Big Business Thinking

Maximizing Daily Turns Does Not Automatically Maximize Profits

In this month’s column, we turn our attention to perhaps the most bandied-about phrase in the discussion of laundromat operations. Sadly, that phrase is neither “outstanding customer service” nor “exceptional operating efficiencies.” It is “turns per day.”

First, a quick definition for newcomers. In big business, turns normally refer to how often a company uses its inventory of raw materials and sells its finished goods, over the course of a fiscal year. A valuable economic benefit of laundry ownership is that by providing a service, rather than a good, you neither purchase nor maintain virtually any inventory,with the possible exception of a small amount of retail items for resale.

Turns, in relation to your laundry, are a measurement of how often your washers, which are your dominant revenue producers, are run by your customers.

To be useful as a BBT (reminder: “Big Business Thinking”) tool, turns need to be quantified via a measurement of time. Most commonly, turns are stated daily, as an average taken over an extended period of time, such as a month, quarter or even a year. Generally speaking, it’s “the longer the better” when it comes to that time period. Turns taken over a period of multiple years, for example, can be used to produce analysis of seasonality and to compare similar time periods from one year to the next.

To understand your laundry and maximize your pricing opportunities, you simply must collect your store in a manner that allows you to calculate your turns. One of the easiest ways is to empty your coin boxes into buckets separately reserved for each revenue source. This means one bucket for each type of machine, not just one for washers and one for dryers. (I also am happy to advertise here the CLA’s new colored coin bags, for the same purpose.)

Although dryers do not have “turns,” per se, if you have multiple dryer types you should nevertheless also collect them separately by variety. Lastly, collect your non-machine revenue producers (soap machine, vending, bathroom lock, etc.) individually as well. Now you can effortlessly calculate your non-washer revenue contributors by source.

If you have a card store, most of that process is unnecessary; you may jump straight to printing out your preloaded turns analysis from the VTMs. Of course, since you had the foresight to invest in a card store, surely you already take the time to carefully analyze that report each month. Right?

For the great majority of you who still empty coin box quarters twice a week, you will now be weighing and recording your revenue from each of your various banks and rows of washers. If you have a small, standard store, your turns per day couldn’t be simpler to calculate: machine collection divided by number of days collection represents divided by vend price divided by machine count. For example, if you have 10 top-loaders, with a vend price of $1.25, which generated total revenue of $1,500 during the past 30 days, then your average turns per day for your top-loaders that month is: 1500/30/1.25/10 = 4.Measure it over each calendar month in a spreadsheet reserved for that purpose on your home computer.

Since you cannot calculate your turns without knowing the underlying vend price, it is important to keep an ongoing record of them. Record in the computer file for historical posterity the vend price for each machine for that month. Carefully note if you change your vend price in the middle of the month; it would be helpful to your turns analysis if you changed prices on or close to the first of the month.

You also will need to make adjustments if you use variable pricing (e.g., offering mid-week discounts or charging extra for additional cycle options), pay frequent cash refunds in the store, or have significant wash-dry fold or commercial accounts going through the same machines as used by your customers.

Some owners find success running such washes—a ROI-focused subject for another time—with specially marked quarters, which they sort out during the collection process. Others start the machines manually, but in most cases giving the keys to the machines to your employees is tantamount to giving them keys to Pandora’s Laundry Box.

Let’s now look at how turns impacts profitability.There are a few truisms I have found when it comes to turns in the vended laundry business. First, most owners think they know their store’s turns, but they over-estimate the actual figure, especially if they are running a profitable laundry.

Second, turns can vary dramatically not only by month and machine type, but also by actual machine.When you notice that the coin box for one particular machine is always nearly empty and its next-door cousin’s coin box is nearly full, this is important information.The lonely machine may be constantly going out of order unbeknownst to you, it may be in a bad location against a wall or in a corner, or it may be something else altogether. But you should be listening to the data and working on an answer. As a pricing maximizer, consider lowering the price of that lonely machine by a quarter (or two, if it’s a bigger washer) and advertise that machine in-store as a monthly special.

Truism No. 3 is that most owners are sure that if they can find ways to maximize their turns they will be sure to maximize their profits. It is very important that you recognize that this “truism” is actually false.

A common misconception is that a higher turn at a lower price is a good thing. This is not the case. Higher turns imply only higher revenue, which in of itself may not occur, and there is no certainty of higher profits. This is because turns are about the gross. As a practicing BBT owner, you are interested in pricing your store to maximize your net.

