In the Summer 2019 issue of PetGroomer.com Magazine we presented formulas and charts for time-range based grooming prices (see link below). What this means is that prices are set by 1) knowing the business hourly rate for grooming services (not shared with customers) and 2) multiplying that rate times the expected time needed for the grooming service. We will provide an example just ahead.
Most groomers never set their grooming prices equally fairly for all customers using time-range based grooming prices. Not only that we have found groomers are undercharging large dogs as a result, losing potential profit. Let’s do a quick review of the last article because we have another hourly rate to introduce in this follow-up article. (The original hourly rate for grooming prices was discussed in this blog post https://groomwise.typepad.com/grooming_business_in_a_bo/2019/08/using-the-time-range-grooming-price-system-worksheets-.html).
Whether or not they know it, every grooming business has an hourly rate built into their grooming prices, and ideally that rate should be equally used in setting literally all grooming prices quoted or printed in signs or price sheets. Careful, don’t get confused with groomers that “charge by the hour.” We are not talking about charging by the hour. Most customers want to know the actual cost they face before they return to pickup their pets.
All grooming prices you set and quote should be based on one business hourly rate for grooming services. It is easy! For example, Sandy’s base rate is $90 for a Standard Poodle and she figures the entire groom takes 90 minutes. Divide $90 by 90 minutes, and we see her price is $1 a minute for the Standard Poodle, or $60 an hour. Her business hourly rate is $60, and all of her grooming prices reflect the same method of calculation. Or so she thought.
Now wait a minute. Sandy’s price for a full groom Bichon is $50, and she figures 60 minutes to complete the service. Why is it $50 when at $1 a minute it should be $60? Most groomers provide price sheets that are way out of balance like Sandy’s. In fact, large dogs are often billed $10 to $15 less per hour. That is a big loss of income for some grooming businesses. It’s important to set a business hourly rate and to apply it evenly to all stated grooming prices.
Now let’s move on to another hourly rate, but it is not related to grooming prices. We have never met a grooming business owner that knew this hourly rate. What is the rate called? Your hourly cost of doing business.
Is it important? Indeed it is if you are to make a profit which provides personal income from the business for the owner, and staff if any.
Doesn’t it make sense that your business’ hourly rate for figuring grooming prices had better be higher than your business’ hourly rate of costs to operate. If not, how will you cover all operating expenses, and make a profit?
If your grooming prices are based on selling services at $60 an hour, your hourly cost of operating had better be well below $60 an hour. If not, you could be headed for financial problems or very low profit.
Knowing your business’ hourly cost for operating is not a difficult task to calculate. Certainly your accountant could assist you. Many of the numbers you need are available in your business tax returns. In traditional accounting terms professionals use the term “break-even.” We want to keep it simple here.
Generally the lower the hourly cost of doing business the more potential profit, yet quality and safety must be maintained. We are going to show you a way to calculate a general estimate of your hourly cost to operate your business. To make it even easier we will use an example for a one person grooming business owned by a sole-proprietor.
If you want calculate a truly formal financial break even projection, use Business Plan Helper, by Grooming Business in a Box®.
The first step is to calculate your annual business operating expenses. This includes rent, utilities, insurance, phone, supplies of all kinds including product and office, professional fees like a bookkeeper, sharpener, and license and fees too. Include interest expense on business loans too.
If you are already in business, the IRS requires you to annually list all operating expenses on the Schedule C you attach to your long form 1040. It is called the Profit/Loss from Business. Easy, check out the last one you filed for a quick answer to your total annual operating expenses. If you have never filed a Schedule C you can download a copy from the IRS forms site and fill one out. Now you know your annual cost of operating expenses. Hold onto that number.
It’s time to do another simple calculation. For the tax year represented by the Schedule C, how many hours were you (or will be) open for business?
For example, many businesses open Tuesday through Saturday throughout the year. That is 260 days a year (52 weeks times 5 days a week). If you were open 9 hours a day, multiply 9 hours times 260 days. The result is 2,340 hours of operation during a tax year.
Now refer to the Schedule C total cost of operating expenses. Let’s assume the total operating expenses were $42,500.
Divide $42,500 by the total hours of operation, 2,340 hours. The result is $18.16 an hour, rounded to $18 an hour. The hourly cost of doing business is $18 an hour. Remember this is a very general estimate. Well done.
Now it is time to compare the two hourly rates for the business:
- Hourly Rate (for pricing)
- Hourly Rate (for cost of operation)
In the last issue of PetGroomer.com Magazine the grooming business owner working alone set her prices based on a $60 an hour rate for pricing. Let’s use that figure here.
We know the hourly cost to operate a business was $18 an hour in the last example, and $60 is the business hourly rate for figuring grooming prices. What is most important is that the hourly cost ($18) is much less than the hourly rate used pricing ($60). That’s critical to earn a profit for a sole-proprietor owner.
Our rule of thumb for a sole-proprietor business is the hourly rate for setting prices should be 3 to 4 times higher than the hourly cost of operating the business. The $60 hourly rate is a little more than three times higher than the $18 hourly cost of operating. Right?
The $42 difference between the $60 hourly rate and the $18 hourly rate is the gross income for the sole proprietor. Remember the sole-proprietor groomer still has taxes to pay on the profit from the business. There may be additional costs such as loan principal to pay as well. If you want to calculate that formally, use Business Plan Helper.
However, our quick rule-of-thumb estimating here is a good quick indication if you are on the right track with both prices and costs.
Remember your business hourly rate for figuring grooming prices should normally be 3 to 4 times higher than your hourly cost of operation for sole-proprietor, one person businesses.