get your money’s Worth
(CONTINUED FROM PAGE 33)
financial statement, they can bring
more value to your compensation
package than their cash value alone.
“hoW ShoUld I Set mY PrIceS?”
With so many factors to consider—
profit maximization, perceived quality,
perceived value, costs, competitor’s
prices—it’s unsurprising that spas
often ask about the best methods for
pricing services, according to amy
martin Duarte.
The most common approaches,
especially at small, single-propri-
etorship spas, are informal. This
includes setting prices based on what
other spas nearby charge (competitive
method), what the spa operator feels
guests are willing to pay (intuitive
method) or what the spa operator
believes guests expect to pay (psycho-
logical method).
however, none of these models
consider the most important factor in
pricing: your cost. a markup-based
approach or a bottom-up approach are
better ways to price out your services,
according to Financial Management
for Spas¸ because they consider cost.
in a markup approach, you first
determine the direct cost of the
service, then add the desired markup
percentage. The bottom-up approach
starts by considering desired bottom-
line profit first. Then, you work
backwards by calculating necessary
pre-tax profit, the revenue necessary to
generate that profit and cover
expenses, and finally dividing that
revenue figure by the number of
services expected to be performed. The
result is revenue per treatment,
otherwise known as price.
it goes without saying, though,
that a scientifically calculated price is
only viable if customers are willing to
pay that price, which itself is
dependent on what competitors
charge, what your spa previously
charged and the perceived value of
the service. Still, it’s recommended
that a spa’s pricing model be funda-
mentally cost-based. n
sample Bottom-up Pricing
Total Capital Invested
Required Rate of Return on Investment
required return $590,542
10%
$059,054
Add:
Earnings Before Taxes (at 35 percent) $090,853
Fixed Charges
Interest Expense
Depreciation
Property Taxes
Insurance $124,800
180,000
23,500
10,250
Undistributed Operating Expenses
Administrative and General
Sales and Marketing
Facility Maintenance & Utilities $071,300
42,500
54,750
Required Department Income $597,953
Direct Expenses (direct payroll and expenses)
Payroll (including benefits)
Other Direct Costs $109,200
81,300
Total Service Department Revenue $788,453
Unitary Services Anticipated
Price per service (rounded) 6,572
$000120
the isPa academy
T
here are a wealth of financial resources available to you as part of your ISPA Membership, including the
online isPa academy. Much of the information contained in this article—in fact, the entire Financial
Management for Spas textbook—is available at the Academy with just a few clicks. You can also learn more
about the Uniform System of Financial Reporting for Spas and receive guidance on how to decipher financial
reports.
The best part? All of it is written by financial experts or veteran spa operators who have mastered the financial
side of spa.
To access the ISPA Academy, visit experienceispa.com/ispa-academy and log-in to your member account.
36
PULSE
■
MAY 2019