Expansion Issues

Expansion Issues

One of the most difficult decisions facing salon owners is deciding whether to expand their business. Fortunately, there are several methods of evaluating your existing business that will help to determine whether a salon owners needs to expand and best time to do it.

While customers stepping over one another in your lobby and scrambling for tanning time is a clear indication that it is time to add more equipment, it is not recommended waiting until the middle of the busy season to physically expand a business. The mind usually works in the following manner when weighing the pros and cons of business expansion:

• More equipment will accommodate more customers.
• More customers will increase sales of lotions and accessories.
• More equipment means I don’t have to turn customers away.
• A bigger salon featuring the latest equipment will discourage competition.
• Based on my demographic research and break-even analysis, the new units will pay for themselves quickly.

• We don’t have the room.
• We can’t afford to purchase more equipment.
• We only busy six months of the year, then the equipment hardly is used.
• We’re not sure if now is the time to expand.

When determining whether to expand an existing salon, the first step always should be to conduct a detailed break-even analysis. The following will help salon owners make a determination:

• How much it costs to operate your tanning systems per session, with regard to lamp depreciation, electricity and general maintenance.
• Your salon’s maximum capacity and how many people you currently must tan each day to cover your fixed expenses.
• How to project profitability and income potential on a monthly and annual basis.

When conducted on an existing business, this also will help determine areas of waste and paint a clear picture of income potential. In addition, the breakeven analysis can tell a salon owner whether a new location has the potential for profitability and the ability to meet income expectations.

Of equal importance, it can be used to help determine whether an existing business needs to expand and can handle the cost of expansion. Based on studies of more than 3,000 salons nationwide, the average successful salon operates at approximately 52.5 percent of maximum capacity or two to three times the breakeven point. The average salon has approximately 1,979 customers in its database (71.1 percent female and 28.9 percent male). The average salon has nine tanning systems or one unit per 220 customers and occupies approximately 1,300 square feet of space.

After conducting a detailed break-even analysis on your salon, the results should then be measured against a demographic profile of your target market. That is, a study of the community to determine how many potential customers live in your target area and the age groups they comprise.

In addition to providing vital information regarding opportunities for business expansion, understanding the population of the market with regard to sex, age and ethnic background also can help salon owners determine the best advertising mediums, dÈcor and location for a salon.

For example, if demographic research shows that you have a high concentration of Caucasian females between the ages of 30 and 39 in your target market, you would then advertise your business via ad mediums that target this group.

Since Caucasian females between the ages of 18 and 49 represent the largest group of tanners (67.2 percent), anyone looking to open or expand a commercial tanning business would want the local population to have a substantial number of people that fit in this category.

Research also indicates that on the average, a representation equal to approximately 10 percent of the Caucasian population will tan at sometime during the year. In areas where tanning is well established and effectively marketed, studies show that this figure may be as high as 20 percent.

Logically, the next step would be to multiply the total population for each age category by 10 percent to 20 percent. This will provide you a good estimate of the number of potential customers in the salon’s immediate area.

For example, if the demographic study of your target market shows the total population of potential customers to be 50,000, you would multiply this figure by 10 percent to 20 percent to reveal the estimated number of potential customers for a target area (i.e. 50,000 x 10 percent = 5,000; 50,000 x 15 percent = 7,500; 50, 000 x 20 percent = 10,000).

As stated earlier, the average successful tanning salon utilizes one tanning unit per 220 customers. Therefore, an area with 5,000 potential customers could support approximately 23 tanning units, (5,000 divided by 220 = 23). An area where is well established and effectively marketed may support up to 45 units (10,000 divided by 220 = 450).

After a thorough break-even analysis and conducted and the population has been researched for your target group, an educated decision can be made how many tanning units your salon can support and if your financial goals are achievable.

For example, your break-even analysis indicates that you need to tan 900 people each month (30 per day), to cover all your fixed expenses. You find that during the busiest months of the year you can achieve this figure, (or the income represented accordingly), by the 10th day of each month. In fact, most days you operate at two to three times the point of break-even.

Demographic research of a target market further reveals that are 5,000 potential customers in your area and there are currently only 15 tanning units in operation. Given these circumstances, it appears your business could support more than equipment.

To further reinforce the analysis, the next step would be to program in the extra units you intend to add into the break-even formula. This will determine exactly how the addition of the new equipment will affect the existing conditions at your business.

Adding more equipment will increase your maximum capacity for tanning and profitability. It also will increase fixed overhead with regard to the cost of the equipment, building more rooms, renting a larger space, adding additional employees, etc.

It is important to note that in most situations where a salon is adding one or two more units, fixed overhead such as rent, telephone and labor does not dramatically increase. The break-even analysis will verify this and allow salon owners to determine exactly how much sessions must be generated each month to pay for each individual cost center.

While the break-even analysis and demographic research will provide excellent guidelines, other important factors also must be taken into consideration.

Markets where competitive salons are mismanaged or feature outdated equipment always percent prime opportunities for growth. When calculating the number of tannin units a market can support, outdated equipment and mismanaged salons should be discounted accordingly.

Remember that mathematical calculations and evaluations are just part of the overall equation. Your own business instincts regarding conditions in your marketplace are of equal importance. The break-even analysis and demographic research are designed to provide guidelines only. They cannot predict actual market performance.

Finally, regardless of whether you intend to expand, it is advisable to conduct a break-even analysis on your business every month. Salon owners also should have a demographic profile conducted on the target market.

All of this information will guide you in the successful operation of your business, whether you have two tanning units in the back of beauty salon or a full-fledged 30-unit tanning salon.