As a consultant firm that helps medical spa owners globally, the first step, we take with new clients is assessing their financials. We assess the P&L statements, and we calculate their financial ratios.
One of the medspa financial ratios that seem to always be high is the product cost.
Medspa Product cost is how much you pay for products to deliver treatments to your clients, such as Botox, fillers, equipment consumables.
Product cost is a little different than Cost of Goods Sold. COGS usually includes labor. For the sake of this article, we are only talking about the actual product cost without payroll. We like to look at payroll separately as its own financial ratio.
Ok, now that we differentiated the two, let’s get back to product cost.
Do you know what your product cost is or how to calculate it?
Look at your P&L statement and see the amount of the products purchased during a period and divide it by the overall gross revenue from the same period. That will give you a percentage of what your product cost is.
Real example – 3-month period.
Product cost $177,967 divided by gross revenue $450,336 = 40%
So, every dollar that comes into the medspa, .40 cents goes to product costs. Obviously, this is a very high ratio. This is not unusual, we see this all the time with new clients. Why do you think it’s so high, and what can you do to reduce it?
If you are paying .40 cents on every dollar for product cost, that leaves you only .60 cents or 60% to pay operating expenses, payroll, and everything else …and this could be one of the reasons why most medical spas are not profitable; the financial ratios are out of whack. After you pay everyone, you have nothing left.
I was reviewing a P&L statement the other day for a new medical spa.
They had over $300K in revenue in one month, with only $4,000 in profits. It broke my heart. This should not be the case.
How do you fix your product cost problem? Here are 5 things you can do!
Forecasting & budgeting
Have an operating month by month budget and forecast all your finances to include profits. This will help you stay on track and control your buying and not overspending. Don’t buy simply because someone is telling you that it’s a great deal.
We fix this by helping clients create a medical spa budget; this practice helps them see how much revenue will come in and how much money you can spend monthly on products. This will provide you clarity and limit your spending, and you will reduce your product cost ratio, which helps increase your profit line.
Manage your inventory
I walk into a medspa and I see boxes and boxes of fillers, just out in the open in treatment rooms or offices, Botox in a fridge with no lock, no inventory system, and no check in and check-out. It’s like the wild-wild-west. This practice is a business owner nightmare. These products are in high demand and sometimes, they find legs and walk out without you noticing. Managing your inventory will help you reduce your product cost and will hold your team accountable to the usage and the charge per clients.
Product efficiency & waste control
Training the team on product efficiency and waste control is a must. Have clear protocols for them to follow. Train them on how to track product usage and how not to overuse products.
Emphasis the importance of charging based on the amount of units or syringes used. Have a process in place to inform the Guest Relations team of any upgrades or treatment changes to reflect the amount the client must pay. Often, your providers/injectors forget to charge more for additional products they used; therefore, increasing your product cost.
Renegotiate agreement terms with vendors
Everyone has competition, even your suppliers. It’s time to renegotiate your terms with Allergan, Galderma, laser companies, etc. You can negotiate terms, annual purchase commitment spread out over the year. Find the right person to talk to and negotiate.
Make it a win/win, where you both can benefit. There are many brands offering similar products, you don’t have to limit yourself to one. Do what is best for your clients, you, and your business.
Raise your prices
If you can’t do any of the above, then raise your prices. This is the biggest mistake we see. Some medspas are still selling Botox for under $10 a unit. As an industry, everyone should stop doing that. We have clients who charge $15 per unit, and they have a very profitable business. No need to reduce your prices to compete. Tiffany does not compete with Zales. Neiman Marcus does not compete with Walmart. Stop the madness. Stop working for free. Decide on delivering a great medical spa experience, one that is worthy of higher prices, and deliver more. You will have a much healthier business, and you will be in double-digit profit margin.
In summary, it pays off to read your P&L statement and calculate your ratios monthly and check it against the budget. This practice will help you monitor and keep you within the financial ratio parameters you need to be at.
Need help? Reach out, and we can plan your financial health and lead you into generating millions with double-digit profits within your medical spa.