How many of your clients come back again and again? It’s a lot more cost…
How to Know If Your Business is Really Healthy
Today we’re going to dive deep and talk numbers, and before you click away because I know some of you just thought “nope, ain’t doing it! I hate that part of business” or whatever…sorry, but if you want to be a business owner, act like it and know your numbers. So let’s get into the numbers you need to know and what they mean for your business.
Key Performance Indicators, also called KPIs, are critical clues that measure your progress in business, and as such are something you absolutely must keep a constant eye on. These are basically indicators of what’s happening within your business and where it’s headed based on that performance; allowing you to not only track all those important metrics, but keep such a clear view of what’s happening in all aspects of your business that you can adjust and stop catastrophes from sneaking up on you. This is how you know how healthy your business is or isn’t. Oftentimes, a business’ failure isn’t a real surprise if these KPIs are being tracked; they lay out everything right in front of you, and you can easily see where the problems are before they grow to an unmanageable size. But if you’re not tracking these KPIs, major problems can arise before you even realize you have a problem at all.
While a lot of business experts have differing opinions on what are the most important KPIs, it varies widely between industries. So here’s what I believe to be crucial metrics you need to always be mindful of as a massage practice owner. And please keep in mind that these numbers are completely arbitrary and are only for examples, ok.
#1 Gross Profit
Gross profit is the money your business makes after you take out your direct costs of that service or product. For example, let’s say you have employees and you charge $75 for a 1 hour massage with them.
Your direct costs of that 1 hour massage…
You pay your employees $15/hr + 20% commission.
The supplies for that massage add up to $5.
That means you’re direct cost to provide that massage is $35.
So since your direct cost is $35 and you charge $75, your gross profit is $40 per massage.
Pretty simple so far? You’re just figuring out what it costs to provide that service, subtracting that from what you charge for the service, and what’s leftover is your gross profit. But the problem here is that most small business owners only focus on this gross profit. There’s more to the story, and is much of the reason so many therapists and business owners don’t understand where their money is going, and why they’re not making more.
For that, you have to keep track of
#2 The net profit
Net profit is when you take your gross profit and subtract all your overhead (marketing, receptionist, phone, internet, website, downtime for employees, utilities, rent, and everything else). Even more simply speaking, you take your sale and subtract your direct and indirect costs. That leaves your net profit – what your business actually makes.
#3 Costs or Expenses
This may seem obvious, but so many business owners only have a rough idea, if any, of what they’re actually spending in any given week, month, or year. It’s imperative to track and know how every single penny is being spent. If not, it’s unlikely that you’re spending appropriately based on your revenue; i.e. spending more than you can really afford.
#4 Expenses vs budget
There are few things as important as tracking how much you’re spending, and on what. That’s why following a budget can help any business stay on track. You allot a certain amount each week or month for specific expenses and do your absolute best to not overspend. No matter if you’ve been using a budget for years or you’re just starting, you’re going to need to stay on top of comparing those expenses to your budget. It’s far too easy to overspend, and staying in constant comparison is the only way to ensure you don’t.
#5 Client Acquisition Cost
How much money do you spend to get each new client in the door? If you’re not sure, this is the number you absolutely must come to know; and it’s pretty simple to calculate. Just take the total amount you spent on ALL marketing efforts, and divide it by how many clients you got with those marketing efforts. For example, if you add up all your marketing costs (Facebook ads, email provider, website, events, etc. and don’t for the love all that is holy, don’t forget to add in your hourly rate for all the time you spend doing this stuff!) to see you’ve spent a total of $5,000 over the last year on marketing to new clients. And let’s say you got 100 new clients directly from all those efforts. We take 5,000 (money spent) and divide that by 100 (new clients). That would be $50, right? So that means it cost you just $50 for each new client you had. Get to know this number, so you know if you’re actually making money on those new clients or not. If those 100 clients only ever came in for one appointment and you charge $50, then you broke even. You really made no money off of all that effort. So you’ll need to look at increasing their spending each time or their rebooking. So this brings us to…
#6 Average client spend
While you may know off the top of your head that your one hour session is the most popular, is that the same thing as the average client spend? Maybe not. What about all those add-ons that clients take advantage of? Or the products you sell? Or the gift certificates they buy, even if it’s just a big chunk around some holidays?
Determine how much on average, each client spends with you. The easiest way to do this is to look at the total sales for a period of time and divide it by the number of sales during that same time. For example, let’s say your total sales for last year was $50,000. And you had a total of 500 sales (not clients, but sales/transactions). That would be $100 on average per sale, or a $100 average client spend.
Knowing this number allows you to keep track of if this is increasing or decreasing from week to week, month to month, and year to year. Plus, it’s a great metric to build goals around. If your average is $100 per sale, then how can you increase that by just $5 per sale over the next month? Over the next year? Even with the same number of sales, that $5 increase on the average sale would give you an extra $2,500 per year in added revenue!
#7 Number of clients
This is pretty simple, how many clients are you seeing? You can look at your average number per week, per month, and through an entire year; but it’s important to have a solid understanding of how many people are actually coming across your table. This will not only allow you to calculate these other numbers easily, but also let you quickly see the fluctuations that can happen from month to month, season to season, and in relation to local, business, or economic changes. Plus, this gives you a great basis for goal setting for increasing, decreasing, or maintaining that number.
#8 Client Lifetime Value
The client lifetime value is a number that shows you basically what your average client spends with you over a certain period of time. Hopefully they’ll stay with you for years and years and that only increases their lifetime value, but even if you just look at this one year at a time, it’s a great metric to track. So look at the last year (or whatever time frame best suits you right now) and see how many individual clients you had. Now you can either look at what each one of them spent over that time, or simply use that average client spend you should be tracking anyway and apply that to the average number of visits per client over that time. Seeing how much people spend over their entire relationship with you is a great indicator as to what each of those clients really means, as well as what investments are reasonable or not, especially concerning client acquisition.
#9 Rebooking rate
You absolutely must understand how many of your clients are rebooking, or returning again and again. So if you look at the last 6 months or the last year, what percentage of new clients rebooked with you?
While you can figure out this rate for any amount of time, it may be a good idea to look at a few different angles to this number. You can find your rebooking rate for each month for the last 6 months, and then the rebooking rate for that entire 6-month period. So for each month, how many different clients did you have, and how many of those people came more than once during that month? That gives you your short-term rebooking rate (how many people rebook at least once per month). Then, take the total number of people you had for the full 6 months, and see how many of those came more than once during that 6 month period. That gives you your long-term rebooking rate (how many people rebook at least every 6 months). You can do the same for a year, or over the lifetime of your business.
For example, if you had 300 different clients over a certain period, and 100 of those came back more than once during that period, then you take 100 divided by 300 and that gives you .33, and that decimal just gets moved over to give you 33%. You have a 33% rebooking rate for that period of time, meaning 33% of your clients rebooked. Knowing that number allows you to see fluctuations and adjust to keep it climbing higher and higher.
While there’s a lot numbers to track in a business, these are some of the most important to know. Understanding and being able to easily check these KPIs at any time will ensure you are truly in control of the health of your massage business. So if you don’t know these numbers yet, set aside just a little time to figure out where you’re at right now with all of these. Then you can create a plan to move forward, improving these numbers. Seriously, if you don’t understand your numbers, your business will never take off like you want it to. If you’re going to be a business owner, act like it and get over your fear or avoidance of this seemingly boring stuff. I mean, this is how you know if your business is healthy or not! Why wouldn’t you want to know that? One of my favorite quotes is from Jon Acuff; “Data kills denial, which prevents disaster.”