The 20% Off Coupon
A four-chair salon in Enugu averages 600 client visits a month at an average ticket of ₦6,000. Fixed monthly costs are ₦1,200,000: rent ₦600,000, utilities ₦250,000, insurance and licences ₦100,000, and the owner's draw ₦250,000. Product cost runs at 20% of service revenue and stylists are paid 35% commission on the price actually charged. The owner proposes a 20% discount from Monday to Thursday to 'fill empty chairs', forecasting a 15% rise in visits to 690 a month. Stylists will receive commission on the discounted price. Each stylist currently sees about six clients a day and the salon can comfortably handle 900 visits a month. The accountant says the promotion is safe because revenue will still be above ₦3 million. Two senior stylists are worried that clients will expect the discount permanently.
1. Calculate the salon's current monthly profit and the profit if the 20% discount produces 690 visits. Show your working.
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Current revenue is 600 × ₦6,000 = ₦3,600,000. Variable cost is 20% product plus 35% commission, so 55% of revenue = ₦1,980,000. Contribution is ₦3,600,000 − ₦1,980,000 = ₦1,620,000, and profit is ₦1,620,000 − ₦1,200,000 = ₦420,000. Under the discount the price becomes ₦4,800. Variable cost per visit is 55% × ₦4,800 = ₦2,640, so contribution per visit is ₦2,160. At 690 visits, total contribution is 690 × ₦2,160 = ₦1,490,400. Profit is ₦1,490,400 − ₦1,200,000 = ₦290,400. The promotion therefore reduces monthly profit by ₦129,600. The accountant's focus on revenue above ₦3 million is misleading: revenue is not profit, and the 55% variable cost means almost half of any discounted naira is lost before fixed costs are covered.
2. How many discounted visits are needed to keep profit at the current level, and what does that imply for the forecast?
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To keep the ₦420,000 profit, total contribution must equal fixed costs plus target profit: ₦1,200,000 + ₦420,000 = ₦1,620,000. Divide by the discounted contribution per visit of ₦2,160: 1,620,000 ÷ 2,160 = 750 visits. That is a 25% increase over the current 600 visits. The forecast is only 690 visits, a 15% increase, so it falls 60 visits short and lowers profit. The 750 visits are within the stated capacity of 900, so the volume is theoretically achievable, but the salon would need to attract 150 extra visits, not 90. The forecast may also be optimistic because existing clients may simply shift their visits into the discount period rather than spend more. That cannibalisation would make the shortfall larger than the calculation suggests.
3. Recommend a pricing action and explain the non-financial risks the owner should consider.
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Avoid a blanket 20% discount on every service. Protect the headline price and target the empty Monday-Wednesday slots with a narrower offer: a first-visit incentive for new clients, a fixed-price add-on such as a deep-conditioning treatment with a colour service, or a loyalty card that rewards the fifth visit. An add-on can work because its product cost is low and it does not cut the price of the core service. If a discount is used, cap it and set an end date. Non-financial risks matter: clients may anchor to the discounted price and refuse to return to full price; senior stylists may see their commission fall and leave; and the salon's positioning as a quality salon can be damaged by permanent discounting. Staff should be consulted before launch, and the promotion should be tracked by new versus returning clients so the owner can see whether it is buying volume or merely discounting existing demand.