Big Business Thinking

And INDUSTRY DYNAMICS BEFORE PRICING

Why are your customers yours?Themost common answer by laundry owners is, “I have the best store in my market.”While thismay in fact be the case, your most pertinent answer is actually, “My customers have to wash their clothes.”

Regardless of one’s specific business, before you can decide how to most efficiently price your services, you need to know who your customers are, where they come from, and why they patronize your business.

You must understand the dynamics impacting both your customers and your expenses. You cannot intelligently pick a revenuemodel without knowing what your customers are thinking.

I have identified five types of customers to whom the laundry business provides a service. The first group consists of renters who have access to a laundry room that they simply prefer not to use.Their laundry roomhas some combination of a small number of machines, small-capacity washers, lack of ambiance or high price that drives these customers to a selfservice laundry. Formost stores, this is, by far, your largest group of customers.

The second largest customer group consists of those that simply have no choice where to wash other than a store. They are renters without access to laundry rooms; they are homeowners who do not have machines (though some may have washers, but not dryers); or they are a catchall of itinerants, tourists, students, RV drivers, etc.This is likely yourmost dependable group of customers.

Many stores get 90 percent to 100 percent of their business from just these first two groups. If your store is very close to a lot of dirty clothes that have no other place to go, thatmay be enough to make money. If not, you will have to compete for business like the rest of us.

Group three consists of homeowners with machines that still prefer the services of a laundromat for various reasons.They are dissatisfied with the size of their homemachines relative to the amount of laundry their family generates, or need to use your larger machines for a special reason, like washing sleeping bags and comforters, or their machines are broken for the time being, etc.

Group four consists of wash-dry-fold drop-off customers. Their home ownership and access to washing machines is essentially irrelevant, as they are prepared to pay for convenience and quality. Group five consists of commercial accounts of clothes, uniforms, linens or supplies.

Few stores, and virtually no unattended stores, generate much, or any, of their business from these last three customer groups.However, while these customers represent collectively the smallest revenue contribution to stores, they concurrently represent the highestmargin business.That is to say, they are the most profitable type of customers.

What do all of these customers have in common?They need to wash their clothes. Nay, they must wash their clothes.This is why even if you do not have the best store in the market, you might still have enough customers to turn a profit.

The simple truth is that for everyone washing clothes is a necessity—a “need” instead of a “want.”This truism distills to a great degree what makes the coin laundry industry so important, lasting and profitable.

I have identified five types of profitable pricing strategies for vended laundries.They are: Low Price Leader; High Price Leader; Market Price Follower; Mixed Price for Mixed Machines; and Consistent Price Promoter. I will discuss in detail each of these strategies in the coming months, and examine real-life examples fromboth inside and outside of the laundry industry.

You have an enormous advantage versus 99 percent of all other retail concepts, in that nearly all of your customersmust use your service.Their choice is not if, but where. The turn of that coin is that enough people have come to understand this—often just intuitively, but understanding nonetheless—that they have opened stores close to you.

There are usually numerous “wheres” for your customers to choose from, and not just competing stores, but also the renters’ laundry rooms and the homeowners’ machines. If you are smart (or lucky) enough to have a store where there are no other stores and there is also a low rate of homeownership, then assuredly your optimal pricing strategy is easy to determine.

While it is not fair to say that price does not matter at all, it is true that price is not the primary factor formost customers in determining where to wash. Most of your customers are resigned to using your service, and they are looking for the best option to solve theirmandatory need.The rest of your customers have a choice,my customer groups three, four and five fromabove, and if they choose to patronize yourstore it will be for reasons other than price, such as equipment mix and availability, ambiance and comfort, and convenience and consistency.

Your customers perform their tasks at your store no less thanmonthly, and often weekly, spending at least an hour, and often more, inside your establishment. For nearly everyone, the pricing obstacle of an extra quarter per wash or two minutes less dry time per quarter can easily be overcome if your store is cleaner, brighter, prettier, larger and all-around better than the stores of your nearest competitors.

Let’s say your average customer spends $10 each visit. There are few customers who are unwilling to spend an extra $2 per visit in order to receive a significantly improved experience during their hour or three in your store, especially if they brought their small children. Yet that $2, or 20 percent, difference is pure incremental profit to you, and is also gross revenue that your competitor did not get.

Furthermore, once a customer is comfortable with their experience in your store, they aremuch less likely to visit your competitors. (The exception to this is the opening of a new store, which offers the appeal of possibilities and the excitement of the unknown.) So long as your customer reliably receives the same positive service experience, she will continue to buy your services—even if you raise prices. There is a belief amongmany owners that their customers care only about price. I wonder how many of these owners have ever actually introduced themselves as the store owner and asked the question to an actual customer.

