Busy But Broke? The 3x Wage Pricing Myth

There is a rule in our industry that your team should generate three times their wage in order to be profitable. And I see it everywhere. Every coach quotes it, every Facebook group repeats it. And frankly, my darling, is the reason that you are hitting your target and still going home skint. So today we're going to put it in the bin. All on Build Your Salon. Hello, hello, hello. My salon friend Phil Jackson here, your Queen of Salons, coming all over the internet with a big dose of my wise owl wisdom. How on earth are you? Achingly well, I hope as we head towards the end of June, and my goodness, end of Q2, halfway through the year. How's it been for you? Bumpy start to spring. I felt things got a little bit easier as we get towards the end of spring. Why not reach out and let me know how it's been for you? I'd love to hear from you. The thing is, I have my group of salon coaching clients and we have my accountability group Salon Spark as well, so I know what's going on with them. It does me good to hear from you, and whether that's something that's unique to my group. If somebody has a great month, is that something that I'm only seeing because a few people in my group have had a good month? What's it like out there? I'd love to hear from you, Phil, at buildyoursalon.com. Why not reach out and let you know? Someone did reach out and let me know with a question, but they didn't ask me a question about anything to do with salons unfortunately. It was all about how I actually put these podcasts together, and they wanted to know how I go from my intro into the credits and whether there was a lot of editing involved. There's not. The reason I can do these things and move my hands around is I've got a pedal on the floor, which acts almost like three keys on a keyboard, and it's been programmed so that when we shift from scene to scene, that's what's happening. I'm just touching on the pedal that's right down by my feet. So that's what's going on there, is from a company called El Gatto. So there you go. You can grab yourself a pedal and make life easier for yourself. No editing, darling. I mean, have you listened to my podcast? Does it feel like I edit it? Of course not. If there's a balls-up, frankly you will hear it. So what are we talking about today? Well, we're in the last of my Money Fix series. So this is the fifth of the five 10-minute Money Fixes. And we've done a lot. We've covered the real cost of expenses in your business. We've looked at the profit vampires that are on your menu. We've looked at the opportunity to increase your average bill, and last Monday I weighed all over your supplier partnership relationships. Well, today we're going to close the loop because none of those means anything if you're still managing your business with the wrong target at the top and by the wrong number. Well, for almost every salon owner I speak to, is this rule where people have to make three times their wage. So the idea is that if your team member is paid 15 pounds an hour, they need to be generating 45 pounds an hour in revenue, three times their wage. If they hit that, the salon's profitable. If they miss it, they're not pulling their weight. You've heard that rule, you've probably aimed for that rule at some stage, but there's a problem because it sounds so reasonable and it's so easy to remember and easy to track that we assume that that is the truth. And I think it's a really, in fact, one of the most damaging assumptions in our industry. And I think it's pushed a lot of very good salon owners into burnout and into debt and into closing their doors because they don't understand why they're not making money. Where the rule came from, well, quick history, but the shape of it's right, actually came out of the American salon industry. Now the difference in the American salon industry is that the commission and booth rental model dominates over there. So what you're trying to do is take something that works in one environment, bring it over to the UK, and push it into an employed salon model, and it doesn't work. So the idea was that if you were earning three times your wage, UK salon owners would have one time the wage was to pay the wage. The second time the wage was for all the products and overheads. The third time the wage was the salon profits. So it assumed a 33% profit margin. The thing is, when you employ someone in the UK, the wage is just the start of what they cost you. Throw in National Insurance, throw in their pension contributions, pay them when they're on holiday, 5.6 weeks a year, pay them when they're off sick. If you're generous and daft, pay them when they're training, then all of a sudden it's not three times; it's going to work for us at all. And I think in the UK, at least, if you look at someone's wage, you need to multiply that by about 1.25 to 1.4 in order to actually figure out how much that person costs you. Sometimes even more than that. So if they're on 15 pounds an hour, the cost to you is actually a lot closer to 20 pounds, and that's before they've picked up a pair of scissors or opened a pot of wax. That three times rule is still based on 15 though. So 45 is the target and now suddenly it's costing us 20 pounds an hour to employ someone. So our profit's gone from 15 pounds an hour down to five pounds, which is quite a jump. But it gets worse because 45 pounds is revenue, not