In late July I was having drinks with an acquaintance, let’s call him Derrick, who is contemplating franchising his men’s hair salon concept. I was put into contact with him through a mutual friend a few months earlier. Since I had been heavily involved in franchising for the past few years, I was the first person our mutual friend thought of when Derrick started talking about franchising his small business. We had met three or four times and each conversation was a deeper dive into Derrick’s business.
Derrick started a men’s only salon a few years back. While many of these men’s only concepts center around sports or provocatively dressed women, Derrick’s concept catered to the man who cared more about their look and the products they used. It was a “higher” class option. He had started it 4 years earlier. Never having cut someone’s hair before (nor has he up to this point), Derrick started the concept after being sick of the “conveyor line” mentality he thought he faced when he went to get his hair cut.
Derrick had also been recently laid off. His job as a sales manager at a medical sales company was eliminated when the company was acquired. He was given a little severance but had suddenly found himself with an abundance of time on his hands.
Derrick had done his research prior to starting. He knew exactly who his customer was and had crafted a store and marketing message that appealed to this customer. The store was not a typical success story. The concept started off slow and because of Derrick’s lack of experience in the industry, he had to pivot and change directions a few times. Never the less, the one thing that was constant in Derrick’s concept was a high-level customer experience. Slowly, Derrick built a concept that customers raved about even though it was higher priced.
While Derrick was around for the start of the business, he soon found himself managing the business on the side as he found a new sales job. The job provided some flexibility, however, Derrick promoted one of his long-time employees to run the day to day responsibilities of the store. This manager had multiple responsibilities, along with being a hairstylist. Because of this setup, the other 9 stylists were left to complete multiple “administrative” duties as well as their normal styling responsibilities. Further, no one employee was in charge of product sales.
Derrick’s business grew to be successful. Sales had increased dramatically after an initial start-up period and his store profit margins were strong. While the average hair salon has a profit margin of around 8%, Derrick’s concept had a profit margin of around 15%. Derrick had been working with a franchise development consultant who was urging him to see if he could increase the profit margins to 19-20%. After the expected franchise fee of 6% and a marketing fee of 1.5%, this would leave prospective franchisees with around a 13% profit margin.
This is where Derrick and I found ourselves during this conversation. Derrick could raise his prices, but that would only get him part of the way there. Being in sales, budgeting was somewhat of a foreign concept. When he started his business, a local CPA helped him with his projected financial statements, but even he would admit that those projections were just done to get him through the SBA loan process and he hadn’t paid much attention to them. He had a bookkeeper, but this person really just kept track of expenses and paid the bills when told to.
What Derrick wanted was a back of the napkin plan on increasing profit margin. Here is the plan we went through…
Derrick hadn’t raised his prices on his hair cuts in two years. He explained that his prices were already top of the market in most cases and was hesitant to go too much higher. However, the good news for him was that he knew his customer base was a little less price-sensitive. He knew that a small increase would not drive them to Cost Cutters. Doing some rough math, we settled on an increase of 2% on most of his hair services.
Hair services accounted for about 80% of the sales. The rest of the sales came from products. The two percent increase on 80% of sales would drop right to the bottom line and increase profit by approximately 1.5%.
Product sales were another animal. The retail sales in the store were the highest profit margin items. They typically were marked up 50%. The profit margin, after discounts, was typically around 40%. This means that for every $10 shampoo that was sold, $4 went straight to the bottom line. Increasing these sales were critical. On the back of the napkin, we came up with a two-pronged plan to increase product sales. First, we would come up with a contest for all stylists. The stylist with the highest sales each month would receive a $150 Amazon gift card (we had a whole idea about a thermometer chart to keep track and motivate employees, but that was a different napkin). While this would take a hit on profit margin, overall it would still drive sales on higher-margin products.
We made a conservative goal of increasing product sales by just $800 per month through this sales program or $9,600 per year. This would increase profit by approximately $3,100 (including the gift cards) which gets him another 1% profit growth.
If your keeping track at home, our plan has now got us to 2.5% profit growth.
I said product sales was a two-pronged plan. The second part of the plan was a little more comprehensive. It centered around his store manager. The manager had taken on some additional responsibilities which cut his capacity in half. Further, because he only took on some of the responsibilities, other stylists spent approximately 30 minutes each day doing administrative duties. This meant that approximately 7 hours per day between all of the employees were being dedicated to “non-revenue” activities. Those 7 hours each day represented approximately $225 of revenue or $100 of expense. Further, there was no one in charge of pushing product sales or that could speak with knowledge about products with customers. Simply put, the systems of the stores were not properly configured.
Derrick had a front desk staff that typically handled check-ins and customer payments. However, that was the extent of the role outside some light cleaning. Because this front desk staff wasn’t typically tipped, Derrick had to pay regular minimum wage (actually, higher than minimum wage to find a good person).
I told Derrick he had two choices. First, he could make the current manager full time and eliminate the front desk person. This would give all the stylists more capacity and would cost Derrick only a little more than he was already paying the current front desk person. The back of the napkin math showed us that the effect of this could increase profit by $140 per DAY potentially. This didn’t take into account an increase in product sales we thought would happen by having a dedicated, knowledgable salesperson upfront.
The second choice was to hire a more qualified person to take care of the front desk, product sales, and management tasks. The financial results of this would be the same as option 1.
In speaking with Derrick in the weeks after our conversation, he had decided to go with making a new hire at the front desk. The current manager was more than happy to give up the title to make more tips styling hair. We had overestimated the result of this, but after the first month, profits had increased on average $75 per day from not only the increase in revenue but the reduction of staff on hand as well.
This change boosted profit margin an additional 5% alone. From putting a strategy and some systems in place, we had come up with a plan that had increased profit margins to 22%! A business that had a very healthy profit of $52,000 now had projected profits of greater than $85,000.
You might be saying this is not the typical small business story. In some ways, you might be right. Not all businesses have low hanging fruit like this that can drastically increase profit. I can’t say I have another story in my career where a business owner has been candid and open enough over drinks where we have outlined a plan on the back of a napkin (OK…4 napkins).
However, in my experience, most business owners do have areas where they are missing out on that can potentially increase their profitability. Most owner’s books are a mess and don’t give them the ability to review their business. Further, most owner’s have been “doing it like this since the beginning” and are not open to changes. However, what most miss is that with good books and a strong advisor, increasing their take-home pay is not only attainable but should be expected.