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 aren’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:
What is up? And welcome back to the Thriving Stylist podcast. I’m your host, Britt Seva. And today we are talking about the age-old question, can a salon afford 45% commissions? Now, as per usual, this is a very inspired episode based on a conversation I had with a salon owner just last week about how to compensate her team in the way that they want to be compensated. And when we look at compensation, whether it be salary or hourly or commission or literally anything, it’s all about making sure that the person feels like the time, energy, and effort they’re putting into their business is worth it when payday comes. And I actually mean that for booth renters too. If you’re a booth renter, you work in a studio suite. So essentially you’re paying yourself, you’re running your own finances. Or if you’re a salon owner, you’re paying yourself.
If all the work that goes into it, the time away from your family, the emotional effort we put into sustaining a clientele, the physical effects of our body. If all of that at the end of the month, we look at how much we’ve taken home, what we were able to provide on our dinner table for our family, and it doesn’t feel worth it. It’s a disconnect. And so whenever we’re looking at how to compensate our team as an owner, we’re like, how do I bridge that gap? How do I make sure that the people who work for me say, “You know what? This was worth it. I’m happy. I’m healthy. I love my clientele. I like the way I’m spending my days. And this was worth it.” And I think that for all of us, this is the goal. One of the words that gets tossed around a lot when it comes to compensation is what I call the F word. And the F word for me is fair, F-A-I-R. I think that is a nasty little four letter word.
Because what does that mean? Fair for whom? Very rarely in life, think about any situation in life, any situation. When do things shake out to be fair for both people involved 100%? Both people fully satisfied? That is so rare in any situation. You go to the grocery store, you buy groceries, “That was too much money. I can’t believe I just spent $400 on three days worth of groceries. That was not fair.” Okay, so you’re mad going to the grocery store. Going to the grocery store is not fair. Going to the dentist, “That’s not fair, insurance didn’t cover everything, I had to pay out of pocket. It hurt more than I wanted to.” Literally nothing in life shakes out fair. And we learn that from the time we’re little kids. When people say, “That’s not fair,” it reminds me of trying to argue with one of my kids when they were three years old. No, it’s not fair. I’m the parent and this is what we’re doing.
And so when it comes to things like payroll and we say, “I just want to make sure it’s fair,” literally what are you talking about? What do you mean when you say fair? I want to stop using that F word and I want to just say, let’s make sure that this is a solid working relationship and that compensation feels appropriate based on the work being done. Appropriate, I think, is a better word than fair. Fair will F you up. Fair will do the other F word to you. Because what often happens when we as leaders use the word fair, we get screwed over. So the other person feels great because generally speaking, when we try to make compensation fair, it’s not fair at all. The owner screws themselves, is drowning, and that’s why the average owner only owns a salon for eight years or less. Because they’re not managing the business properly, they’re chasing the F word which doesn’t exist.
Okay, so let’s talk about commissions. And I think this episode’s actually going to surprise you. So whether you’re a stylist or a salon owner, I think you’re going to love this one. So the question was, can I afford a 45% commission? This was the standard going rate that this owner was paying and she’s in trouble. So I’m going to read with you her message and then we are going to use the tools that I coach all of my Thriving Leaders with to give her an answer. So here’s what she said. “I sat down with my bookkeeper yesterday and 78% of what we bring in goes towards payroll.”
78% of what gets brought in goes to payroll. Yikes. So you could just Google good business budget practice or you could talk to a CPA or an accountant and do it properly, but literally a good old fashioned Google search will give you this data. If you have a business with employees, shooting for about 30% of your expenses to be payroll is where you want to be. 50% is also acceptable. 78% not acceptable on any scale, its just too dangerous. And as we go into this and we learn more, we come to understand that part of what the owner is producing behind the chair is going to funding that as well. Which makes it even more dangerous because we’re already operating at a margin of what? 22%. And that’s not profit margin. A 22% profit margin would be stellar.
No, 22% of our revenue is left over to pay for literally everything else. The lease, the energy, the color, the back bar, that’s 22%. When you look at how much it costs to run a salon, usually that’s 30%, 40%. So basically this salon is running on fumes. So then she says, “I sit at about 14% for taxes alone.” So I dug in a little deeper, I said, “Can you tell me a little bit more about the numbers?” So she gave me a full breakdown of what the team makes and I’m going to share it with you. So in July, herself as the owner, 50%. And she says that, “I don’t pay myself an owner’s draw, I take a higher commission as an S corp.” So if you don’t know a very common practice when you reach a certain level of revenue, this is not something you can do out the gate because there are higher fees associated with filing taxes this way as well.
