The Math of Paying 60% Commish

the_math_of_60%_commish_salon_gurus

Quote seen on Facebook:  “If the owner is not paying you at least 60% you’re getting ripped off!”

We’re seeing this all over FB lately…especially in massage therapy groups where some people are advising posters they are being taken advantage of if they are not being paid at least 60% commissions. This is not a discussion of employees vs independent contractors….this is a discussion about hired employees.

We are saying 60% is NOT sustainable for businesses who actually fulfill all their obligations as employers.  And if you hire people and boss them, then you NEED to classify them as employees and handle your business. If you are doing that…then you are paying people to do the work for you and at 60%, probably taking a loss. Let’s see how that works…

Let’s say you have two employees who generate about $100K in gross services revenue (round numbers…just for math’s sake). $40,000 left to you…so…hey…that’s great!

But you have employer’s share of Social Security and Medicare which is $7,650.00.
You have Federal Unemployment Insurance which is 6% of the first $7K or $420.00 x 2 employees

State Unemployment last quarter varied between Nebraska at 4% and Rhode Island at 12.8% and lots of states were between 6-9%, so let’s say….on average 8%  on the first $7K (varies) or $480.00) x 2 emps
(https://www.bls.gov/lau/)

So take $9,450 right off the top, leaving $30,550 for you. All good still!

Worker’s comp rates in the salon industry vary according to the work being done, but according to one provider the cost is 49 cents per $100 of wages paid or $294 for the 60K paid out. And a general liability policy to cover their errors and omissions is about $375. So now we’re down to $29,881.00. (www.workerscompensationshop.com).

But wait! In today’s cashless world, credit card fees will come right off the top, too. There are credit card processors who routinely quote rates like 1.65%…but …only for qualified cards. Processors who use that bait-and-switch marketing are selling a tiered fee plan and don’t tell the facts: barely any credit cards actually qualify for that lowest rate. Any cards that have points or mileage or are membership benefits cards or corporate credit cards do not qualify. (Almost everyone uses a card for miles, right? Who do you think pays for those bennies? Not the credit cards! They pass those costs along to their merchants by way of fees). In addition, many processors who quote low rates add on little fees here and there – swipe fees of a few cents, monthly billing fees of a few dollars. PCI compliance fees.  Government tariffs…etc. etc.

Sorry to tell you this, but you are most likely paying just under 3% on card processing…no matter what they quote you.   So…yeah…let’s take off another $2,900.00  Oops! Don’t forget the credit card fees on employee tips!  You have to pay those fees even though you didn’t earn that money.  Say your employees are great….and some people tip well…some not so much…so let’s be realistic and say your employees were tipped an additional 15% – the credit card fees on that additional $15K is another $450.00 off the revenues.  Now we’re down to $26,531.00.

Let’s look at that….your employees are receiving actual paid wages, legal obligations and benefits valued at $73.469.00 This makes their actual rate 73.5%.  Not 60%.

This is without paid days off-no holidays, no sick days, no vacation days. Many employers (in the real world…or in corporate salon businesses) pay a couple week’s paid vacation, 5 or more days of sick leave and a few holidays – let’s say 5. That’s around 20 days off per person per year!  Let’s math some more… on $60K, let’s say 2 employees each got $30K. There are on average 260 work days in a year (working 5 days a week). Divide 30K/260 that’s $115 per day x 20 days…so paid time off is worth $2,300 per person per year.   If your small business is trying to pay holidays/vacation days, you’re now down to $21,931.

There’s a reason corporate salons, spas and chains do not pay out these crazy-high commissions. They know there are a lot of additional benefits they are obligated to provide for their employees.  This is why you see sustainable commissions being in the higher 30-40 percentages. They have to make a profit – many have stockholders to answer for. They know their stuff…why would you discount their methods?

As if it weren’t enough…in my years of experience, product costs for nails were right at 7.2-7.5% of gross nail revenues. Skin care was between 11% – 14% (depending on if I had added a new modality). Linens were more.  Massage therapy has much lower per service product costs, and less linens than skin care. So, products could run you between say $1,000 for massage oils, lotions, disposables, new linens to up to over $10K for skin care.  Now you’re down to between $11K to $20K per year.  You gotta ask yourself is it really worth a lousy net revenue gain of $916 – $1666 per month to have two employees to worry about?

Note: None of these numbers are about overheads; these are the numbers from having paid staff perform additional services in the space at the existing overhead.

And if you are looking at taking a job as an employee…be sure you are receiving all the legal obligations required by the employer.  Be aware that if you demand more than say 40% of service revenue for commissions…something has to go. And that’s where the messy credit card fee charges, back bar charges, amenity fees for your guests…and all those other ways owner are desperately trying to cover the shortfall.

It’s all in the maths.

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