ARMONK, N.Y. — My previous articles showed that from 1997 to 2010, the average washer vend prices stayed ahead of inflation, but fell behind the cost of natural gas.
Our overhead costs should be used to set our base vend price, but any adjustments to vend price should be made with utility costs in mind.
We need information before making intelligent decisions regarding vend prices. Visit your competitors at least once a year and record their vend prices. Take notes regarding their strengths, weaknesses, opportunities and threats (SWOT). Keep track of their hours of operation, drop-off- service pricing, whether the store is attended, the store’s appearance, and cleanliness. Understanding how your store compares to the competition puts you in a better position to evaluate your own business as a price leader, price follower or something in between.
You want to be the best store in your market, and the price leader. It’s better to set the vend-price benchmark. But being the best store and price leader has its consequences — your competitors will wait for you to set the vending-price benchmark and then react to the increase. As a price leader, you need the most current information about your market, and you have a responsibility to set a fair vend price.
Before doing anything, make sure your store is clean, safe, and all the equipment is operating properly. Failing in any of these areas causes customers to lose confidence in your store. Fix things. You know how your store looked when it opened; you need to maintain that look or improve on it.
Here are some of the strategies for setting vend prices:
- Match the lowest vend price in the market.
- Pick a nice, round number.
- Use inflation, consumer price index or another benchmark.
A CLOSER LOOK
Historically, a Laundromat with all front loaders needs 20% of the gross revenue to pay for all utility costs. Within the last seven years, the same Laundromat now needs 25% of gross revenue.
In my stores, I don’t want my utility costs to be more than 25% of the gross income. If I pass 25%, I’m using too much of my profits to pay for utilities. (Gross income is self-service income, and includes the drop-off-service revenue to start the machines.)
When we look at the cost of natural gas and Laundromat vend prices for the last 13 years, we see that stores fell way short in 2000, and were short again between 2002 and 2009. Currently, natural gas is at a historic low, and we are just barely getting back to our vend-price curve.
During the eight years when natural-gas prices were higher than the national average vend-price line, Laundromats were less profitable. We were discounting the cost of the wash to our customers.
As I mentioned in a previous article, if any of your four major expenses (rent, labor, loans and utilities) become too high, your store’s profitability suffers. The cost of utilities fluctuates, and the busier the Laundromat, the higher the utility costs.
Let’s compare one store with the same gross income and expenses but different utility costs. In one case, the utilities are 32% of the gross (see slideshow: Chart 32%), and in the other case, the utilities are only 25% (see slideshow: Chart 25%) of gross income. The vending price in these examples affects the utilities’ percentage.
In the store with the 32% utility costs, the profit has decreased from 22% to 15%. With a $5,000 week, this loss would be 7% of the annual gross income, or a loss of $18,000 per year. The choice is simple: Have the customers pay the utility companies or it comes out of your profit.
If we allow vend prices to remain static while the cost of inflation and utilities increases, it is the beginning of the end for your store. If all of your costs are increasing between 3% and 6% annually, you need to keep your vend prices ahead of this curve. Laundromats that are barely making a profit are stores that have no reserves and cannot withstand an unexpected expense, such as a broken water heater or having to add a replacement washer or dryer.
Price increases are a fact of life. Accept it and learn how to deal with the few customers who will complain. Your responsibility is not to be “buddies” with every customer, but to produce a fair and reasonable profit for you, your family and your employees. People will pay for quality and accept the price. People will complain if a low price means a compromise in service. Give the customers what they want, but get a fair vend price.
The next article will detail how I calculate what the fair vend price should be and how to get there.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].