Intro: Do you feel like you were meant to have a kick-ass career as a hairstylist, like you got into this industry to make big things happen? Maybe you’re struggling to build a solid base and want some stability. Maybe you know social media is important, but it feels like a waste of time because you weren’t seeing any results. Maybe you’ve already had some amazing success but are craving more. Maybe you’re ready to truly enjoy the freedom and flexibility this industry has to offer. Cutting and coloring skills will only get you so far, but to build a lifelong career as a wealthy stylist, it takes business skills and a serious marketing strategy. When you’re ready to quit just working in your business and start working on it, join us here where we share real success stories from real stylists. I’m Britt Seva, social media and marketing strategist just for hairstylists, and this is the Thriving Stylist podcast.
Britt Seva: What is up? And welcome back to the Thriving Stylist podcast. I’m your host, Britt Seva, and today we’re talking about which salon model has the most profit potential. Now, I will say this is an inspired episode. I had an amazing listener write in and ask, “Between commission, booth rent and hybrid, which one A, makes the most profit. B, is the easiest to scale and C, is the most stable long-term? I’m sure there’s not an easy answer.” That was a great question and I love that last line because it’s not an easy answer in the sense that I don’t think it’s a linear question because the question of which is most profitable to me is extremely clear. There is only one answer to that. But when we look at what is right for you, that’s when it stops being linear. I’ll give you an example.
This existing business that I own right now, you probably know it as the Thriving Stylist. Some people notice Flourish Salon Business Development. Some people call it Thriver’s Society. I could make this business more profitable. If I wanted to, I know exactly how I would do it. I would be miserable in the process. So there’s two sides of that coin, right? What does it look like to turn more profit, but then also what makes the most sense for you as the business owner? And so I want to take that tactical approach of talking about profitability as a salon owner, looking at where the most profit would potentially lie for you, but then also helping you choose which model makes the most sense and which model I think is going to be most in demand for probably the next decade. Our industry is incredibly cyclical and we’re in a cycle turnover right this second. And so I think this is a very timely question. Thank you for submitting it in and let’s dig in.
Before I answer which I think is the most profitable, I want to share with you some very current stats. So these stats are current as of early May 2024. So this is very current stuff. It takes the average profitable salon three and a half years to turn profit. So the average salon owner that is profitable worked without a profit margin for three and a half years. I think that’s really important for anybody who’s considering opening a salon to know and understand, like just know for the first three to four years likely there won’t be a profit margin for you. You may be running in the red. It may have a bit of a financial implication on your personal life for a few years. I think that’s a pretty reasonable expectation.
That being said, 38% of salon owners report not turning a profit at all. So 62% are turning a profit. It took them three and a half years or more to get there, on average. 38% of salon owners saying, I’m not turning any margin. Now when there is a margin, the average profit margin today, what do y’all think it is? Think it in your head. Say it out loud to yourself. I’d be really curious to see what stylists think the average salon profit margin is. Clients would just be beside themselves if they knew this answer. 6%. A 6% profit margin is the average profitable salons margin. When you combine that with the fact that the average salon gross revenue annually in the United States today is $245,000. What that means is that 62% of profitable salons are taking home an average of $14,000 a year in annual profit revenue.
I don’t know about you, but if somebody told me that I was going to do all the hard work it took to be a business owner, it’s really hard to be a business owner. It’s really hard to lead a team. I was going to do all that and my reward was going to be $14,000 a year. I don’t think I could do it. That’s a little discouraging to hear. And by the way, that’s not normal. When you even look at local small businesses, a 6% margin on $245,000 in revenue is highly unusual. This is why our industry gets the reputation that it gets. It’s an industry of struggle. It’s an industry of low profit margins and industry of high turnover. This is because of lack of structure, lack of education, lack of tools to ensure that a profit is possible and also lack of leadership.
The most profitable businesses today are led by incredible leaders, and that’s also what it comes down to. But I wanted to share those stats at the beginning because when the question is where does the profit live? Well, the profit lives in the successfully run business every single time, but there are differences in profit potential for booth rental commission-based and hybrids. So I do want to dig into that also. So let’s start with commission and I want to talk about the pros and cons and as I say, cons. Cons has a real negative connotation of pros are good and cons are bad. Instead of saying pros and cons, I’m saying pros and considerations because I don’t even think that the things that are technically like cons are necessarily bad. I truly think they’re considerations like, listen, this is something you should keep in mind.
