I sit draped in a black cape, magazine in hand, trying to gently blow strands of wet hair out of my eyes. My hairdresser, who I have known for five years now, chats warmly as she snip snip snips away at my curly locks. It’s a relaxing atmosphere. I pay big bucks often, just to soak in this simple pleasure of having my hair done. And I know I’m not alone! Salons must make a killing, right? I wonder…
So I ask: Do salons make a lot of money? Since the recession in 2008, the Hair & Nail Salon industry has shown steady growth to become a $56 billion dollar industry in the United States. Revenues are projected to increase by around 2.1%, with a profit margin of 8.2%. On average, salons make about $19,000 in profit every year. The salon industry as a whole is mature and stable – but whether or not your particular salon will be profitable (i.e., “make a lot of money”) primarily depends on merchandise sales and price-premium services.
I would like to explore how these two factors drive the profitability of salons, as well as discussing a few industry trends that could be capitalized on for future revenue.
Merchandise Sales Impact Profit Margins
We’ve all left a salon wishing we could get our hair to look the same when we do it at home, which is why many salons also sell the particular brand of hair care items that they use. This is not just helpful for customers. It is also a smart business move. These sales create “passive profit” for the salon. Here’s why:
The greatest expense for any salon (and arguably any business) is labor. Unless you are a one-stylist show, paying the stylists or technicians who work for you will greatly impact your bottom line. So you need to generate some revenue that requires little to no labor. Enter merchandise sales: it costs you next to nothing in labor expenses, yet you earn a lot!
Take this example:
Susie is your hairstylist. You pay her $20/hr. It takes her an hour and a half to cut and color a client’s hair. The client pays you $75 for the cut. And you will pay Susie $30 for that client. Now for simplicity’s sake, let’s pretend that’s the only expense you have (I know, it’s not, but let’s pretend!). You have a profit of $45. But what if you sold your client $30 worth of hair care product before she left? Product that only cost you $10. Now you have added an additional $20 of labor-free profit!
See the point? Selling merchandise increases your profit because it costs you less to sell merchandise than it does to provide services.
In 2017 merchandise sales accounted for 7.2% of the industry. That even beat out skin-care services, which only accounted for 3.5%. In a strong economy, more people have disposable income that they are willing to spend on those “extra” items above and beyond the bare necessities. While many drugstores can compete with salons, offering do-it-yourself hair coloring or waxing kits, there is still huge potential to capitalize on merchandise sales within a salon. Here’s why:
- Convenience: The client is already in your store. It is easier for them to purchase the hair care or nail care products they need from you than it is for them to make an extra stop at a drug store or cosmetic store. Most clients will prioritize convenience, even if it means paying a little more.
- Brand Loyalty: If a client is going to spend money on a product, they want to know that it works and that it will continue to work over and over again. When they get a haircut at your salon, it gives them a chance to “try the product out” to see if they like it. There is a lot of brand loyalty around beauty products, so if a client likes your product, they will buy it again and again and again. This not only drives your profit margin, but it also develops great customer loyalty. You are the one-stop-shop they can trust for their hair care or nail care needs.
- Innovative Products: There is a huge trend towards more natural, organic, toxin-free beauty products. These products can be hard to find, and, as mentioned above, clients will want to try them out. But consumers want to know that the products they use will not only benefit their hair; they want to know it will benefit the environment as well. Becoming an advocate and outlet for natural hair care products will set you apart from other drugstores and salons alike.
Price-Premium Services Impact Profit Margins
The second way to increase your profit margin is to introduce price-premium services. Premium-pricing, also known as image-pricing, is when you charge more for a service than its base price, because of the added value of the experience. You can go to a GreatClips and pay $12 for a haircut. Or you could go to a high-end salon in New York and pay over $300 for a haircut. Is the difference in someone snipping your hair really worth $288? It is to some people, and they are willing to pay for it!
Price-premium services mean that you are charging your client for the value of your salon services. How do you add value and thereby increase prices? Consider these options:
Hire stylists with a reputation
Styling hair is a work of art, which makes stylists the artists. Each artist is unique and can attract a following of clients (sometimes local, sometimes national) who will pay to become the “canvas.” In this case, the value being added is the reputation the stylist brings to your salon.
Consider the experience
This cannot be stressed enough. Exceed clients’ expectations, and they will happily pay to have you do it again! Know the experience your clients are looking for and go above and beyond.
Are you a family-friendly establishment, offering value cuts for the whole family? Make every element from the waiting area to the stylist’s station kid-friendly and fun—surprise kids with balloons and stickers. Offer busy moms a simpler way to book appointments or family haircut packages to encourage group bookings. Minimize wait times. Do everything in your power to create a wow-moment.
Or maybe you are a salon boutique, catering to young professionals. Keep your environment sleek. Offer before-work hours for quick styling. Serve wine and cheese. Host bachelorette parties. Give goody bags with trial-sized samples. Again, do everything possible to create a wow-moment. Your client is no longer just paying for the service you provide. They are paying for the experience you provide—and that is worth something far greater!
Provide top-quality service
This goes along with the experience but is more bedrock and foundational. Nothing beats quality service. Consistent, efficient, friendly: clients will pay more for salon services they can trust. And spend time creating the perfect complaint policy, so even an upset customer can become a repeat customer through great service.
Industry Trends to Capitalize On
While increasing merchandise sales and premium-pricing will positively affect profit margin, there are some other industry trends worth noting that could impact client growth.
The first to mention is increased employment in this sector. The industry employment is growing at a rate of 1.9%. Unfortunately, wages have not kept pace, and the low or substandard wages that many stylists and technicians receive is increasingly becoming a point of concern in the public eye. As mentioned before, labor costs are typically the highest cost a business faces. However, according to the IBIS consumer report, this could also be an area to potentially attract and retain clients. They state that “consumers are anticipated to increasingly opt for salons that offer fair wages to their employees.”
Another trend to note is an innovative product and pricing strategies. There has been a growing demand for high-quality products that last longer (especially in nail care) versus the less expensive but lower quality alternatives. Salons are also trying membership pricing that creates a steady stream of revenue each month rather than pricing per service. Continue to think outside the box, offering your client’s services that better meet their needs, rather than just following the traditional salon experience.
Other profitable trends:
- Natural, non-toxic, environmentally friendly products
- Anti-aging products and treatments
- Long-lasting gels and polishes
Which salon services generate the most revenue?
According to IBIS’ 2017 Consumer Report, the breakdown for industry revenue is as follows:
- 45.5% Haircut and styling services
- 17.1% Hair coloring and tinting services
- 15.9% Nail care services
- 7.2% Merchandise sales
- 6.1% Other beauty care services
- 4.7% Other hair care services
- 3.5% Skincare services
Is the salon industry a stable source of revenue?
The short answer is yes, it is. The salon industry is considered a “mature” industry with fairly steady innovation. While many of the high-end services offered are considered luxury goods that would decline during a recession or downturn of the economy, hair and nail care are considered by many a necessity. So salons offering value pricing should still see profits even when expendable income decreases!
Looking to start your own Salon? Get the documents you need to get organized and funded here.
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.