The Simple Lessons We Learned Making A 500% Return Growing A Hair Salon

This is the story and important lessons we learned in figuring out how to make a salon successful.

October 1st, 2016, I received the keys to my first small business, Arrowtown Hair.

I owned Arrowtown Hair from October 2016 to March 2019.

During that time, the salon generated $599,459 in revenue and made an operating profit of $87,538. (screenshots of proof at end of article)

I purchased the salon for $125,000 + Stock ($128k) with a mixture of bank debt ($60k), vendor finance ($30k) and cash ($35k) and two and half years later I sold for $170k + stock ($185k) for cash ($60k) and vendor finance ($125k).

Combining the after-tax operating profit of $63k with the return from sale of $219k ($185K sale + $34k of vendor finance interest payments) total cash generated from the business was $282k. Less debts of $60k (bank loan) + $30k (vendor finance) the net cash return is $192k on an initial investment of $35k. A 450% Increase | 5.5x return over 2.5 years.

More important than the dollars generated though were the lessons I learned from this business adventure that I’ll share below.

As John Kavanagh (world-renowned MMA coach) likes to say ‘Win or Learn’.

 

Before You Buy A Salon Do Proper Due Diligence

 

When I purchased the salon, the team included a head stylist, a senior stylist and a part-time senior.

On our first day of ownership and before the doors had opened, I received an email from the head stylist. She informed me she wasn’t happy with her pay and the conditions of her job. She believed she was underappreciated, underpaid and asked for a ~30% pay rise, accompanied with a politely said ‘take it or leave’.

I thought I’d call her ‘bluff’ and declined the offer.

It turns out she wasn’t bluffing, and before I had time to process what was happening she visited the salon, packed up her things, told her clients she was leaving and moved on.

I didn’t know anything about a ‘client base’ at the time. Turns out salon clients are very loyal to their stylists, generally they’ll often go wherever their stylist goes. We lost $90k in annual revenue overnight.

Not a good start.

Not long after that, maybe a week. The senior stylist also informed me she wasn’t happy with how the salon had been running and was pretty close to leaving herself. However, rather than issuing me an ultimatum, she was willing to talk it through and see if we could come to terms.

If she’d left as well, I think I would have had to close the doors for good.

Eventually, after back and forth emails and uncomfortable phone conversations, we came to an agreement. She would stay on and become the salon manager for a $10k pay rise.

She could have asked for more too – I didn’t have much choice but to concede. Maybe she took pity on me? Within the first month of owning the salon, revenue was down 40%, and our operating profit dropped below zero.

Bearing in mind pre-purchase the projected profit for the first year was $50k

Lesson = Do your due diligence.

Before buying the salon, the previous owner refused to let me speak with or meet the staff until I’d signed the sale and purchase agreement. Even then, I couldn’t talk with the team until two days before we opened the doors.

The previous owner had been living in England for six months before the sale and left the place to run itself. This left everyone disgruntled and a myriad of unresolved issues. I walked into a shitstorm that I didn’t see coming.

Your Salon Staff Are Your Most Important Asset

By the time 2017 rolled around, we were doing okay.

We had a record December trade, the stylists were making good money (commissions), and they even enjoyed some time off over Xmas.

Because the place had been so busy, we thought it was the right time to add to the team. We found another stylist who was keen to come on board, and the team was back up to three.

Business continued to pick up, and by the end of the financial year (March 31st), we were starting to gain momentum. In our first three months we made a $5k profit, during our second three months we made a $10k profit.

I thought everything was under control. Not quite.

In April that year, our junior stylist decided to move to Australia, and a month later our manager decided she was ready for another overseas adventure.

The first time we lost our head stylist, we were heading into the busy period. This time we weren’t so lucky. We lost our manager and junior stylist coming into the ‘shoulder’ season, a notoriously quiet time for Arrowtown.

Our profits turned to losses, by May our annualised revenue had dropped to $150k the lowest it had been for three years and we started losing over $3,000 a month.