In truth, it is a self-fulfilling prophecy for these owners. They believe that price is all that matters, so they have the lowest prices. Their competitors respond not by enhancing the experience offered by their store, but by lowering their prices, too.The result is that their stores’ profits decline, so they stop improving and reinvesting into the store.

These owners have chosen the single worst strategic option, Low Price Follower. So now the only people who use their store belong to that small percentage of customers that do care only about price.

When you do take the time to stop and ask the question, I assure you that most customers will say they care about the experience more than the price, so long as the price seems to themto be competitive, or “fair.”This will be especially true if you ask the question to the happy customers at a store whose owner has chosen the strategy of High Price Leader.

The simple truth
is that for everyone
washing clothes
is a necessity—
a “need” instead
of a“want”

Of course, nobody likes spending more than they have to. Yet time and time again, if you offer customers a higher priced but tangibly better washing experience, they will choose it over the somewhat lower priced, but significantly less attractive experience.

The CLA’s 2005 customer survey, performed by a third-party professional surveying company, asked customers in laundries: “What factors made you choose to come to this laundry today?” The survey concluded that price was the customers’ eighth highest factor in deciding where to wash.

This means that, from the list of choices given by the pollsters, therewere seven itemsmore important than price to the surveyed customers. (Iwill review those items as they relate to your pricing strategy in future columns.) Indeed, only half of the customers surveyed thought price was even important enough to mention. So unless you’re not prepared or not able to deal with these other issues, price need not be the dominant issue for your store.

In large cities, andmany small ones, there is rarely a Burger King without a McDonalds down the street, rarely aMobil gas station without a Chevron across the street. Coin laundries are becoming no different.However, such establishments in these other industries have pricing advantages that laundries cannot match.

Fast food restaurants are selling a good, rather than a service, and combine it with an experience, which they call quick, convenient, tasty, filling or the like. They compete both on price and on the good itself.

Gas stations are similar to laundries in that they provide a good that is a “need” for each of their customers, but their goods are essentially identical to the goods sold by every one of its competitors. The successful stations have adjusted to thismarket condition, as you should, by focusing on the gas station experience, rather than on just selling gasoline.

In fact, nearly all gas stationsmake far higher gross profit margins, and generally greater net income as well, fromthe sale of ancillary goods, such as cigarettes and bottled water, than from the sale of gas. Their pricing strategy is an intriguingmix of Low Price Leader orMarket Price Follower on their outside goods, and being a High Price Leader on their inside goods.

Furthermore, gas stations have a pricing system that is the envy of the retailing world. A card-operated laundry can price to the penny, coin laundries price theirmachines to the quarter—but gas stations price to the tenth of a penny. Put visually, retail gasoline is priced to the $0.001, card stores are priced to the $0.01 and coin laundries are priced to the $0.25.Therefore, gas stations have 2,500 timesmore flexibility in their pricing versus a coin-operated laundry. 25,000 percent!

You are selling a commodity service to a customer base that has the disadvantage of having to use your service, and the corresponding advantage of having a range of options to fulfill that need. As a result, you should be working hard every day to provide an experience to supplement your service.

The next time someone suggests that your new coin laundry’s revenues will increase at a 3 percent or 5 percent annual clip, ask them if that projection is based on an assumption of more customers or from a price increase. It must be the former, because there’s no coin slide I’m aware of that will let you raise your topload washers from $1 to $1.03, or from $1.25 to $1.3125.

That level of inflexibility, combined with the high fixed costs of running your business, makes it extremely difficult to compete on price alone.This is yet another reason why your pricing strategy needs to be so well thought out. Your expenses can go up by pennies, but your service is priced in quarters.

Have a pricing strategy
that maximizes your profit,
rather than your revenue

Worse, you are sure that your expenses will increase over time, but you cannot be certain that your revenues will do so as well. Nor can you easily pass along your rising costs to your customers in the same way that your vendors and supplies pass along their rising costs to you.

You operate a high-fixed-cost business and have little control over your variable costs. So, as I discussed in detail in last month’s column, you best have a pricing strategy that maximizes your profit, rather than your revenue.

Next month, we’ll commence our detailed examination of the pros, cons and best practices of each of my five pricing strategic options.

I wish each of you and your families aHappy New Year. May all of your business decisions in 2008 be ROI-positive.