But you get to a point where you’re making so much that it makes sense to pay the fees and get this additional tax benefit of, generally speaking, being an LLC that files as an S corp. And when you do that, you can put yourself on payroll as the business owner and essentially treat yourself as an employee of your own business. And there’s lots of different perks and benefits to doing that. So she’s doing that. Okay, so she gets a 50% commission split as the owner, does not take an owner’s draw. Then she has another stylist who had a commission split in July of $4,880, and that was a 43% split. She had another stylist who made $1,620, that’s a 45% split. Another sales who made $2,858, that’s a 45% split. And another stylist who made $7,047 on a 45% split. So everything I just rattled off was total monthly compensation for each of these people.
So she herself is taking home, I’m doing very rough math, somewhere around 90 grand a year take home. She has another stylist who’s doing about the same. And then she has another stylist who’s more like 60 grand a year. She has another stylist who’s much more like 18 grand a year, but I think chooses to be. She says, this person’s only working one day a week. So 16 grand a year working one day a week is not bad. And then we have another stylist who’s doing more like 40 grand a year. So what I did is based on what they took home and what their splits were, I took a look at what their service total would’ve had to have been for that to be the split. So for herself, if she’s making $7,790 on a 50% split, she did about 15 K in services for the month.
The stylist who did $4,880 on a 43% split would’ve done $11,000 in services. The stylist who took home $1,620 on a 45% split would’ve done $3,700 in services for the month. The stylist who took home $2,858 on 45% split would’ve done $6,500 in services in a month. And then finally her high performer who took home $7,000 and some change on a 45% split would’ve done $15,500 in services. Great. So when we look at that, this salon is doing an average of almost $60,000 a month in services. So this is a salon that’s doing almost $700,000 a year in services, no profit. So for those of you stylists who were like, “The owner’s taking all the money.” This owner’s taking no money on a that does $700,000 in services in a year. Y’all don’t know how common this is. I’m just thankful this owner was willing to share such transparent numbers with me.
This is really common and this is what’s tricky for owners and stylists alike is often we walk by a salon and it looks busy and it looks fancy, and they say things like, “We’re running a million dollars a year.” And you’re like, “Wow, that’s incredible.” And then you look at the books and you’re like, “$700,000 when there’s no profit margin, is that what we’re shooting for?” It might be fair. It just raises a lot of questions. And then to the stylists who are hearing this and they’re like, “Well, she’s got pay her people.” She’s considering just stopping all of this because she can’t afford it. And I think that that’s the piece that some stylists don’t understand is she’s at the end of her rope here, how do I make this business work? Imagine having a business that does that high volume of revenue and $0 in profit.
So let’s unpack exactly where we are. So I asked, I said, “What are your monthly expenses as a whole?” I said, “I don’t need you to break down everything, but as a whole.” And she says, “On average my expenses are 25 grand. I have zero debt. I’m finishing out a remodel, so I do have a payment on that. Payroll is by far my biggest expense. I do also have a manager who does everything and does it well. And that manager makes an hourly rate, a pretty nice hourly rate if I’m being honest. And then a receptionist who makes $17 an hour.” So two employees that I call these non-revenue generating employees because generally a salon manager and a receptionist are not active revenue producers. But we will talk about that at the end of this show as well. So what’s happened is the salon owner has a budget for nothing and is wondering how do I continue to sustain my business and pay my people fairly and keep the lights on?
So what I had suggested was looking at payroll calculation and dialing in what she’s budgeted for. And I’m actually going to talk you through this exercise on the podcast right now. So what I’ve done is I’ve pulled up our Thriving Stylist Method Compensation Calculator. And I use a method called Profit of Profit, and we’ve actually spent a huge part of this year dissecting it six ways from Sunday. And this method works and it works really well and it checks out on paper. And the reason I love it is because it’s set up so that the stylist always makes the vast majority of the compensation, by a long shot. So there’s several different calculators an owner can choose to use. The most successful salon that’s in demand, that is full to the brim, stylists are begging to get in and work there. In the most successful scenario, the stylist takes home 70% of profit and the owner takes home 30%.
In a salon where it’s just getting started and the salon owners maybe just starting to hire team members. The stylist takes home 80% of the profit and the owner takes home 20%. So with this compensation method, no matter how you do it, I think in most stylists’ eyes that would be F word. That would be fair, if we’re even going to use that. I hate that word. But it’s hard to say, I don’t think that’s fair that I’m keeping way more than half of the profit. If anything, it’s most fair to the stylist, not to the owner. But what I love about this method is actually everybody comes out a winner. So I’m going to explain it. It’s going to make a lot of sense when we run through it. So I have the calculator up in front of me and we’re going to run through it together.