Just as worrying was our only remaining stylist was having to slog it out by herself. I thought it’d only be a matter of time before she left as well.

Lesson = Staff are essential; good staff are everything.

That was the last time I took the people I work with for granted.

The last remaining stylist stepped up to the management role and helped turn the place around. By the end of that year, we’d hired two new full-time senior stylists and a third part-timer. Annualised revenues were back up to $240k (what they were before we bought the salon) and we were back in the green.

All in all, it took us 15 months of ups and downs to get back to where we started.

Focus On The Salon Clients Already On Your Books

By early 2018 we could see some of the positive effects of decisions made earlier the previous year.

Sometime earlier in 2017, my team came to me with the idea of new loyalty cards and a referral system, as we were starting to get the odd referral here and there and clients were asking for loyalty cards.

This turned out way better than I expected. Over the next ~ two years, we gained 185 new customers, from referrals.

Repeat business from regulars picked up as well.

At a conservative estimate our loyalty and referral system generated us $135k in revenue over 2’ish years or 28% of total revenue under my ownership.

Without that revenue, the salon would have run at a loss for the entire time I owned it.

Introducing a loyalty system was nothing new or innovative, but it worked.

The only thing different that we did was set the rewards higher than usual—none of that free coffee on the 10th coffee rubbish.

Every third visit our clients got 10% off any service and every 6th visit our clients got 30% off any service. On top of that, anytime they referred someone new to the salon, we gave them another 25% off their next visit.

Of course, people gamed the system and used the discounts on their big once a year $400 balayage service. I wouldn’t be surprised if our stylists encouraged them to do it. If they did, I’m glad because It worked.

I should point out that a referral system by itself won’t do much good. We looked after our clients with good service and gave them a high perceived value for each visit. They wouldn’t refer us to friends if we didn’t. The clients that refer you to their friends are your best customers and the ones your want to focus on most.

After taking over as salon manager in September 2017, Amelia built many close relationships with the salon’s top clients. She drove business improvements that aligned with our clients values, giving them a continually improving experience.

These relationships and experience improvements compounded the positive returns of the loyalty systems.

In the 18 months since we sold, the new owners have continued developing the client experience and in that time they’ve received 320 client referrals. That’s 2.5x the rate we achieved.

Lesson = If you look after your customers, they’ll look after you.

You Need To Regularly Raise Your Salons Prices

I remember the first time our manager asked if we could raise our prices, she’d noticed we were the cheapest salon within 50 kilometres at that time and thought that wasn’t right.

This was circa March 2017 We’d just been through a pretty nerve-racking experience, losing our head stylist and losing a lot of clients with her. I was scared; I thought raising our prices would cause even more people to walk out the door.

Our team thought we were a high-quality salon but weren’t pricing ourselves as one.

I think they also felt undervalued. The prices our clients were paying was indirectly signalling what the stylists’ skills were worth. On top of that, part of their pay’s were incentives, the more we charged per appointment, the more they would earn.

I guess I was guilty of not appreciating the great work the team was putting in and the experience they were providing.

We decided to increase our prices by ~10%. We barely lost any clients and generated a noticeable increase in revenue.

Lesson = Raise your prices.

The thing is If you truly believe in what you’re selling. People will be willing to pay for it.

Increasing prices isn’t greedy; it’s just common business sense. Over time if we didn’t increase them, we’d end up out of business. Like clockwork, our operating costs kept increasing and we needed to keep up.

After the fact, I realised raising prices rewarded our regulars. See we could afford to offer bigger loyalty bonuses, we could afford to give them free coffee’s; we could afford to buy them the magazines they wanted to read and so on.

The extra revenue generated gave us more play money for the salon that we could spend on the people who supported us.

We raised our prices another two times while I owned the salon, and the new owners have subsequently raised them more. Without fanfare or lost clients.

In 2016 our average order value was $82.17. By 2020 the average order value was $107.39. That’s a 30% increase over four years, which translates to a significant improvement to the service we can offer and our bottom line.