profit. Revenue's what goes into the till, profit's what's left after everything that's paid. So your team member generates 45 pounds an hour. They hit that magic number. We've already said the true cost of that hour is 20 pounds. You've got 25 left. Add in the product costs. So let's say we're doing a colour or a facial or a treatment, let's say eight pounds in product, now we're down to 17 pounds. Then we've got the rent, the rates, the utilities, the booking software, card machine fees, the marketing, the insur. Can you tell I'm reading a list here? The insurance, the accountant, also your non-productive team members. So if you've got a front desk team or a cleaner or an apprentice, that all needs lumping in there. And somewhere in there you are hoping to make a profit as well. Three times wage is simply not enough. It can be, and I'm going to throw it out there, it can be if you are a home-based salon without premises costs. So if you are not paying rent and rates and all those good things, if it's just you working from home, three x is probably really generous actually. I think you could make a really good profit on that. But in a salon where you have premises, it's just not going to work. So three times wage goes in the bin. What are we going to replace it with? Well, not one number, it's a bit more complicated than that. I want you first of all to be looking at your profit per service hour, not revenue per service hour. The profit that's left over after you've taken off that fully loaded cost of the team member and all of the overheads as well. Different services, different team members, different days of the week. Some are going to be brilliant, some will be losing money. You're only going to find out if you are looking. Number two is utilisation. My favourite measure in any salon, it's how much of the week is actually booked up, because it's fine saying a service is profitable because it's three times wage, but they're not working every single hour of the day. So we've got to take into account that there might be 10, 15, 20, 30, 40% of the week that's not booked up with paying clients that needs paying for as well. Three: average bill, look at not the menu price, but actually after we've managed to upsell any retail, any treatments, we want to see a good strong average bill. And we fixed this over in Money Fix Number three, we want to look at client retention and rebooking rate. New clients are expensive. It's a dear way to run a business by trying to pump new clients into columns day after day, week after week. We want to know if somebody comes back for a second visit, are they still going to be there for the third visit? When do people start to drop off? And what's our retention rates like? Look at it as an individual team member level. Look at it across the salon as well. That will tell you more about the health of your business than your revenue figure will, I promise you. And also I want you to look at how we're turning over stock. How fast are you getting through your salon new stock? How fast are you getting through your retail products? Because stuff that's sat on the shelf for a long time is cash that's not in your bank account. And we looked at the supplier side of things last Monday. So there on the dashboard, not three times wage, not how busy are we. But don't try and implement all five today. Start gathering those reports. They're all going to be in your salon software somewhere. Start with one. I suggest start with the one that scares you the most. It's usually the one that has the most insight for you. And that is Money Fix Number Five. If you've been with me all month, here's what you've heard. We've looked at the real cost of every expense. We've looked at the profit vampires on your menu, and we talked about reprice, reframe or retiring. We talked about the pre-appointment upsell window that allows us to make more money on every appointment. I challenged that supplier partnership relationship in the episode last week. And today I want you to tear up the three x rule and throw it in the bin once and for all. So five fixes, each of them designed to keep more profit in your business, each of them worth your time and a little bit of your money. If you want all five fixes as PDFs, as audio, and as video, head over to 10minutemoneyfix.com, nine quid for all of this information in one place. It's about an hour to work through the whole lot. It's the cheapest bit of business education you'll ever buy. And I think it's one that will pay you back the fastest too. So 10 minute funny money, 10minutemoneyfix.com. That link is in the show notes too. And that is the Money Fix series done. We'll be heading with a different flavour episode on Friday. And here me are, look, hands up here, and we change scene, my email address, scrolling at the bottom of the screen, phil@buildyoursalon.com. I'd love to be talking to you about what's going on in your salon business. Also, reach out now that we're end of June. If you have ideas for future episodes of the Build Your Salon podcast, I'm guessing what's going to be useful to you given what I'm hearing in the salons that I deal with. If there's a topic that I'm not covering, please reach out and let me know. I love hearing from my salon owner friends. Anyway, just a few short days until I'm coming all over the internet again with another dose of my wise owl wisdom. And until then, take care.