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The Wellness Capital Management Economy. What Really Happened In 2011?

As you already know, I'm a stickler for numbers. In addition, I have an on-going feud with the data and research that is done for the health, wellness, and spa industries. I feel that the data is not verified and that the method of reporting and analyzing data leaves much to be desired. The data that we have used historically to analyze and plan our businesses is inconsistent to say the least. I'm constantly asked what type of return (Net Income) someone can anticipate in a Day Spa or Med Spa. Many physicians tell me they expect to earn 20% on their Med Spa investment. There is some Spa industry research that touts that Spa Net Income is 18%. I respectfully disagree.

So, it's time I put up and shut up. Wellness Capital Management (WCM) manages the budgets and bookkeeping for many businesses in these industries. That said, I have compiled and consolidated the data I have so I can present an accurate, consistent, and verified summary of how the businesses within the WCM Economy performed financially in 2011 compared to 2010. Whereas I do not purport that these numbers represent industry-wide trends or financial standards as many pollsters in our industry may, I can represent them as accurate numbers of real businesses in our industry. So, using the language of WCM's "6 Numbers You Need to Know to Manage Your Business", here we go.


Spas in the Economy experienced an average sales volume (product and service sales) of $824,240 in 2011. This is up 18.1% from $698,105 in 2010. The WCM Economy is comprised of 56% Day Spas and 44% Med Spas. The average Med Spa sales increased 24.6%, from $437,123 in 2010 to $544,610 in 2011. Day Spas increased 15.6%, with average sales increasing from $906,874 in 2010 to $1,047,943 in 2011. So does this increase show that our clientele is coming back? Yes and no. We are seeing increasing spa visits; however, due to coupon websites and savvy competition, the selling price for our services has actually decreased. This has caused us to weather the current competitive situation and hold service prices stable.

Direct Labor

Direct Labor includes practitioners, service providers, front desk, attendants, and everyone on payroll except the General Manager and bookkeeper. This category also includes all payroll taxes, Workers Comp, TIPS, and benefits. Decreasing the selling price of services has caused an increase in Direct Labor Cost. As a percentage of total sales in Day Spas, Direct Labor Cost increased from 50.2% in 2010 to 56% in 2011. In Med Spas, the increase in Direct Labor was less dramatic as it increased from 29.7% of total sales in 2010 to 31.5% in 2011. Looking at the combination of Day Spas and Med Spas, Direct Labor Cost as a percentage of total sales increased from 44.5% in 2010 to 48.8% in 2011. In past years, we were able to manage this to 42%. We are working to get back to that level.

Total Direct Costs

In addition to Direct Labor, Retail Purchases, Back Bar/Professional Products/Medical Supplies, Credit Card Discounts, Laundry, and any other costs used to provide services to clientele is Included in Total Direct Costs. Including Direct Labor, the target for Total Direct Costs is 70% or less. In the WCM Economy, Total Other Direct Costs increased from 64.4% of Sales in 2010 to 66.8% in 2011. In Day Spas, Total Direct Costs increased from 69.0% to 69.3% of Sales. In Med Spas, Total Direct Costs increased from 52.3% to 60.8%. This increase shows what happens as prices are driven downwards. Med Spa costs are lower because the selling prices for services are higher, and when managed correctly labor costs are lower as a percentage. Day Spa Direct Costs are about as high as they can afford to be. In the WCM Economy the Direct Costs required to provide services increased in 2011 compared to 2010. If this stabilizes, we're going to be okay. If we anticipate that service prices are going to stabilize or decrease, we will need to re-evaluate our costing structure. Perhaps there is better margin on retail products. We may be able to adjust our compensation for payment on service ad-ons. For now, we're under 70% at 66.8% which is netting us a Gross Margin (Sales minus Direct Costs) of 33.2% of sales. This forces us to focus on cost control for retail and professional product. We need to control our treatment room and make sure that we aren't over-using professional product. We also need to make sure that we have good control systems for our retail inventory.

Overhead Expenses

WCM Economy clients target Overhead Expenses to be less than 30% of Sales. These monthly expenses such as advertising, repairs, rent, insurance, travel, office expenses, telephone, and utilities do not fluctuate much from one month to the next. We've used the downturn in the economy to re-negotiate our leases and contracts. We're constantly re-evaluating long-term plans for telephone and insurance. We don't let advertising programs get out of whack and we watch office supplies to make sure we're not wasting money. Yes, it takes effort and attention, but in the end you can see WCM Economy Overhead Expenses were 27.1% in 2010 and 25.3% in 2011. Day Spa Overhead Expenses were 25% in 2010 and 23.6% in 2011. Med Spa Overhead Expenses were 32.3% in 2010 and 29.4% in 2011. A little effort goes a long way.

Net Profit

The bottom line. The amount of money I have left to service my debt. The measure of whether this business is working is my Net Profit. It's the reward, the promised land, the grail.... No, it's not 20% or 18% as much of the industry research claims. Net Profit for all Spas in the WCM Economy was 7.9% in 2011. This is down from 8.6% in 2010. Net Profit in Day Spas was 5.9% in 2010 and 7.0% in 2011. In Med Spas, Net Profit was 15.4% in 2010 and 9.8% in 2011. As my grandfather used to say, "You'll never go broke making a small profit".

Debt Service

No net, no debt. Good advice, but it's not heeded by many spa operators. My clients work to negotiate their debt so that it doesn't exceed 50% of their Net Profit. This leaves 50% for something that may be a foreign concept to many of you; operating cash reserve. "What's that?!" I can hear many of you asking. It's surplus, boot, gravy, float, security, rainy day cash, savings.... I'm happy to report that Debt Service in the WCM Economy was 1.4% of Sales in 2011 which was down from 3.1% in 2010. Debt Service in Day Spas was .5% in 2011 down from 1.5% in 2010. Med Spa Debt Service was 3.7% in 2011, down from 7.2% in 2010. Yes doctor, those lasers are expensive.

The Big Picture

Yes, Spas in the WCM Economy are profitable. They are, however, not as profitable as the industry research suggests. While the WCM Economy is a small micro-economy of the reported 12,000 Day Spas and 1,800 Med Spas in the US, it does help us identify how some well-managed businesses operate.


My challenge to you is to compare how your business did from 2010 to 2011 when compared to those in the WCM Economy. Do any of these numbers surprise you? Was your sales growth as strong? What are your percentages of Total Sales for Labor Costs, Direct Costs, Overhead Expenses and Debt Service? Were you as profitable? We're making changes and implementing strategies and plans to move forward in the WCM Economy. Are you?

I'm available to discuss this with you if you have questions. As always, the first call is free. What are you waiting for?