The "leaders get paid last" myth

Or as I used to say, "I'm just reinvesting in the business"

For years, I took draws to pay myself. In good months, I paid myself well. Slow months, not so much. This approach felt responsible at the time because I believed I was building something. “Reinvesting,” as it were.

What I was actually doing was treating my own compensation as optional.

I ran my studio as a sole proprietor for way longer than I should have. When I eventually applied for S-corp status with the IRS, the structure required me to pay myself a reasonable W-2 salary. Essentially, paying myself what I would pay someone else to do my job.

I started small, maybe 40k. It was a big step for me as a studio owner to have a regular paycheck on direct deposit. It wasn’t quite enough for my expenses, but I supplemented with draws whenever the studio had a good month.

Still, for the first time, my salary was a line item on the bookkeeping report. And it changed everything for me, including how I priced our services.

So when a coaching client tells me she’s fully booked but financially unstable, I have a specific sequence that we walk through to secure her spot on payroll.

Here’s the breakdown:

Expenses

Not all expenses are fixed. Some are habits, like the subscription that made sense two years ago, or a vendor relationship that hasn’t been renegotiated. Soft costs accumulate quietly. This is a good place to start because it is the one place you have immediate control.

Payroll

I covered payroll ratios in Issues 3 and 5. For a boutique studio with a teaching team, payroll and instructor costs should max out at 40% of gross revenue. If you are above that range, a painful but necessary shift needs to happen.

Rent

And this is where it gets hard. Industry benchmarks for boutique fitness put rent at under 15% to 20% of gross revenue. When your lease runs above that threshold, it can hamstring you for years. Unfortunately, I have been there.

In this case, the only real lever is revenue.

Pricing

Many studio owners set rates by what the studio down the street charges. But competitors are increasingly made up of private equity and well-funded franchise networks. Austin is filled with them. Those studios offer rates that reflect their overhead, not mine. Benchmarking against them is a trap. An independent studio simply cannot compete with pricing that reflects a regional or national budget.

So I recommend a different exercise: pricing based on your overhead and owner pay. This is a completely different exercise than benchmarking against competitors. And for most studio owners, the number it produces can lead to sticker shock.

But there is a way to get there. I’ve done it myself many, many times, and I’ve stepped others through dramatic changes as well. So if you’re struggling to get yourself onto payroll consistently, take heart.

This summer, I reworked Somaspace’s pricing from a new perspective. I let our expenses get very lean, took a hard look at occupancy costs and built in a payroll budget to accommodate a teacher’s well-earned pay raise. Maybe I’ll get one, too.

I’ll share my methodology next week, including the revenue target I arrived at and the research behind it.

We’re nearing our busy season in Austin, and that’s always a good time to look at pricing. If you’re there, too, let me know how it’s looking.

-Amanda