The million-dollar question… what should my profit margin be? I was listening to one of the ISPA audio lectures the other day and the speaker was saying how her spa was generating over 40% in profit for the past few years. That’s a good margin if you have a resort spa.

I can just imagine the faces of all the day spa owners in the room thinking to themselves "I don’t even have double digit profit…how is 40% profit possible?"

Myth and reality: Profit margins vary tremendously. It depends on which business model you have. It’s different for resort, medi and day spas.

In resort spas, the spa normally has no major expenses. The hotel or resort operates the spa and it is not a standalone business in most cases. Therefore, the spa does not pay rent, laundry, electricity, maintenance etc. The main cost the resort spa has is product cost and human capital payroll. The reality is: it’s easy to earn 40% in profit when you don’t have to pay for major operating expenses!

Medi spas connected to a dermatology center or operated by plastic surgeons are in a similar situation as with resorts. Again, in most cases, the practice pays the bills. So profit margin should be around 40% to 50%.

Medi spas and day spas that operate as stand-alone businesses are responsible for all operational expenses, compensation, product cost, and marketing. Therefore, the profit margin is significantly smaller. Depending on your spa’s operating expenses, payroll rate and overhead, an acceptable profit margin is 10% to 15%.

The other main differential is spa marketing. With most resort spas and medi spas, clients are on location already: all you have to do is motivate them to come into the spa. Stand-alone spas have a broader challenge. They have to be very creative in driving traffic into their spa and generally have larger marketing expenses.

The day spa business model is the most challenging. The biggest challenge facing day spa owners is compensation rate. This is the number one concern we hear about all the time. Most day spas are running 50% and higher compensation rates, leading to minimal profits.

Reality check: If you operate a stand-alone spa business, it’s time for a financial check-up. You need to identify your financial ratios and set a goal to trim your compensation while increasing capacity and volume in order to improve your profit margin.

Do you know your financial ratios? To know your ratios, you need a budget to use as a financial blueprint to guide you. You can’t maximize your business without a budget. Here is what a day spa financial ratio model should be:

If you need help with your financial structure, we invite you to attend a free webinar where we share a budget sample and the VPG ComPlan, the most innovative compensation plan, to help you expand your profit. Click here to register for the free Budget and ComPlan webinars.

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