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What if You’re Paying Staff Too Much and What is The Best Time to Raise Your Prices?

Posted on November 27, 2018 | by Marita Carroll | in Uncategorized

Compensation Structure Changes

Having the wrong compensation package is one of the leading reasons why our businesses are not profitable. Hands down, one of the scariest moves for any business owner to make would be to change their compensation package. Some common barriers owners face is lack of understanding about how to pay i.e. complying or the more important fear of a staff “walk out”.

It is important to walk through these uncharted waters safely and securely at a pace that is comfortable for you and does not throw you into overwhelm. Many times, you will see that compensation is an issue and yet you may not be prepared to do anything about it right away.

The important thing to do is educate your team members on the appropriate profitable structures and come up with a game plan for when and where the change can be implemented. You may find that you want to focus on other areas first to build your confidence and move towards this change in time. Such as instituting productivity goals and training on how to reach them. These are highlighted below.

Team Member Compensation All employees should be compensated with a base and/or a commission salary package. This can vary depending on the position and commission percentage due to services performed. An R.N. may have a higher hourly wage such as $20 to $25 plus tiered commissions of 5 to 20 percent on retail products. An esthetician may earn $10 to $15 per hour or 35 to 45 percent tiered commissions. You would pay the base draw or the commission—whichever is greater. Also, service providers should be eligible to participate in a retail commission program. The following are four ways to track a service provider’s performance and pay them accordingly:

Pre-booked percentage the pre-booking number comes from the number of clients in a pay period who have scheduled their next appointment with the service provider. If the service provider saw 40 clients during the pay period and 20 of them booked their next appointment before leaving, his or her pre-booking percentage would be 50 percent because half of the scheduled clients are pre-booked for their next appointment.

Retention percentage This refers to the number of clients seen in a pay period who return and request a specific service provider. If the service provider saw 40 clients during the pay period and 20 of them were return requests, the provider’s retention percentage would be 50 percent because half of the scheduled clients were repeat business. Realistic retention is a return request in a 120-day period.

Series of Service Percentage This percentage is determined by identifying service categories that are sold in packages, such as laser treatments, facials, massage, and medical-grade peels. Selling a series locks in the customer paying up front thus enhancing business cash flow, coming in more frequently to maintain service quality and finally spending more money each subsequent visit. Suppose a service provider had $4,000 in gross service sales for the two-week pay period and $2,000 of that total came from series sales. Divide $4,000 gross service totals by $2,000 series totals, and your series percentage would be 50 percent.

Retail percentage This percentage is derived by dividing the service provider’s retail product sales during the pay period by their service sales. For example, if a service provider generates $2,000 in service sales during the pay period and in addition sells $300 worth of retail product to his or her client, divide $2,000 by $300 and you would get a 15 percent retail percentage to service dollar sales.

We are most likely all cash-based businesses and need good software to manage our business. A terrific software that tracks all these productivity goals easily can be found at www.patientnow.com

Incentives and holding people accountable are well-established methods in other industries and work very effectively in a medical and spa when training is provided. Employees naturally perform better with incentives. The harder they work, the more they can earn, based upon productivity. It’s a win-win situation for everyone involved.

Another option is you may not change the compensation right away with your current staff and will implement a new structure for new hires. Eventually a structure will have to be implemented across the board to reach profitability. It is a numbers game and payroll cannot exceed 52% of gross service sales in the spa and 35% for medical spa services within the business if it is going to make any money.

If a business owner is paying more than listed above, they are most likely losing money. This means every client who is in a treatment room is costing them money instead of making them some. It does not matter how much money a provider brings in. Costs go up exponentially. Typical payroll burden is about 10% above the commission paid out. This includes costs of matching FICA, Medicare, and workman’s comp insurance. We of course can only pay retail commissions to medical providers. Their earnings off services must be hourly or salary to comply.

When is the Best Time to Raise Your Prices?

The best time to raise prices is the time between Thanksgiving and Christmas. It is when people are the least price conscious. Look at your cost of goods and expenses in relationship to your desired profit margins to determine your increase. You may raise prices on various services differently based upon perception and viability in your marketplace.

Doing a compensation change at the same time as a price increase can be ideal. If you raised your prices for example 10% at the same time payroll was reduced 10% your providers would not see a difference in their take home all while the business may move into the black by reduced labor costs.

Profit Sharing as Incentive and Reduction of Waste

Profit sharing is an excellent benefit because it also motivates the staff to be more productive and reduces waste. It encourages team members to take an ownership attitude towards the business since they have a direct stake in the bottom line.  An example of a profit-sharing plan is 10% of the net profits after all expenses are paid. This could be distributed monthly or as a yearend bonus. This would apply to team members who have completed a year of employment or more. The profit-sharing bonus would only be eligible to employees who are currently working for the organization. If a staff member were to leave during the year, they would not be eligible. Staff receive a percentage of net profits based on hours worked.

Total net monthly profit after expenses example: $10,260 for one month of sales

Team Members receive 10% total of net profits =$1,026

The commission is split between team members based upon hours worked

 

437 work hours are divided between three team members

1 at 160 hours

1 at 150 hours

1 at 127 hours

Divide total hours into the commission – example: 437 hours divided into $1,026 = 2.35

Multiply each team member’s hours by the divided amount

Example: 160 hours x 2.35 = $376

150 hours x 2.35 = $352.50

127 hours x 2.35 = $298.45

Total                      $1026.95

 

This is a rounded number – you may be slightly off by a fraction with rounding the numbers. You can also offer profit sharing for through department bonuses based upon performance. The below example highlights for levels of profit sharing based upon four different productivity goal incentives. The idea is that if department manager or team meets the incentive in their department, they would earn a share of profits after cost of goods and expenses for the business.

 

Spa Profit Sharing by Department Team:

Level 1 Level 2 Level 3 Level 4
Profit Sharing %

After Bus. Expenses

3%

 

5%

 

7%

 

10%

 

Dept. Productivity

Hours Booked

50%

 

60% 75% 76% & up
Spa Supply Costs 9-10% 7-8% 6% 5%
Medical Supply Costs 20-22% 18-19% 16-17% 15%
Total Retail Sales% 1-8% 9-12% 13-19% 20% & up
 Quarterly Service Sales Increase 5% 6-10% 11-20% 21% & up

 

The important factor when making compensation changes is coming up with a step by step plan that outlines the process of what the change needs to be and how it is going to be implemented. There must be a focus on what the win is going to be for the owner and the people who work for them. Typically, strong marketing pieces, referral programs, a coaching program, business building tools (Secrets of Ka-Ching) https://squareup.com/market/durocher-enterprises/item/the-secrets-of-ka-ching  and creative incentives are not in place. These are all definite wins for the team regarding what new benefits they will be receiving when a change must be made.

 

Additional tools that can help are listed below by business type.

 

https://squareup.com/market/durocher-enterprises/item/medical-spa-compensation-cd

 

 

https://squareup.com/market/durocher-enterprises/item/pay-day-compensation-plans-cd

 

Yours in Success,

 

Bryan Durocher