One pointer I picked up from this process that I’ve now applied to other businesses is when you raise prices, always give a little more. For example, a couple of those price rises at the salon coincided with a salon makeover, a new product range, and our loyalty cards’ launch.

Only A Few Decisions You Make Will Truely Matter

As I dissect the events that unfolded while I owned the salon, I can see a few critical decisions produced most of the outcome, i.e. the 414% ROI.

I used to think, that every decision was just as important, but that’s just my ego talking.

In reality, I can count on both hands the number of decisions that lent to more than 80% of the positive outcomes we achieved at the salon.

Here’s a few of them.

1. Hire good staff

Good staff are worth their weight in gold. I was lucky to hire a couple of good ones. I don’t think there’s a decision more important as a small business owner than deciding who to hire.

I’d assess my career hiring success rate at around ~50%. I’ve made some good calls and some terrible calls. At the salon, I was lucky enough to make more good calls than bad, which led to many good outcomes.

I haven’t figured out a way to do this consistently yet. What I do know is personality or the person’s values are far more important than their qualifications or work experience.

2. Let your staff make decisions

Without recognising what I was doing, I continually ‘pushed decisions down the chain’. This means letting the people closest to the action make the decisions. I.e. the ones serving your customers and operating the business.

This led to decisions like

Becoming a sustainability-focused salon

Raising prices

Introducing a loyalty system

Taking on new product ranges

3. Look after your staff

I always paid or tried to pay our staff above-market rates.

I invested in their development with cutting courses and several other training sessions. I shouted them dinners. I spent $100’s of dollars on their Xmas presents.

I continually tried to show them my appreciation.

Because the staff felt appreciated and acknowledged they put their best foot forward for the salon and went that extra mile when they otherwise mightn’t have.

I don’t have any quantifiable data to back this up, but I could see in my staffs’ actions and the conversations we had, that they cared for the place and I’m sure a part of this was driven by them feeling appreciated.

Also, it’s just the right thing, todo. Virtually no one wants to spend 40+ hours at work a week. Acknowledge that.

4. Act for your clients

I decided early on that we would try to make all decisions in our clients’ best interests.

This one big decision to focus on clients led to many trickle-down decisions that all contributed to providing a high-value experience that far exceeded what other salons offered.

We did things like;

Free barista coffee for all appointments

Customer loyalty cards

Magazine subscriptions

Environmentally friendly products and aesthetics

Free weekly yoga classes

Acting for clients’ best interests was a great long-term decision that provided a compounding ROI.

5. Zig when your competitors Zag

Operating a hair salon in Central Otago is highly competitive. To ‘beat’ the competition we just went where they weren’t.

Given we’re talking about 2016, 2017, 2018 it sounds silly to talk about using social media to be one of these moves, but none of our competitors was on them.

We also built relationships with some local influencers, we looked after them, and in return, they talked about us. Again no other salons were doing this at the time.

We invited local media peeps to the salon to try us out. One of them ended up doing a news piece on us with a video crew n all.

While other salons were advertising in newspapers and radio, we went everywhere else and had no competition for a while. Of course, over time, our competitors caught on and started copying us. If I owned the salon today, I’d be looking for new places where the competitors aren’t like Youtube. Learn how to win on Youtube here.

Old Lessons Are The Best Lessons

I know these lessons aren’t anything new or innovative. The thing is, I’d heard these all before myself and yet I didn’t follow any of them. I stumbled onto them by trial and error.

I think the problem with common sense lessons is because they are so common it’s easy to write them off. Perhaps we subconsciously believe that it won’t help if everyone else is already doing it. Maybe common sense is too obvious. I’ve been guilty many times of looking for the ‘secret’ idea’s that no-one knows about.

Fortunately or unfortunately, the obvious common sense stuff works, and it’s all any of us need to do well.

I’ve applied these lessons to other ventures and seen the same positive results. In fact, I developed a framework from these lessons for growing any small or new business which you can read about here.

See financial proof below.

2017 Financial Year Results (6 Months Trade)

2018 & 2019 Financial Year Results

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