To demonstrate, let’s review a delightfully implausible scenario. A successful young man—we’ll call him Sergei—has his people contact you about the new coin laundry you just opened in Mountain View. You will commit to your laundry being reserved exclusively for Sergei’s use for the next year and, in turn, he promises to come to your store every day. Sergei likes math and puzzles, and so he offers you a choice.

Option One: You may raise your prices 400 percent and Sergei will use every machine once per day (don’t worry, he can afford it). Option Two: You must keep your prices as they are now, but he will wash five loads of laundry in every machine, every day. Which do you choose?

The first option results in a turns per-day of one, normally a prescription for bankruptcy. Option two provides a turns-per-day of five, normally a lucrative figure. So to maximize turns, option two is the clear winner. Yet Sergei graciously offered you that price increase in option one. Consequently, the revenue, or gross, from both options over the course of the next year will be identical, even though the turns are quite different.

The higher vend price, single turn per day scenario handily trumps the current vend price, five turns per day scenario. Option one allows a significantly lower variable cost, particularly in terms of utility costs, and extends the useful life of your equipment with no effect on your tax benefits from accelerated deprecation. To maximize your profits, or net, option one is the only rational choice.

Do not assume that this example is so fantastical that it has no bearing on your own pricing, for that is most certainly not the case.Would you rather have your top-loaders turn three times a day at a vend price of $1.50, four times a day at $1, or five times a day at 75 cents? Conversely, would you rather have your 60-pound front-loader turn three times a day at a vend price of $6, four times at $5.50 or five times at $5?

Over the course of a year, the difference in net income is hundreds of dollars per top-load washer and thousands of dollars per 60-pound front-load washer. The chart clearly shows that you would be better off in terms of both net and gross to price your top-loaders higher and your 60- pound front-loaders lower, assuming your store could achieve machines turns of three and five turns, respectively. Also, please remember that the variable cost assumption I’ve used in the chart may not be accurate for your circumstances.

The surest way to increase your turns on a top-loader, which is still the dominant washing machine type nationally in older stores, is to lower your vend price. In highly competitive urban environments, washes at 50 cents and 75 cents are frightfully common.

Older top-loaders are surely the least-efficient user of utilities in your store (with very old single-pocket dryers a close runner-up). Every time the machine starts it loses a little bit of its value, and your monthly parts and repair costs go up a little bit, especially if it is out of warranty. More important, the economics behind the variable cost of running a top-loader at less than a dollar are so poor that you may be running each wash at a loss, depending on your sewer fees.

Turning your top-loader even 10 times a day at 50 cents, for $5 in gross, is a terrible deal for you. If you raised your price from50 cents to $1, you would have to lose over half your customers to break-even on the revenue side, but your-marginal profit per turn would concurrently increase by at least double, and likely more. Having said that, a careful ROI analysis (please see last month’s column for a detailed discussion) of your price increase is still in order, as losing customers does impact other revenue channels, such as dryer and vending income. Consequently, the best thing to do would be to price your machines to drive customers to or from certain machines.

For example, an idea for most owners to consider implementing immediately would be to raise the price of your top-loaders a quarter while lowering the price of your midsized front-load washers a quarter. If your store’s equipment mix is that it has only top-loaders older than five years, it’s time to start running some detailed ROI analysis on the benefits and costs of buying new equipment.

The only sure way to increase your net when you increase your turns is to do so without lowering your vend price. If you can improve your business through low-cost improvements and modest marketing, you win. If you can raise prices and maintain your turns, you win big. If you can raise prices and increase your turns, you win huge. But—and this is critical—if you raise prices and your turns go down a little, say one time, you are likely to still win.

Pricing your store should be designed as a balance between turns and gross, that results in maximizing net. If you are one of the thousands of owners who have made the decision to price their washers low, hoping that the lower price will maximize their turns per day, you need to seriously reconsider your strategy. Is it concurrently maximizing your net? A strategic price increase that reduces your turns may in fact increase your gross and dramatically increase your net margin.

Since you are unlikely to get a call from Sergei, you will have to do your own math and make your own decisions.Knowing precisely how your machines are turning at their current vend price is the first step. Become a fanatical turn measurer during the next 30 days, and next month we will start to examine your options for specific pricing strategies.

THE JOURNAL DECEMBER 2007