I’m a big fan of employee-based salons. I’m a big fan of booth rental salons. I think both models are great. I think they cater to different owners. I think they cater to different stylists. They both, I’m so glad that they can coexist in most of the states in the US today. So again, I think that it’s mostly choosing the model that makes the most sense for you. So when we look at commission salons or employee-based salons, could be hourly, could be salary, could be whatever. To me, the most obvious pros are a more cohesive environment, a huge fan of having employees. When you look at who works for me in this business today, over 90% of our team is employees. Our only contractors are my fractional CFO, our podcast editor, my video producer. I really think that’s it. Everybody else is an employee. Why? When you have an employee-based business, you do get a more cohesive environment.
You do get a stronger, more tight-knit bond because everybody is, if the business is built well, fighting towards the same vision, mission, core values, the culture stays a little bit stronger. It’s just easier to have more cohesive personalities, values, alignment, structure in the business. It simply is. When you have employees, you can implement more control. It’s just kind of the way it goes. Another pro, if you are an employee-based stylist, trust me when I say there is much less work on your plate than there is for somebody who is independent, whether they’re a booth renter, studio suite owner, it is significantly more work to do either of those things. So for a stylist who’s like, “I just want to come in, do my clients, everything is there for me, taxes are taken care of for me.” There are so many perks to being an employee today, especially with where the economy is at right now.
I think that’s a huge pro and that’s why we’re seeing a big shift back to people wanting to work for salons. We’ll get to that in a minute though. Stronger profit margin potential. So ding, ding, ding. I’m just going to go ahead and say it right at the top. When you look at the data, there is a much stronger profit potential in a salon business when it’s employee-based. When you have a booth rental salon, there’s just more volatility, there’s less profit levers to pull to even have the potential to generate profit. We’ll get more into that in a moment, but the short answer is having some kind of employee component to your business does give you a stronger chance of profit margin. Doesn’t guarantee it, but it gives you a stronger chance. Number four, and this is a part of why that’s true, stronger growth paths to attract top talent.
Listen, I don’t believe in commission caps. There’s a lot of salons that say, well, we simply can’t afford to pay more than a 50% commission by the by. If you work at a salon that is offering more than 50% commission to most of their team, I can just about promise you, just about, there’s always exceptions. But I can just about promise you that there’s not a profit margin happening in that salon and they’ve chosen their profit margins because they want to attract good people, and I totally understand that. But when you look at how expensive it is in the overhead of salons, especially today, there’s nothing left. It would take at least 50% of the clientele revenue just to run the thing, and then you’re paying the rest out to your team and then there’s the employee taxes and all the other staff. It’s too much.
When stylists say, I can’t believe I’m making 40%, the salon’s keeping 60%. Make no confusion on that. The salon is not keeping 60% of anything. At best, they’re keeping close to 3, 4, 5, 6%, but 38% of salons are not generating profit at all. So the reason why commissions are set up like that is because it’s simply what the salon can afford. Now that being said, if a stylist was doing 2, 300, $400,000 in services, there would be a margin on that person, a big fat margin and so they could be making more money. They could be making more than a 50% profit margin because the revenue is there. And that’s why I don’t believe in having commission caps. I believe in structured pay increases for sure, but unlimited growth potential should be possible. Bonuses could be possible, earning additional perks. A lot of salons say things like, “I can’t afford insurance pay.” Well, sure not for your brand newest person on the team maybe, but it could be something that was earned.
So having strong growth paths to attract top talent becomes possible when you have more of an employee-based structure. It is a little trickier to do those things when you have booth renters. Not impossible but trickier. It’s more streamlined when you have employees. Next, scalable. Much easier to scale a business when you have team members who are employees, not booth renters, and also much more likely to be sellable. If you want to sell a salon today and you have booth renters, the value of your salon is going to be next to nothing. You would be lucky to get a depreciated value of the furnishings in your space. And to be candid, I don’t even know that you would get that. Don’t worry. A person who was just talking to me about this, I will not say on the podcast who exactly you are, but I was just chatting with somebody literally last month who was considering buying a salon and asking what I thought they would need to pay, and the salon owner had made up this figure about what their salon was worth.
And I straight up told the stylist, I said, you have all the bargaining power on this. There is no way that salon owner is going to get that amount of money that they’re asking for their salon because it’s a booth rental salon and when there’s a booth rental salon, there is no intrinsic value on the clients, on the people who are working in the building. They have the rights to go anywhere at any time. And not that employees aren’t at free will because they are, but those lessees are simply renting a chair in your space. They literally aren’t hardly a part of your business at all. And the assumption would be that when the sale happened, they’re going to break their leases and split. So they power when you’re selling a booth rental salon, the power fully goes to the buyer, not the seller. And the vast majority of booth rental salons that I know that sold closed, didn’t actually sell, didn’t get a profit, didn’t get their furnishings bought out at a rate that gave them anything to go home with, they pretty much turned in the key and walked away.
