Business Basics: Pricing Services - Doing the Math

When determining your prices, you don't want to price yourself out of the market, but at the same time you want to cover overhead expenses and generate a profit. Therefore, in pricing your services you must consider these two factors: what the market will bear and your profit margins.

First things first, let's determine our target market.

Target Market
You cannot determine your prices if you do not know you you are servicing. Your target market is not something I can tell you , you will need to think about it in relation to your own area.
There are four main pieces to your target market:

• Region (Determining the types of jobs that people in the salon's region hold may give you a clue as to the prices you can charge and the services you should offer)
• Gender (do you cater to men or women exclusively? Or both?)
• Style (are your clients on the cutting edge offashion or more conservative? Are they young mothers who want natural looking nails or are they teenagers who just want to look "cool"?)
• Socioeconomic Status (Pricing is going to be very different if you service affluent young professionals in a large city versus people in an economically challenged rural area)

Of course not everyone in your area will get their nails done here are some questions to ask yourself to help narrow down your potential market:

• Who has the need for my products or services, the financial ability to purchase my services, and the ability to find my services?
• How many of these people or businesses exist in my general area today?
• How much money does each person or business currently spend every year solving the problem that my service also solves?
• Who else do I share this market with? (how many other nail salons are in my general vicinity?)

Service Pricing Categories
“Within our industry there are three categories with which you can choose to align yourself: budget/economy, intermediate/midsection, and luxury/top end,” says salon consultant Maxim Titter. There is no right or wrong category, she emphasizes, only the danger of not knowing which category you belong to.

Each category varies, once again, with your location - in my area anything under $40 for a full set is a budget salon but in other areas the mid-range price is $25 and $40 is getting expensive. What your online friend charges has nothing to do with how much you should charge(unless you work across the street from each other).

Your Service Offerings
Next, you want to figure out what prices your market will bear - ask yourself this question: Is my service unique? Now, yes, there are a million places offering acrylic nails, but your service can be unique in that you guarantee your work and offer free hand massages and basic nail art. If your service is unique--meaning there's little in the way of direct and indirect competition--then you're a market leader and you have more leeway in setting the prices.

If you are a market follower--meaning your service is not necessarily unique and you're not the only outlet--then setting prices is easy. Your prices simply can't be higher than that of your closest competitor. The question you should then ask is this: Should I be offering this service? (or should I make my services more unique) The answer lies in your profit margin for this product.


Profit Margins
All right, get our your calculators and spreadsheets. We are going to crunch some numbers!

Keep this in mind: The purpose of business is to make a profit. Every service you offer must must cover your fixed costs and generate a profit--otherwise, you're just trading dollars.

One more thing, I am looking at these number as an independent tech. If you are paying employees your costs would include their salary and employer taxes, which would make them much higher.

Terminology:

• Fixed costs:costs that do not fluctuate with sales volume such as rent, utilities, depreciation, licensing, insurance, advertising, laundry, maintenance, postage, bank service charges, computer programs related to your business and so on.
• Depreciation:loss of value over time and with use - you likely use a range of equipment that has a limited lifetime (brushes, electric files, tables, lamps, chairs, etc.) and the decrease in value of these items should be considered an expense. You should figure out depreciable items and their life expectancy and work in the monthly cost of these items into your fixed costs. For tax purposes, the IRS considers items subject to depreciation to be "fixtures" (like table and chairs) but for our purposes anything that we need to buy periodically (brushes and UV bulbs) will go in this category.
• Direct Costs: Costs that are directly associated with the service being sold such as product cost.

Step 1: Make a list of all of your fixed costs, not including depreciable items. For items you pay annually, take the annual amount and divide by 12 to get the monthly cost.

Fixed Costs:	Monthly
Rent	$500.00
Utilities	$60.00
Insurance	$8.25
Licensing	$2.92
Advertising	$16.67

Total Monthly Cost: $664.71

Step 2: Make a list of all of your depreciable items and their cost and life expectancy. Here is a good list of examples on depreciable items and their life expediencies. Here is another good reference. Obviously things like acrylic brushes are not on the list so with that you just figure how often you buy that item. Take the cost and divide by the life expectancy to get the annual cost. Then take the annual cost and divide by 12 to get the monthly cost.

