Big Business Thinking

ASK WHAT PRICING STRATEGY YOU CAN IMPLEMENT FOR YOUR STORE

My fellow laundry-industry Americans, after a long lead-up, we have entered the heart of primary season. The candidates are feverishly positioning themselves, often based upon relatively fine degrees of distinction, so that you will feel they are worthy of your vote. A few early dark horses have worked their way up to join the leaders.Others have already been rejected by the voters in early states, and have dropped out of the race.

Perhaps you feel that one candidate is clearly your favorite, or conversely that any candidate but “that one” would be fine.Many of you have not yet made up your mind, continuing to examine your options in detail before choosing a candidate. Of course, far too many Americans are simply not paying any attention at all, feeling disenfranchised from the system, or just not caring.They choose to make no choice at all.

In my first four columns I laid the groundwork for how to analyze your laundry’s profitability. Now it is primary time, time for you to “Pick a Pricing Strategy for Your Store” by choosing one of my five profitable pricing strategies for coin laundry owners.

To start the Pricing Strategy campaign, I will be holding two rallies in this month’s column. First, I will make a whistle stop by examining how to go about setting a price.Then I will make my first policy speech, in which I will lay out the pros and cons of the first of my five optimal pricing strategies at your disposal. In future columns I will discuss each of the other strategies.Metaphor accomplished!

Let’s stop the campaign train in the small town with the unlikely name “PricingMethodologies.”There are a number ofmethodologies fromwhich you can set your price. Understanding the various approaches is our last step before beginning our examination of the best pricing strategies.

You can try to price based upon a targeted gross profit or net income margin, using a cost-plus approach. It is a popular method in a variety of industries, such as construction, interior design and regulated utilities. My personal favorite cost-plus approach is utilized by sophisticated restaurant companies, who have an intimate understanding of their cost of goods for every portion size of each ingredient of their dishes.

However, cost-plus is extremely difficult to accomplish in a retail environment, where sales volumes are unpredictable and seasonally impacted. Further, you must have an excellent understanding on your true operating costs (which is critical information no matter what) in order to accurately price to a margin.

A cousin of cost-plus is pricing per pound. There are some savvy owners who implement a proxy of this process, by approximating a charge per pound for their washers; 10 cents is a popular round figure these days. Of course, straight-forward pricing per pound, usually with a minimum, is nearly universally used for wash-dryfold drop-off business.

Broadly speaking, these are both bottom-up approaches, in that they focus on the targeted net (and the targeted netmargin, in particular) ahead of trying to project the revenue. A topdown approach is easier to accomplish and significantlymore commonly used. Top-down businesspeople set their prices with a goal (hope) ofmaximizing revenues. By far themost common topdown methodology is the market approach.

Nearly every laundry owner in America sets his vend prices based on how a competing laundry owner has previously set her store’s vend prices. Whether the pricing in the store is higher, lower or the same, it is based upon the competitors’ pricing.While either higher or lower can be superior choices depending on circumstance, choosing “the same” is easily the most popular choice among laundry owners. The market approach is the dominant force in pricing strategy for coin laundries today. So it is appropriate that we make the first examination of my five profitable pricing strategies Low Price Leader, High Price Leader, Market Price Follower,Mixed Prices for MixedMachines and Consistent Price Promoter—with the most popular strategy,Market Price Follower. If I were to poll 100 randomly chosen laundry owners in my home market of Southern California which of my five strategies they think they use, Market Price Follower would be a runaway winner, with well over half the vote.

However, if I were to put together a focus group and grill these owners on their strategic approach, we would quickly find thatmost of these owners do not, in fact, understand what it means to be aMarket Price Follower. They have intuitively adopted the pricing methodology of the market approach, without executing on a subsequent pricing strategy. In other words, they do not implement this strategy with intent, and just follow their competitors’ pricing, usually based only on the pricing at the time they bought or opened the store.

Second, we would learn that many of these owners do not have any idea of what their competitors are charging today. This will be especially true in urban environments, where theremay be a dozen other laundries within a few miles. Yet that is precisely where this strategy works best.

Visiting your competitors’ stores on a regular basis simply must be done. You need to create a survey sheet and check prices of eachmachine type and of ancillary services, as well as dryer time. For card stores, you should also be looking for pricing promotions based on volume, day of the week and time of day.