So I do believe there is much more power in selling an employee-based business. And there is a podcast, I didn’t make note of that podcast episode number, but if you look up Thriving Stylist podcast Build Salon to Sell, if you Google that, the podcast on how to build a salon to sell will come up for you. So that’s available as well. Okay, considerations. This will take longer to turn profit. I do believe that commission salons or employee-based salons take longer to turn profit than booth rental salons do. We’ll get into the reasons why in a moment. So the profit potential is higher, but I believe it takes longer. Low-performing stylists can and will destroy your margin. So this is where most commission salons go sideways, is they have too many underperforming team members and not enough A players. Why is that? Because stylists get to a point where they’re doing well and they say, “I’d make more money independently, so why would I stay working for you?”
Hence, why I say there should be strong growth paths and plans. There should be freedom of schedule and people should be able to make uncapped commissions because then it’s like, okay, you can go rent a booth, but for what are you going to get over there that you’re not going to get here? Make it good enough to stay. We had employee-based stylists who worked with us for 7 years, 10 years, 15 years. We celebrated a 20-year anniversary at our salon because it was so good working for us as an employee that leaving to go rent somewhere, you literally would’ve made less money. You would’ve lost so many perks and benefits. It wasn’t worth it for people, so they chose to stay. That’s what you need to create. But if you have too many underperformers because you don’t have strong enough growth paths, you’re not hiring the right people for whatever given reason, that’ll eat up your margin real quick.
So you need to have a balance of high-performers, medium-performers, and newer team members. Another consideration, employee taxes. When you are the owner and you have employees, you have to pay a heightened tax rate, just like when you go out and booth rent or studio suite rent and you pay more in taxes than you did when you were an employee. So the owner has to pay those additional taxes. It’s just something to consider. Day to day management is significant. I believe that if you have an employee-based salon team, you cannot be taking clients more than two days a week and I actually think that’s too much, but very, very heavy team management load. And then lastly, lacking options for those who want to try being independent. If you do not have a hybrid model or an aggressive growth path model, you could lose top talent to more of an independent option. Those are considerations.
So let’s talk about booth rental. Pros. The majority of our industry today currently does still like working independently. We are seeing a shift in that, but at this moment, the majority of the industry does like working independently. I believe that if you have a booth rental salon versus employee-based salon, it’s about 40% less work because you’re not doing payroll. And there’s just certain things that you have to do when you have team members, you have quarterly conversations, quarterly reviews, performance reviews, managing numbers. There’s just some things that when you have booth renters you don’t have to deal with. I don’t think it’s like, oh, you lose 50% of your work. I think you lose about 40%. I think good booth rental salons are still very well managed and the leader is very hands-on, very hands in. There are brand standards, there is structure.
I think that people have a negative connotation with the word rules, like rules always sounds bad. Notice that I didn’t say rules, I just said structure and brand standards. And somebody’s going to say, “Well, that’s just another fancy word for rules.” Yeah, I don’t believe so. I think it’s simply defining like this is the way we move here. This is the way we respect our space. This is the way we respect each other. I think it’s just setting up good culture, good values and good guidelines for people to work well together. You can and should have that in a booth rental salon space. It shouldn’t just be people working randomly together hoping they get along. You can have brand standards and cultural structure in a booth rental environment and you should. Lower overhead, which is really nice in a booth rental environment, less risk of running in the red if you calculate expenses and booth rental rates properly.
I do have tools for that. If you need tools for that, you can DM me @brittseva. I can tell you more about that. And then no employee tax contribution, which is a pretty significant financial savings to the owner. That of course is passed on to the booth renter or suite owner; they pay those taxes. Considerations. It can be hard to hire booth renters unless your culture and brand is extremely strong, very hard. I did a poll recently and salon owners reporting that the average stylist stays with them for two years. That’s a really high turnover rate, and I believe the majority of that is people not feeling satisfied in their salon environment. So they’re looking for the next best thing, the next best thing. The grass is greener, the grass is greener. You need to make sure that you are the greenest grass and that you’re hiring highly qualified people or you’ll fall into that every two year turnover category, which is really high.
Another consideration, profit margin potential is lower unless your brand is extremely strong. So that leads into my next point. Where does the profit live in a booth rental salon? There’s only two places the profit lives. One is going to be retail sales, if you sell retail and if you have more than keystone markup. Keystone markup is not profitable, and I know other people don’t agree with me on that. Run the math on it. There is a piece of the equation that everybody forgets to take into account that makes it essentially non-profitable and it’s not tax. So I have a whole training on that, but if you do retail above keystone, you can make some profit there. The other profit lever in a booth rental salon is the booth rent. You would need to be charging a rental rate that creates a margin for you. The problem is a lot of salon owners today are making the mistake of saying, well, I need to make this much money, so I’m going to have my rent be this much.
