Case Study: ARISE Day Spa

ARISE Day Spa: This is a fictitious company and this a case study that was done as an assignment for my MBA program. The case is linked below and my response is as typed. This case was actually extremely interesting to me (even though it is fictitious) because I am currently affiliated with a company that has many of the same missions right now, The Armory. I have seen many of the problems outlined in the case as well as numerous others. So, providing my best recommendation felt like a true and honest effort.

The Dallas ARISE Day Spa is currently showing unsustainable financial conditions. ARISE Day Spa operates on main value proposition of helping their clients achieve “integrated health and happiness plans” this success is levered on hiring the best providers in the industry and maintaining a low employee turnover rate. With this mission, in two straight years the company has reported losses of $448k and $387k. Market data from 2023 supports the macro trend that the day spa industry is growing with a large interest amongst startup and unique service offerings – clients are feeling more stress and are looking for solutions [1]. Suggesting Krista Chambers shouldn’t give up on her mission, but rather change her strategy on the pinch point problem: Hiring great PWCs and keeping them.

ARISE customers are overall not dissatisfied with their services when receiving it. However, ARISE Day Spa has failed in its main value proposition. The employee turnover over the two years was 31% and 54% with more departures than new hires in the most recent year. Internal statistics reveal that ARISE loses 55% of that employees’ clientele upon their departure, directly impacting the top and bottom lines. Consequently, ARISE truly is only as strong as their PWCs. If the structure is not in place for ARISE’s PWCs to succeed and remain happy, ARISE will never reach its sustainable revenue and operational goals. Until clients value the ARISE the brand over their PWC’s, they must operate under these conditions.

Literature has suggested that entrepreneurship firms must understand the dynamic nature of HR management in small and emerging enterprises. There should be a roadmap for evolution of organizational structure [2]. The HR system that supports the growth and establishment of the business can, often will, be different from the HR system that eventually sustains the business. Chambers can hold her head high that it’s not uncustomary to evolve an HR system. The business will be in a better position to disrupt when profitable with brand awareness.

Why are the employees leaving?

ARISE has taken on unique fixed costs amongst their competitors to attract top talent with benefits and fixed salaries. Salary/Wages alone currently representing nearly 70% of ARISE’s total costs according to exhibit 5a and 5b. In their two operating years so far, Spa and Salon has failed to cover wage these wage costs alone. Though PWC’s may appreciate their stable salaries and healthcare benefits, their true demands are probably elsewhere. ARISE hires top performers. According to Harvard Business Review, the top two things a high performer values at work is competitive compensation, bonuses, and merit-based awards. The lowest valued benefits include healthcare and workplace amenities. High performers will always seek opportunities for challenges, growth, and rewards [3]. Top performers know their service value. All they ask is a compensation structure to capitalize on their skills. True high-performers bet on themselves and place less value on stability offerings.

Exit interviews reveal a consistent theme: PWCs feel that their earning opportunities do not align with initial promises. Chambers assumed a 25% tipping rate, mirroring her own practices. Research suggests that tipping percentages decrease as bill sizes increase [4] [5]. ARISE's model hinges on increasing the bill size for all clients, but striving to reach initial tip projections may prove futile. Chambers must acknowledge the discrepancy between her projections and reality.

The recommendation for change includes decreasing ARISE’s fixed costs by providing a transitional plan to an aggressive incentive-based pay structure through revenue sharing and commission structures. In turn, PWCs will lose their employee provided healthcare and fixed salary benefits. This incentive-based pay structure will put responsibility on the service providers to act as owners of the business not just as service providers. As Chamber’s envisioned, PWC’s will be treated as professionals: Responsibility and ownership to their bottom line. In the end, there will be no finger to blame but themselves for competitive compensation. While turnover may still exist, it will never exist amongst ARISE’s top performers. Keeping the bottom line intact. Top performers will make better money amongst their industry competitors and build better rapport with their clients as all the top clinician’s will exist at ARISE as a one-stop-shop.

Relying on tips as a significant source of income may not be viable given human behavior. Premium service warrants premium list pricing, prompting a pricing model from the current 12% below market to 10% market. This adjustment allows strategic marketing, promotional, and discount activities to transition peripheral customers into mid-level clients. Though tips may remain lower that Chambers envisioned, the 25% price increase attached to midlevel and core clients will generate the revenue opportunities needed for PWC’s make money and pay out commissions to retain them.

Transitioning to a variable cost model while scaling and establishing the business will mitigate the risk of unprofitability. PWC providers will receive enhanced commission incentives to drive revenue and manage their businesses professionally under ARISE. For all true top performers, these commission incentives will offset the loss of health benefits that ARISE was previously offering. Although, tips may fall short of initial projections, increased pricing for “midlevel” and “core clients” will offset losses, ensuring consistent revenue. These price increases will also provide strategic pricing opportunities to transition peripheral customers into mid-level clients. As ARISE builds its brand awareness beyond its PWC providers, Chambers and her executives will be better positioned as a profitable business to assess the value of transitioning back to a fixed-cost model.

Reference

[1]       Jha, S. N. (2023, May). Market research survey: 10 years historical data, analysis and forecast. FACT.MR. https://www.factmr.com/report/341/spa-market#:~:text=The%20global%20spa%20market%20is,by%20the%20end%20of%202033.

[2]       Cardon, M. S., & Stevens, C. E. (2004). Managing human resources in small organizations: What do we know? Human Resource Management Review, 14(3), 295-323. https://doi.org/10.1016/j.hrmr.2004.06.001. [Abstract available at https://www.sciencedirect.com/science/article/pii/S105348220400021X]

[3]       Willyerd, K. (2014, November 18). What High Performers Want at Work. Harvard Business Review. https://hbr.org/2014/11/what-high-performers-want-at-work#:~:text=Money.&text=A%20high%20performer%20can%20deliver,difficult%20to%20take%20meaningful%20decisions.

[4]       Bodvarsson, Ö. B., Gibson, W. A. (1994). Gratuities and customer appraisal of service: Evidence from Minnesota restaurants. The Journal of Socio-Economics, 23(3), 287-302. https://doi.org/10.1016/1053-5357(94)90005-1. [Abstract available at https://www.sciencedirect.com/science/article/pii/1053535794900051]

[5]       Green, L., Myerson, J., & Schneider, R. (2003). Is there a magnitude effect in tipping? Psychonomic Bulletin & Review, 10, 381–386. https://doi.org/10.3758/BF03196495