Salon Owner Wants To Know The Secret…

[Editor's Note] Angie Richards, owner of the salon, A Cut Above in Washington, sent us this thoughtful dilemma she felt she was in. We wanted to respond with good information so we passed on her letter to beauty industry expert Gordon Miller. His answer follows her letter.

Dear Editor:

Owning a full service salon (hair, nails and esthetics) for only one year now, all on my own, has been rewarding but exhausting. I now have enough clientele to where I am entertaining the idea of bringing in some help.

Here is my dilemma. I understand that if I choose to lease out my stations, I will receive a set monthly rent from the operators. All the revenue they produce is theirs, because... well... I am basically just a "landlord." If I bring an operator in as an employee, then they receive an hourly rate and/or commission based on the agreed amount. (for example, compensation would be 50 percent commission on all services; 10 percent on retail) but in my state, the law requires that they be paid at least minimum wage for the hours worked if they don't hit commission levels. That is fine. I understand this as just the cost of having an employee.

My question is this: If I have only employees, it is very clear to me how my salon will make money; potentially unlimited. But if I lease stations, I cannot understand how my salon will ever make any more money than the total amount of rent revenue each month. That seems like my potential to grow is set. Whether I have three stations to rent or 15, once I hit that maximum rental income of those stations, I am done.

So am I missing something? It seems an owner's income is capped, ultimately, while the operator's income has no limits. Is that really how it works? If so, then how in the world do these big salons make the owners so rich? What's the secret?

I need help and I want to grow, but I don't want to go backwards in my income level! I am just unclear how a business can do this as a "landlord."

Signed, Thoroughly Confused

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Dear Confused:

As the great Vidal Sassoon said so well "The only place where success comes before work is in the dictionary."

Let's start with your big question: "What's the secret that makes big salon owners rich?"

We're going to let you in on a bigger secret (and misconception): Owning a big salon does NOT guarantee "rich." In fact, there is a very short list of big success stories out of the 250,000 salons in America. The biggest often struggle to sustain their businesses – and profitability (and many long for their days of "smaller").

Most important to note is the fact that the road to 'big' is littered with many more failures than successes – and most were smaller salons who lost it all trying to be big.

Regarding individual opportunity, no matter what the size of a commission-based salon, it is the owner's income that is likely more "capped" than the stylist. YES you read this correctly. Owners have the responsibility for "overhead," including payroll, taxes, supplies, laundry and cleaning, equipment, marketing and more. These expenses reduce profit to an industry wide average of five percent of total salon revenue.

Commissioned or rental stylists, on the other hand, have the opportunity to earn a share of the revenue they generate behind the chair– capped only by the time they have for bookings and their overhead (i.e. rent paid or percentage of sales the salons retains).

Success is about maximizing revenue while controlling expenses within the context of your revenue base. As importantly, success is also usually based on understanding and aligning with three key drivers:

1) Purpose: why you are in business – i.e. what do you hope to achieve in the big picture of your career?

2) Passions: understand deeply what you love doing professionally every day (what makes you want to get out of bed and run to the salon!? )

3) Plan: the details that guide your daily efforts to build a better career and life for yourself, your peers, clients and those you love; including specific and measurable short, medium and long term goals.

Each option has its pluses and minuses, each its potential frustrations and joys.

Owners assume the lion's share of risk in business – in exchange for hope of generating a profit above and beyond salary. Stylists assume the risk of working in a salon that may or may not be the right place to maximize their potential while assuming little risk.

Commissioned Salons

If a commissioned salon, an owner must manage lots of people, process and space (or delegate) and market the collective services of a team and retail to drive maximum income. Although opportunities abound, we all must also recognize the realities of limitations. A salons income potential is limited by size salon (number of chairs, retail space and more); number of revenues producing team members –and total hours available for services. Prices also add limitations.

Lastly, resources (i.e. cash to invest into the business) can limit a salon potential sales and profits. As an example, salons often struggle with retail because of inability to carry sufficient inventory; many lack funds to keep equipment and facilities current – or to invest in staff training to support growth. (note: large salons depend on retail profits to keep them healthy; large salons unable to retail do not typically succeed).

As commissioned salons grow, new expenses creep in (i.e. marketing, management and support staff, investments into facility; inventory), which add pressures on profitability. The biggest challenge to growing a salon's bottom line is the cost of employees. Best practices of profitable salons is pointing towards a downward trend in commissions (towards 40-45 percent )in exchange for benefits like group insurance, sick pay, and a busier more professional salon in which to work.

Rental Salon

Being a Rental Salon eliminates the day-to-day responsibilities of managing people and clients and puts you in the business of managing tenants and their space. Owners (or those they delegate to) are managing tenants – not unlike managing an apartment building. You have to insure you get the right tenants to ideally in some way fit in with the rest so as not to create unrest or negativity.

You want tenants who are respectful of your property, the property of their neighbors –and, importantly, of their neighbors so that you can have harmony in your building. You also have to manage the property to meet your obligations to your tenants and to do your limited part in helping them to grow their businesses so they can remain rent paying tenants. You may or may not choose to manage amenities for tenants (i.e. cleaning and laundry service) but at minimum need to be up on what it takes to be a competitive landlord in a growingly competitive rental market.

On the profitability front, many former commissioned salon owners who have moved to rental models have found that profitability for their business went up – while their day-to-day responsibilities went down as it relates to the daily grind of operations of managing a team. While others have found the opposite – struggling with the huge shift from boss of employees to landlord of tenants.

How we do business – whether as an employee or in some form of self employment (owning or renting)- is ideally a choice made consciously in relation to our strengths. The opportunities are as varied as the options but each comes with its own price. The only thing we can say for sure is that no matter what model you pick, that success doesn't come easy.

by Gordon Miller, Passion Squared

In 2011, Nina Kovner and Gordon Miller co-found Passion Squared, a venture focused on using the social web and digital platform to empower and engage salons and brands. To help salons build more effective Social and Digital Plans, they created The Social Beauty Intelligence Report. Find out more at www.facebook.com/passionsquared; email Gordon at gordon@passionsquared.net.