The Profit Trilogy - Part 3 - The REAL cost of discounts

Taking a few quid off your prices might feel like a shortcut to getting busy and boosting your profits, but do you really understand the cost of discounting? Hello, hello, hello my salon friends. Phil Jackson, your queen of salons, coming in your eyes and ears again with another dose of Wise Owl Wisdom. And here we are on week three of our trilogy, diving into the murky world of salon profits. How have you got on? How are you managing? Are you keeping up with the information that I'm putting out there? Any revelations? Anything you want to share with me? Any questions? Please ping me a line, phil at buildyoursalon.com. My email address is at the bottom of the screen. I would love to hear from you. You know, darlings, I would love to hear from you anyway. I just like hearing about how well my salon owner friends are doing at the moment. I am putting these episodes together to take me through the time that I'm away. So I shall be in Tenerife at the moment while you're listening to this on my salon owners retreat and more details about the next retreat, which will be in January. January. It's going to be your amazing year. And hopefully I should have a venue confirmed in the next day or so. As soon as the details are available, head over to salonownersretreat.com and all the details will be there and your ability to snatch up a place and enjoy some fun in the sun with me will be available there for you as well. So what are we talking about today? Well, discounting can be a super useful marketing tool in the salon industry. I know there are some salon coaches who say you should never discount anything at all. And frankly, they're wrong, my darlings, in a very arrogant way. I don't believe that's the case at all. I think it's OK to discount sometimes. And usually I would say that it has to be in exchange for a shift in customer behaviour. So, for example, in the financial crisis of 2007-2008, we offered a discount to our customers in exchange for them rebooking sooner. Because what we found was that though our average bill stayed the same, the time that people were leaving between their appointments was getting longer and longer and longer. And of course, that's the same as losing customers in the long term. So we offered a discount if they would come in in six weeks or less.

So I was swapping a discount for a shift in customer behaviour. Also, I would offer a discount if it's a brand new service for the customer. I think it's OK to discount if you're trying to entice people back into the salon because you've lost them as customers. I don't think there's anything that works better than a discount, to be honest with you. But today's episode is all about the real cost of discounting, because I don't think unless you've got a grasp of this and a grasp of your profit margin, I don't think you really understand what that's doing for your business and how much harder, more importantly, you have to work to make decent money. So I put together a cheat sheet to help us through these three episodes. This is the last of the trilogy, but the cheat sheet is still available at buildyoursalonpodcast.com forward slash money. Opt in, grab the cheat sheet. It will certainly help with this episode because we're going to be putting some figures together. I'll do my very best to talk you through it, but I've chosen nice round numbers to make sure that illustrating it is as simple as possible. So I want you to imagine that we're running a salon business and the turnover is 100k. So whether you're working in euros, dollars or pounds, we're turning over 100,000. And I'm going to say that that's made up of 2,000 customers spending 50 pounds. OK, so we've got 2,000 visits with an average bill of 50 pounds. Now, I know some of these will feel wildly out away from where your business is right now. I just need round numbers to demonstrate. OK, and I'm going to say of that 50 pound average bill, 35 pounds of that, so 70 percent of that is taken up with what we call direct costs or variable costs. So that's what covers the wages and the stock that we use in carrying out the service. And again, that might feel wildly out for you, but for now, just bear with me. And I'm going to say our 100,000 also needs to cover 10,000 in overheads, fixed costs. So our rent and business rates and utilities. OK, so our rent and business rates and utilities, about 10k out of that 100k. If you squish all that together in a little table, like I've given you in the handout on buildyoursalonpodcast.com forward slash money, you'll see that we're making 20 percent profit margin. OK, which I said way back in episode one of this trilogy, 20 percent was pretty good. You're doing pretty well if you're on a 20 percent profit margin. Now, let's say that that's also it's also the case we've got lots of white space.

We want to run a discount to get our stylists or our beauty therapists busier. So I'm going to say on that average bill of 50 pounds, we're going to offer a 10 percent discount. So we're going to take that down to 45 pounds. Now, if we have the same number of people coming through the door. So let's say it doesn't work to get new people through the door. What impact does that have on our profit? Well, it means that our takings go down to 90,000. But the thing is, those direct costs are exactly the same. The wage bill is going to be the same. The products we use are going to be the same. And our overheads are going to be the same. So the only place that discount can be funded from is from our profit margin. And you'll see on the table on the handout. In fact, it's cut our profits in half. We've gone from a 20k profit to a 10k profit just by offering a 10 percent discount. And I find that kind of startling, to be honest with you, to be able to take a 10 percent reduction in our takings and all of that to come out of our profits, I think is sobering. And I think lots of you out there are running discount after discount after discount and wondering why you're not making decent profits. Now, I am instinctively a lazy person. I work extremely hard, but that's because I've got routines and I've got tools in place to make sure that I work really hard. But I promise you, my darlings, if there is a shortcut, your Uncle Phil has probably found it. And I don't want to work harder than I need to. So what I'm going to run through with you now is a set of figures that shows how much harder you would have to work on those discounted services in order to make the same profit. OK, so we said our profits have gone from 20k down to 10k. So you might say, well, if I can increase my takings by 10,000, that will be fine. That will get me back up to where my profit was before. I'll be making that 20k profit. Well, I'm afraid that doesn't work either because every service that we carry out has those direct costs attached to it. We still have to pay the wages. We still have to pay for the products. So 10k is not going to be enough. In fact, if all the other things stay the same on our table, when you have a look at that handout, you're going to see we're going to have to increase our turnover to 135,000 in order to get our profits back up to 20k.

You're going to have to work 35% harder to fund a 10% discount. And that, to me, doesn't make great business sense. So head over to buildyoursalompodcast.com forward slash money and get that handout. See this for yourself. Run it through with your own profit margin. Run it through with your own turnover figures. Have a look at the impact of the discounts that you're making on your business. And I think that's going to be a real eye-opener for you. And please reach out. Let me know what you think. Let me know your thoughts. Let me know your findings. Has this been useful to you? Do we want more episodes talking about money or is it time for us to have a change? Phil at buildyoursalon.com. You know I love hearing from you anyway. I'd also love to hear from you if you know of someone or you think you might be a brilliant guest for the Build Your Salon podcast. Just seven short days until I'm coming in your eyes and ears again with something a little bit different from the last three weeks. And until then, take care. Sit down and see what's going on with the queen of salons. Hair, beauty, and more successful tips for business owners. All on Build Your Salon.