So what I’ve already done is I’ve implemented the total average monthly expenses for the salon, which the owner said was 25 grand. So I’ve gone ahead and added that in. Now when you look at the calculator, there’s a place for you to enter in things like your lease, salon amenities, if there’s healthcare, laundry, cleaning services, you can totally segment it. In this case, I’ve just plopped it all in. The math is still going to math. Then the other question that the calculator asks is how many stylists work in your salon? I entered in five because I have data for five. It sounds like there are five. So now we’re going to start running each stylist through it. So let’s start with the stylist who took home $4,880 on a 43% commission. That stylist is doing $11,000 a month in services. So when I run $11,000 through the calculator, it tells me, okay, we can afford to pay this stylist 40% commission. So we’re not far off. We can afford to pay this stylist 40% commissions and still the owner would turn a profit.
So that’s so crazy. That doesn’t make any sense. And by the way, if you were to go with this method salon owner listening to this, I would not reduce the stylist’s commission. You’re so close. She’s at 43%, you’re budgeted for 40%. It seems like she is a driven stylist. She’s going to get there and close the gap. I would leave her compensation completely alone. I don’t think you’re far off. So let’s shift forward. Let’s look at this other stylist who took home $1,620, making 45% commission and she’s doing $3,700 a month. So let’s see what we can afford to pay that person. So here’s a tough fact, and this is one of the stats that the calculator gives you. So the calculator gives you a lot of stats and data, but one of the things that gives you is the total monthly employee cost. And this is one of the figures that I think most salon owners aren’t even aware of or completely ignore.
There is a cost associated with having a person breathing air in your space. And if you’re an owner, you might relate when I say this, if you have a stylist on commission, who is working at one of your chairs and they sit in the back room all day and they don’t serve a single client, are they costing you something or are they costing you nothing? They didn’t use any color. They never shampooed anybody. Are they costing you something or nothing? They’re costing you something. Because having them in this space, first of all, they had a chair that nobody else was using, I assume. And even if you’re like, “Oh, well the stylist next to them used that for one client.” That’s not what I’m talking about here. I’m talking about each station as a productivity hub. Theirs was dead all day long.
And while they did not use shampoo or color or anything else, they sat in your air conditioned space, the lights were on, they could have done hair had they wanted to. So you had supplied an entire dispensary so that they could do the hair, hoping that they had clients. My guess is that you’re making social media efforts in the hope that they had clients. You are putting wheels in motion and creating an environment where this person could be doing hair and making money, they’re simply not. And that overhead cost, let’s say we’re not even paying this person hourly, which I’m not going to unpack the legalities of that right now. But if we were not even paying that person hourly for their time being in our building, you’re still having to pay for them to be in that space. And that’s the piece I think most saloners don’t get and this is how they get themselves into this bind. So when I run the calculator, that stylist who is doing $3,600 a month in services, it costs the owner $4,969 a month just to have them in the building.
So while that stylist did $3,600 in services, it did not cover their cost to be in the building. And this stylist is one of the reasons why the owner is drowning. So while the $11,000 a month person is being a little tiny bit overpaid to the point where I’m not even going to worry about it, this person, you can’t afford to pay them any commissions, they’re not even paying for themselves. So let’s move forward and then I’ll talk about what I would do with this person. So let’s go onto the person who’s doing $6,500 a month in services and see what we can afford to pay them. So we’ll run that through the calculator $6,500. That person’s costing us $5,177 a month to have in the building and we can afford to pay them a 16% commission.
Now, I would never, ever coach to any owner offering any stylist a 16% commission. It’s offensive, nobody’s going to work at that rate. It doesn’t make any sense. So what do we have to do instead? Hourly wage. And that’s why hourly wage exists in our industry. And if you scroll down on the calculator further, it shows you what the wage range you could pay that person is. So there are tools to help you do that and I would suggest leaning in there. But this is somebody who would need to be on a growth plan, which is also what we coach to in Thriving Leadership Method. They’d go into a growth plan and we’d say, “Okay, my goal is to get you to 35% commission in the next six months. Here’s what needs to happen to do that.” And this calculator will let you know exactly what has to happen for them to get there. Actually, I can let you know. Let me tell you how much they’d have to make to get to that 35% commission.
Perfect, easier than I thought. So $9,500 a month is what they need to do in services in order to hit 35% commission. So this becomes a coachable moment and we say, “Listen, I want to get you to at least 35%. What we need to do is increase your service dollars by $3,000 a month.” Now, I know $3,000 a month sounds really huge, but let’s do the math on that. So let’s say that this stylist is a full-time stylist. It doesn’t say how many days a week this person works, but we’re just going to make the assumption. So knowing that they need to increase their income by $3,000 a month to hit that 35% commission, that’s $150 a day. So $3,000 a month sounds insurmountable. $150 a day, for a lot of stylists that’s one more client a day or a couple of add-ons.