While you’re in the store, look for any significant changes, for better or worse, since your last visit. New equipment, more equipment out of order, dirtier or cleaner, change in hours of operation, new services being offered—these are all things you should be checking.

One of the great pieces of advice in the laundry business is that the best way to check out a competitor is to do a load of your own laundry at their store. I encourage you to do so immediately. It need not be a large load. As a fun plus, it is also tax deductible. (Sigh; disclaimer here: check with your personal accountant. But it is.) Make an effort to visit your competitors’ stores quarterly, but certainly not less often than every six months. If you have less competition, say only one or two stores in your trade area, then you should have no trouble visiting, even if only briefly, on a monthly basis.

Every owner needs to have a solid and updated handle on the competition in order to wisely choose and implement their pricing strategy. I will endeavor to not mention this in each future column, but I believe that a lack of understanding of the true nature of their marketplace is one of the most common mistakes made by experienced laundry owners.Defining the geographical scope of your store’s marketplace is in and of itself a future issue that I will address; for now rely on your common sense, which is likely highly accurate, and lean towards a too-large scope.

What kind of store should an owner operate if he or she wishes to embrace Market Place Follower? It is not appropriate for the smallest stores with the least to offer, nor for the newest or largest stores with themost and biggest equipment. It is not appropriate if you do not have enough competitors to follow, so store owners in small towns or rural environments should not consider this option.

TheMarket Place Follower strategy works best in urban, dense, competitive areas for middle-of-theroad stores. It works best when the owners of the stores you are choosing to follow are themselves rational, thoughtful owners who have set reasonable prices, allowing the entire marketplace to co-exist with comfortable but not earth-shattering profit margins.

It is also important that your key competitors are not embracing either of my two Leader pricing strategies. If your competitors choose the Low Price Leader strategy, then you are following their price structure down, but you are highly unlikely to be maximizing your income even if your turns do rise (please seemy column in the December 2007 issue). They also may have a significant advantage in their fixed cost structure. If they choose to beHigh Price Leaders, then you are following their price structure up, but you will not have the ability to compete directly with the highly positive store experience they provide. Additionally, if your competitors are largely insane big-city Low Price Followers, I beseech you not to embrace the Market Price Follower strategy. At the very least, if they choose to be Low Price Followers, you should strongly consider becoming a Low Price Leader, which I will discuss in detail in a future column.

Market Place Followers are for mature stores that generate Turns Per Day greater than three and less than six, a range that represents the 80 percent heart of the TPD bell curve.

Ideally,Market Price Followers should expect to have a profitable store at three to four turns per day (before debt service and assuming your fixed occupancy costs are under 30 percent of your gross). Otherwise, you will be better off executing another strategy.

The fallacy of many Market Price Followers (as well as by many other owners) is that they feel they do not need to do much to or for their store, because they have “the same” prices.

Ask yourself, if you have exactly the same prices as your competitors, what enticements does your store offer the customer base to sample your store, and then to stay with your store, rather than use or return to your competitors’ stores? You should not have the best store in the marketplace, nor the biggest, to profitably executeMarket Price Follower. You should just operate a great store, in terms of hours, cleanliness, machine downtime, lighting, and so on.

If you are a new and/or time-pressed single store owner in a city setting that is trying to make a consistent moderate profit with an established unattended store, Market Price Follower is a basic strategy that is worthy of your consideration. For those who believe they are a Market Price Follower, but have never completed the analysis necessary to do so with intent, take the time to update your marketplace pricing knowledge and see if you still believe you are maximizing your net on your current average turns.Many store owners who have not raised prices in some time should be doing so. This week. You may find that a change in strategy is in order. It’s never too late to change your vote in the pricing strategy campaign. Remember, pricing is about choice. Your customers’ decision each day whether or not to patronize your laundry is about choice.

Commit to making a choice by the time my campaign is over. The good news is that as long as you carefully consider your options and then execute on your plan, whatever vote you cast is guaranteed to be a winner for your store. But you must choose.

Next month, we will continue our examination of the candidates. Please spend this month completing a detailed survey of every store in your marketplace.

THE JOURNAL • FEBRUARY 2008