How do I as a salon owner determine appropriate booth rental rates?

Do it by the numbers with your end goal in mind.

How much do you want to make clear in a year?
What percentage of turnover would that figure represent?

Lets say you wanted to make 45,000 in profit.

If all your expenses add up to 99% of your turnover, then for your 1% profit left over to be 45,000 you would have needed to turnover 4.5 Million, unlikely I know, but I'm just starting with big round numbers for the example.

Let's work that example the other way.

Lets say our salon turnover is a more realistic 300,000 annually.

If we wanted to clear our 45,000 profit out of this business, we would need to keep our expenses down to 85%, so that 45,000 is 15% profit.

To keep expenses in the region of 80 - 85% we will need to breakdown our expenses into benchmarks, or if you like give each area its own budget.

An example budget could be:

135,000 = 45% Cost of Team
 39,000 = 13% Operational expenses
 30,000 = 10% Stock
 30,000 = 10% Rent / Loan
 21,000 = 7% Marketing
 45,000 = 15% Profit


300,000 = 100% Turnover

Obviously you can massage these benchmarks to your circumstances, so if your stock and rent don't cost you this much per year, you can increase what you can afford to pay the team, without cutting into your goal profit or even achieve greater than 15% profits!

Generally the percentages for most healthy businesses will be within 5% of these benchmarks.

Try this exercise to determine what you can "profitably afford" to pay.

1. Go through your annual accounts and arrange your expenses into the broad categories of Operational, Stock, Rent, Marketing to calculate them as a percentage of your turnover, then add them up for a total percentage. Call this number (A).
2. Decide on your goal profit percentage for next year? Will it be between 5% & 15%? (If you haven't made a profit yet or for a couple of years, make it 1% or even 1/2%. Call this number (B).
3. Take your total turnover figure and minus (A) and (B) from it. Appropriate or not, this figure is all you can afford to pay the team without dipping into your profit goal or worse making a loss.
4. Take this figure and divide it by the number of team members working the booths. (If you employ dedicated receptionists not responsible for producing salon income, for this exercise you could add the cost of their wages to (A) first, by considering them an Operational expense).

You now should have an annual figure of what the current business turnover can afford to pay each booth worker.

If this isn't enough to provide an attractive or sustainable annual individual income and you can't reduce any overheads calculated in (A) and the profit goal you set yourself at (B) is reasonable for the business turnover, then your team is not productive enough (too many appointment spaces) and / or your prices are not set profitably (too low or too much discounting).

Hopefully this exercise has shown why is can be a mistake to set flat rates.

Even if you keep the other 4 expense categories at 5% less to release a further 20% towards paying the team a rate of 65% of turnover, what incentive is there to book in 7 clients over 5 clients for the day? Being 50% productive of available appointment times, might provide the booth renter a comfortable income, but cost you roughly the same expenses as if they had of been working closer to their full potential.

The only difference is it will affect your profit goal, or cost you money as a loss & wont have done any favours to the goodwill of the salon.

THE SOLUTION TO APPROPRIATE PAY RATES

Its better to reward teams on progressive scales, where the higher the target hit the higher percentage of turnover can be paid.

Here's a blog on best ways to compensate http://salon-management-nexus.blogspot.co.uk/2012/03/whats-best-compensation-model-for.html

Best way to attract team members http://salon-management-nexus.blogspot.co.uk/2012/04/what-is-best-way-to-attract-new-team.html