And this is how we coach, this is what leadership looks like. And it shouldn’t take more than six months to get this person there. If you’re a checked-in leader and we’re growing together, that should be very possible. Okay, so then let’s run the last person who’s the high performer. The high performer is doing $15,500 a month in services. So this person is actually being underpaid. This person should be making a 50% commission split. And this is what I love about this calculator is that if we’re going to use the F word one more time, I don’t think there’s any more fair way that you can run compensation. So using this method, I’ve seen stylists making up to 70% commissions in a way that the owner still turns a profit. The problem is most owners aren’t using a tool like this, so they just throw numbers out there like, “Well, I’ve got to offer a 55% commission to stay competitive.”
You can for the right person and then for the person who’s not there yet, they’re going to have to start at $22 an hour. And because most salon owners don’t have things like growth paths, plans, marketing in place, they know they can grow a stylist, they can confidently say, “I’m going to get you to 35% commission in the next six months and I’m going to get you to 45% commission in the next year.” Because they can’t confidently say those things because they don’t know how to do it, we end up just saying everybody makes 45% and then we end up in a bind. Which is where this owner is right now. Underwater because two of their people are overpaid, two of them. Now, the other thing that I think we need to dive into is something I talked about briefly at the beginning. You also have two people who are technically non-income producing, I’m going to assume, the salon manager and the receptionist.
Now, I like salon managers a lot, I was a salon director, which to me is different than a manager in a few ways. One, I was not forward-facing. So I wasn’t interacting with clients. I didn’t do any services, which I don’t assume your manager is either. I had my own little space downstairs in the back and I was hiring and firing and payroll and marketing and networking and events and doing totally other stuff, really running the overall operations of the business while the owner had gone absentee. While I was not doing services, I was able to, by my efforts, increase the salon’s revenue by hundreds of thousands of dollars every single year. So I more than paid for my salary. So I never made even $100,000 a year as the salon director, but I was generating multiple hundreds of thousands of dollars in additional revenue.
So I produce profit margin for them. My question to you is, does your manager do that for you? Is she a revenue center for you? Is she doing the things that need to happen to grow your salon and your team? Not the things that keep it running. I also did the things that keep it running. I ran to the grocery store and bought the granola bars and the drinks and all this stuff. I did all that too. But what is that person doing to grow the business? If nothing, I do question if it’s the right time to have them there. I know that person’s taking a load off your plate, fully understand, but your business is in a bit of a scary spot and it makes me nervous. We might have to do a short-term sacrifice for long-term gain. And have you really dive into the things that need to be done to grow this business and then potentially bring that person on more full-time down the line.
The reception team member, same thing. Are they just sitting at the desk and waiting for people to come in? Or are they doing things that help to grow the business forward? Are they upselling? Are they doing retail for you? What are they doing? And is there validity in their role as it stands today? So when we look at how does this business start to turn profit, few things we need to think about. Adjusting compensation method and model. We just uncovered, yeah, you can absolutely pay a 45% commission to somebody who’s earning it, and more. But to somebody who’s not, we can’t just blatantly throw money at them in the name of being fair. It doesn’t work. This salon will not be able to stay open like this. Much as it feels nice to be able to say, “I offer everybody 45% commissions,” it’s not sustainable though.
And as the world just starts to get more and more expensive, this is going to become more and more dangerous. So this owner writing in was saying, “I’m thinking about going booth rent. Having an employee is just too expensive.” If you think that charging a rental rate instead of paying this is going to put you in a better financial position, based on the numbers you just gave me, it’s not. I don’t see how it would, unless you were charging a pretty astronomical rent, which I don’t believe. We could run you on a rental calculator and see what your rate would be for sure. But I don’t believe that that’s actually going to improve your financial position based on what we’re looking at and what we talked about today. Because your one day a week a stylist is going to pay you what, maybe $1,000 a month in rent?
No, probably not even. Maybe $400 or $500 a month in rent. That’s less than you’re making from them right now. It’s not going to improve your financial position. And yeah, you wouldn’t have to back stock color for them and some of the other things, I think that we need to just restructure. And we do this as owners, is we say, “Well, what would make the team less angry at me?” And we make our decisions based on that. If she’s to go to these team members and say, “Listen, I’ve got to pull back this 45% commission,” they’re going to be upset. Versus if she says, “Everybody gets to be an independent.” She’s hoping, I’m going to assume, that that lands better. And I totally get it and I totally understand, but it’s not going to improve her position. It might make her less stressed. I don’t even know.
But what I do think is for your high performer, you’ll get to go back and say, “I get to raise your commission.” And for your other higher performer, they get to stay right where they are. It’s these people who are just not there yet who are being overly compensated. So I hope that this was food for thought. If anybody wants access to these calculators, you can head to thrivingstylist.com/thriverssociety and check out Thriving Leadership. And as I always say, so much love, happy business building, and I’ll see you on the next one.