You don’t get the luxury of doing that, though, because you may have made poor financial decisions to get to that place of overhead, and you can’t expect your stylist to pay for that. So instead, you have to calculate the cost of your booth rent based on the perceived value of the salon that you own, and that creates the booth rental rate. Now, if we can increase your perceived value, you can charge rental rate above market value because working for you is so desirable. It’s like anything else. When the desire is higher, the price can be higher. That’s where the profit margin comes in for booth rental salons. There’s not a lot of other levers. Most booth rental salon owners, the biggest benefit they have is they don’t have to pay booth rent. Their booth rent is covered by their team and they take that enough as a win.
That’s probably the person who is turning $14,000 in profit is like, well, at least I get free booth rent. But the amount of work you have to do to get that and the amount of stress and pressure and the fact that you likely will never be able to sell your salon, it’s a lot. And so it’s just something to think about. Are you working on the perceived value of your booth rental salons so that the profit margin is there? When you look at employee-based salons, there’s a lot of different profit levers. We have services done by team members, we have retail. You can do events. There’s just all kinds of different things that you can do. When we talk about commission splits, the split that I coach to is called profit of profit and the stylist keeps 70% and the salon owner keeps 30.
We talk about that in Thriving Leadership and why the math maths on that, but I do believe the stylist always should keep more of the profit. But I also believe that a stylist is kind of bonkers if they want to work for a salon that’s not profitable. It’s like hoping that you show up to work every day and the doors are still open. Has anybody ever heard a story of stylists showing up to a salon and the doors are locked? It happens, because the salon owner was not able to generate a profit and now everybody has no job. That’s the worst case scenario. So when stylists tell me, “Well, the salon owner shouldn’t be making money off me,” okay, then everybody has to be a studio suite owner because nobody in their right mind would open a salon hoping to make no money. Your owner is not well, if that was their intention. Salon owners need to be making money.
We need incredible leaders stepping up, leading the team, making profit, creating a beautiful life for themselves. Has anybody ever worked for a stressed-out, burnt-out, in debt, overworked business owner? It’s terrible for everybody. Versus if you’re working for a business owner who’s doing well, is living a comfortable life, has a good headspace, is educating themselves, feels confident their business is successful, they’re a dreamboat, and a good leader wants to turn around and share those profits with the rest of their team. Our most profitable year, I took my salon team to the Ritz-Carlton for a holiday party, and it was so amazing. We had extra profits. I didn’t keep those for myself. I was like, let’s do something really over the top for the team. I still look back on that. I’ll never forget. It was such a core memory. And good leaders do stuff like that.
If there’s no profit, they can’t do cool stuff like that. And I think a lot of stylists are like, “We want insurance. We want 401k.” If the salon owner’s not turning a profit, they can’t do any of that stuff. So we first have to also unpack this mentality of salon owners should not make money. Well then stylists can’t get benefits. You can’t have one without the other. They go hand in hand. They just simply do. So going back to the initial question, between commission, booth, rent and hybrid, which one A, makes the most profit? I do believe there’s more profit potential in employee-based salons, commission salons, hourly salons, salary salons at surface level. That being said, I do know some booth rental salons that make a ton of money. The owner does really well, but it’s because their perceived value is so high that their booth rental rates are much higher than market value.
But on a day-to-day basis, I would say a commission salon does have more profit potential for sure. Which is the easiest to scale? Again, it goes back to an employee-based salon for me, and/or a hybrid model. And then C, which is the most stable long term? I think you know my answer. And all of these things to say I still do really like the booth rental salon model. I’m not saying it’s not good. I think that there’s some leaders who don’t want the heavy-handed management of owning a team-based salon. I think that there’s some owners who are like, “I don’t need to sell my salon at the end. I really am just happy if I turn a decent profit. I like the people I work with. I’m in control of my environment.” Perfect. That’s amazing. I think you should have that.
Closing thought. Talking about the cycle we’re going back to, we’ve spent the last almost 15 years in the cycle of stylist seeking independence. As the economy turns and changes, I am hearing story after story after story after story of salon owners being like, “Finally, stylists want to work for me again.” And also studio suites are feeling the heat and the pressure. I’m hearing from some studio suite like independent franchise owners who are saying like, “I’m having a harder time filling these suites than I thought.” More people are shifting back to a team-based salon environment and could be booth rent, could be employee-based, but here is a really great opportunity, if you’re a salon owner, to create the kind of environment that people will clamor to.
I hope you found clarity in this one. If you ever want to get me a question to answer on the podcast, you can hit me up in the ratings and reviews on iTunes. Give me a rating or review, ask me a question, and I’ll do my best to get you an answer. So much love, happy business building, and I’ll see you on the next one.
