ARMONK, N.Y. — My previous articles have shown that many operators need to raise their vend prices in order to get a fair and reasonable profit. This brings the “mechanics” of raising prices into play.
I own and manage four stores in competitive areas. My first task is to visit the competition and keep track of their equipment and vend prices. I even track their “special” and “extra-feature” pricing.
If I meet the store owner, I offer to buy him/her a cup of coffee, and explain that I’m in the process of raising my vend prices to offset the increase in utility costs. My competitor is my neighbor, one whom I may not have to like, but someone whom I have to co-exist with and respect. I end the conversation with the assurance that I will be raising my prices, and will let him/her know when I do. Hopefully, the owner will also raise prices.
I have been in the laundry business too long to think that my competitor is going to go out of business. My approach is not to crush the owner, but to be friendly, form a mutual respect for both of our operations, and (most important) make money.
I have seen some operators take this competition personally and vow to bankrupt the other business. Well, it’s not going to happen. Any owner who just invested more than $100,000 in a business will accept a slow start and do whatever is required to make a living. This person will even tolerate monthly losses rather than walk away from a sizable investment.
When a new store comes into the marketplace, each slice of the pie gets smaller. How does everyone survive? You don’t cut vend prices! Everyone can make a decent living if each slice of the pie is worth more. By raising vend prices, you survive, and so does your competitor. You can both make money.
ANALYZING YOUR NUMBERS
Once I know what the competition is charging, I study my own numbers. What are my utility costs as a percentage of gross income? Traditionally, a well-run, all-front-load store should be in the 20% range; an all-top-load store would be in the 30% range. However, these percentages went out the window in 2005 when natural-gas prices tripled. Now, even the most energy-efficient, front-load stores strive for a utility cost of 20-25%.
In this example, the goal is to manage the utility cost so that it is 25% of the gross income. You might not be able to get to this target figure in the first price increase. Be realistic. Can you charge $2 more for a wash than your nearest competitor? Probably not, but you can charge several quarters more and still make a decent return on your investment.
(Please note that the Laundromat gross-income figure is only the self-service washer-and-dryer income, not income from vending, etc. We also need to include the revenue from the machines being used for drop-off service. Don’t forget to exclude the attendant’s cost to start the machines. One of the easier ways to do this is to use nail polish to paint the coins you provide to the attendant.)
What is the new gross income (dollar amount) needed to achieve your 25% utility goal? What across-the-board increase is needed to achieve this percentage? Take a look at the charts (slide show) for a store with 20 washers and 20 dryer pockets.
We initially calculate the utilities as a percentage of our gross. The chart “store” has utilities at 32% of gross. This means we are only working with 68% of each dollar to cover our overhead. This needs to be corrected.
If I can increase my vend price and still be within 25% of my competitors’ pricing, then I will raise my prices and track revenue for the next two months. It takes approximately two months for the “market” to balance out — a couple of weeks to lose customers, and a couple more weeks to have most of them return.
In this example, I have also tried to balance out my vend price per pound of washing capacity. Most Laundromats deeply discount the big washers. I’m not sure why, since the larger washers are the most expensive to purchase, are the fewest in number, and are always in demand. They use the same proportion of water, gas and electricity. According to supply-and-demand principles, they should have the highest vend price.
You also notice that I haven’t touched the dryer vend prices. Customers are sensitive to any reduction in dryer time, and react negatively and emotionally to any dryer- price hike. Customers who are content to pay an extra dollar for a washer “go ballistic” when they have to insert one more quarter into the dryer. I still don’t know why this happens.
In this example, I raise the 20-pound washers from $2.50 to $3, and the 30-pound washers from $3.50 to $4.50. The 60-pound washers go from $5 to $6.25.
Do these increases shock you? If you did this, would any customers be left? Well, it depends on your location and the social economics of your market. If you are in a low-income neighborhood, and close to several good stores, you may not be able to reach so high in the first round of increases.
In the final article, I will share the three things I do before a price increase, as well as my best tip to take the “sting” out of a price hike.