Depreciable Items	Cost	Life Expectancy (years)	Annual Cost	Monthly Cost
Manicure table	279.00	7.00	39.86	3.32
Tech Chair	99.00	7.00	14.14	1.18
Client chair	99.00	7.00	14.14	1.18
Pedicure station	2,395.00	7.00	342.14	28.51
Electric file	350.00	5.00	70.00	5.83
Bits	150.00	1.00	150.00	12.50
UV lamp	150.00	5.00	30.00	2.50
UV bulbs	45.00	0.25	180.00	15.00
Desk lamp	79.00	7.00	11.29	0.94
Acrylic brush	28.00	0.50	56.00	4.67
Gel brush	15.00	1.00	15.00	1.25

Total monthly cost: $76.88

Step 3: Make a list of all of your direct costs (product cost per service)

This step can be a bit harder since cost could vary. Many manufacturers have broken this out for you. For my example I am using the CND product cost per service chart. Remember, buying larger sizes will lower the cost per service and increase the profit margin

	Product/ Service	Other Costs/ Service*
Acrylic Full Set/Fill	1.87	3.00
Gel Full Set/Fill	3.28	3.00
Shellac Manicure	3.21	3.00
Spa Manicure	2.56	3.00
Spa Pedicure	2.89	3.00

*other costs include disposables like files, cotton, toe separators, etc. I just used the same number for all services here but you should figure out your specifics.


Next determine how many of each service you perform each month

Service	Average # Per Month
Acrylic Full Set/Fill	25
Gel Full Set/Fill	30
Shellac Manicure	20
Spa Manicure	15
Spa Pedicure	25

Total Services per Month (average): 115

Take the total number of services (115) and divide your fixed costs and depreciable costs by that number

Fixed costs per month: $664.71/115 = $5.11 per service
Depreciable costs per month: $76.88/115 = $0.67 per service

For a total of $5.78 - Now add those costs to your product costs

Service	Product/ Service	Other Costs/ Service*	Fixed Costs/ Service	Total Cost Per Service
Acrylic Full Set/Fill	$ 1.87	$ 3.00	$ 5.78	$ 10.65
Gel Full Set/Fill	$ 3.28	$ 3.00	$ 5.78	$ 12.06
Shellac Manicure	$ 3.21	$ 3.00	$ 5.78	$ 11.99
Spa Manicure	$ 2.56	$ 3.00	$ 5.78	$ 11.34
Spa Pedicure	$ 2.89	$ 3.00	$ 5.78	$ 11.67

Your total cost per service is your break even point. Setting the price at the break-even price will give you a profit of 0. Essentially you would be doing the service for free if you charge that amount.

Figuring Out Your Pricing Structure

Now we need to determine what we need to charge to make a living.

Lets say my goal is to make $15 an hour.
For the sake of this exercise I am going to assume that I am booked completely solid - meaning every hour I work I am booked with no gaps. If you are not booked solid (and honestly, who is?) then you need to figure out how much you need to make during the hours you are working to cover the hours you do not work. I will be writing a post on that soon (and yes it involves more math!).

Service	Total Cost per Service	Service Timing (hours)	Salary	Minimum Price to Charge
Acrylic Full Set	$10.65	1.50	$22.50	$ 33.15
Gel Full Set	$ 12.06	1.50	$22.50	$ 34.56
Acrylic Fill	$ 10.65	1.00	$15.00	$ 25.65
Gel Fill	$ 12.06	1.00	$15.00	$ 27.06
Shellac Manicure	$ 11.99	0.75	$11.25	$ 23.24
Spa Manicure	$ 11.34	0.75	$11.25	$ 22.59
Spa Pedicure	$ 11.67	1.00	$15.00	$ 26.67

So now you have a price that will make you a profit and a living wage (assuming you are booked solid!). Ask yourself this: Can I sell my services at this price and still be competitive? If the answer is no, then you have the following alternatives:

• lower your direct costs, fixed costs or desired profit
• make your service unique and market it as such
• reduce your timing or salary expectations
• Get in more clients to spread out your fixed costs further
• consider not selling this service and focus your attention instead on services that have a better profit margin or less competition.

Resources & References
http://smallbusiness.chron.com/target-market-salon-industry-21637.html
http://www.entrepreneur.com/article/53786
http://www.nailsmag.com/article/81998/determine-your-target-market
http://articles.bplans.com/how-to-determine-your-tam-total-addressable-market/
http://www.inc.com/guides/2010/06/defining-your-target-market.html
http://www.nailsmag.com/article/108396/figure-it-out
http://smallbusiness.chron.com/depreciate-beauty-salon-taxes-33545.html