of a losing
product. Buying in volume and assuming many of the functions of a wholesaler
can be difficult. Profits are certain to be made, so many specialty shops
will enter this field in the next few years.
Trend 2: Minimum Service. Many new stores do not value service
as a major factor in selling. They feel that service costs them money
in labor and expenses. Nowadays, the consumer is an independent creature
who would rather pick an article of clothing for herself. The goal is
to provide the consumer with needed services (for example, shoe salesmen
are still needed to find the consumer's proper size), but allow the individual
space to make personal decisions. Keep in mind that even if you decide
this principle applies to the retail portion of your business, it's unlikely
that it will be appropriate for the service portion.
Trend 3: Low Prices. Price wars adversely have affected revenues
in tanning, especially in recent years, and the same problem makes retailing
especially competitive. Low prices draw customers where other techniques
fail. Everyone wants a deal so they go where prices are low. One method
for counteracting the low price-seekers is to give them items they want
desperately, but can't find anywhere else. This produces a climate where
the retailer has some control over demand and thus can charge a higher
market price. However, the cost of a product places a definite limit
on how far the price can be profitably cut. Keep this in mind if you
decide the low-price avenue is the one for your business.
Storage, Inventory And Access
A major problem in retailing is getting the goods efficiently to the
consumer. Many stores are fine at getting goods out, but often times,
the hottest goods are in the shortest supply. Timely ordering and delivery
can help, but an empty shelf that should be filled with a hot item can
cost the retailer many valuable sales. The objective of distribution
management is to keep the store's inventory low and the accessibility
of goods high.
There is a definite logic to this approach. First, the store pays for
inventory which, in turn, must be moved, rotated, marketed and sold.
If an item isn't selling, it is killing floor space and the company has
paid for a non-productive item. However, a good item that sells well
should always be close at hand. When an item is moving well, the last
thing a retailer wants is a break in the flow of that product that could
inconvenience consumers and harm overall sales. To alleviate large backlogs
of inventory, the retailer must control the quantity of stock so it doesn't
take up too much storage space, but also so that it can be reached quickly
for immediate sale. For this reason, finding a supplier who has a good,
reliable source for the product and offers quick delivery is important.
The retailer or salon owner must know the proper methods of selling
goods. Obviously, the salon owner already should know the market for
his salon service, but dealing in hard goods can be a different technique.
Selling takes place in three ways. There is personal selling where a
salesperson or the product itself confronts the consumer and says, "Buy."
Advertising is the presenting of a product through a medium such as television,
radio or the press. Finally, promotion backs up a product through in-store
displays, radio contests and similar tactics.
Each time a retailer introduces a product, there must be a promotional
campaign. Be it large or small, the promotional package must get the
word to potential buyers that the product is available to them. A simple
way to promote a product line (such as tanning lotions or cosmetics)
is through an in-house promotion with fliers handed or mailed to steady
In any case, promotion can come from two sources: producers and retailers.
The producers push the product by offering inducements to wholesalers
and retailers to stock the item. They can provide promotional materials
or special discounts to help push the product out. The pulling technique
is used to stimulate consumer demand for a product. Here the consumer
doesn't see the product at the store first (as in the push method of
promotion) they might see it on television. The next time the consumer
is in a store, he or she thinks to ask for that product. The producer
has created a strong demand for the product and now the retailer will
have to stock it.