ARMONK, N.Y. — In Part 1 of this article, the focus was on the various expenses Laundromat owners encounter. In this part, the emphasis is on pricing and inflation. Have prices really kept up with inflation?
If you built your store 10 years ago, the cost of doing business is now 25% higher than it was when the store opened. If you built your store 20 years ago, the cost of doing business is 65% higher, and if you built your store 30 years ago, the cost of doing business is a whopping 160% higher!
Let’s look at the increased costs associated with inflation. A $150,000 store in 1980 would now cost more than $240,000 to construct today.
If you review the chart (see slideshow: “Historical Laundromat Vend Price”), you can see what the national average washer prices were from 1997 to 2010. There are consistent increases in price for all the different-sized washers from year to year, despite some dips and “burps” in the data.
There is also another chart (see slideshow: “Inflation”) that highlights the relationship between inflation, natural-gas prices and average vend prices. I was surprised to see that Laundromat vend pricing has kept pace with (and even surpassed) inflation. I had always believed that the industry’s vend prices failed to keep up with inflation.
How are we doing with regard to utility costs? I could not find any historical data for water or sewer costs on a national basis. I did find the wholesale cost of natural gas, the Henry Hub price. Henry Hub is the main distribution point for natural gas to the continental United States, and is located in Louisiana.
Reviewing the “Inflation” chart, we see that the average vend price has fallen way below the cost of natural gas. If you observe the dotted pink line, you see the linear average of natural-gas prices back to 1997. The linear average for natural gas shoots way above the cost of inflation and way above the average Laundromat vend price.
In 2000, and again from 2002 through 2009, the Laundromat vend price has not kept up with the operating costs of running a Laundromat. There were nine years when the store owner was subsidizing his/her customers. This may sound extreme, but the point is that unless we use utility costs as a benchmark for setting vend prices, we will certainly become less profitable — to the point where we will no longer be making any money!
In the purest sense, we are selling utilities. Customers are renting our machines, but we are selling the utilities to operate the machines. Our cost of “goods sold” is electricity, gas, water and sewer. The other expenses (lease, note, insurance, labor, alarm, marketing, cleaning and supplies) are all overhead costs. These costs will remain the same if you have four customers a week or 4,000 customers.
Utility costs are the only variable cost in operating a store, and should be the determining factor when increasing vend pricing. Overhead is required to set the base cost for vending the washers and dryers, but any washer/dryer vending increases (or decreases) above the base cost are really a function of the cost of the utilities.
How much of an increase should we get? Should we raise the prices on all washers and dryers? Will a quarter hike be sufficient? Should we figure out the cost per pound and determine the price hike using that figure? Can we make a pricing decision in a “vacuum” or do we need to see what the other stores in our market are charging?
In Part 3, coming next week, I will tackle the preparation that is required before you raise vend prices.