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get your money’s Worth (CONTINUED FROM PAGE 33) financial statement, they can bring more value to your compensation package than their cash value alone. “hoW ShoUld I Set mY PrIceS?” With so many factors to consider— profit maximization, perceived quality, perceived value, costs, competitor’s prices—it’s unsurprising that spas often ask about the best methods for pricing services, according to amy martin Duarte. The most common approaches, especially at small, single-propri- etorship spas, are informal. This includes setting prices based on what other spas nearby charge (competitive method), what the spa operator feels guests are willing to pay (intuitive method) or what the spa operator believes guests expect to pay (psycho- logical method). however, none of these models consider the most important factor in pricing: your cost. a markup-based approach or a bottom-up approach are better ways to price out your services, according to Financial Management for Spas¸ because they consider cost. in a markup approach, you first determine the direct cost of the service, then add the desired markup percentage. The bottom-up approach starts by considering desired bottom- line profit first. Then, you work backwards by calculating necessary pre-tax profit, the revenue necessary to generate that profit and cover expenses, and finally dividing that revenue figure by the number of services expected to be performed. The result is revenue per treatment, otherwise known as price. it goes without saying, though, that a scientifically calculated price is only viable if customers are willing to pay that price, which itself is dependent on what competitors charge, what your spa previously charged and the perceived value of the service. Still, it’s recommended that a spa’s pricing model be funda- mentally cost-based. n sample Bottom-up Pricing Total Capital Invested Required Rate of Return on Investment required return $590,542 10% $059,054 Add: Earnings Before Taxes (at 35 percent) $090,853 Fixed Charges Interest Expense Depreciation Property Taxes Insurance $124,800 180,000 23,500 10,250 Undistributed Operating Expenses Administrative and General Sales and Marketing Facility Maintenance & Utilities $071,300 42,500 54,750 Required Department Income $597,953 Direct Expenses (direct payroll and expenses) Payroll (including benefits) Other Direct Costs $109,200 81,300 Total Service Department Revenue $788,453 Unitary Services Anticipated Price per service (rounded) 6,572 $000120 the isPa academy T here are a wealth of financial resources available to you as part of your ISPA Membership, including the online isPa academy. Much of the information contained in this article—in fact, the entire Financial Management for Spas textbook—is available at the Academy with just a few clicks. You can also learn more about the Uniform System of Financial Reporting for Spas and receive guidance on how to decipher financial reports. The best part? All of it is written by financial experts or veteran spa operators who have mastered the financial side of spa. To access the ISPA Academy, visit experienceispa.com/ispa-academy and log-in to your member account. 36 PULSE ■ MAY 2019