Big Business Thinking

A Detailed Examination of the Low Price Leader Pricing Strategy

Last month, I analyzed Market Price Follower, the most commonly used of my five profitable pricing strategies for coin laundry owners. This strategy essentially requires you to accept your competitors’ pricing as your own. Those who wish to go their own way will be seeking an alternative.

As a leader, you will need to choose to go high or go low. In this column, I will focus on the pros, cons and best practices on implementing the latter choice, the Low Price Leader pricing strategy.

This strategy is highlymisunderstood, chosen far too often by far too many owners and fraught with hidden costs. Most low priced stores are not leaders in their marketplace.

For the small percentage of owners who have the right store, in the right market, and execute effectively, the strategy can lead to much higher revenues and somewhat higher profits than the Market Price Follower strategy. It is certainly a better choice than having no strategy at all.

Letme be clear that there is nothing inherently wrong with low prices. Billions of dollars of value is created annually by businesses based exclusively on being a low price leader in their area of expertise. Such companies know how to increase their mass (gross) while strictly controlling, and regularly lowering, their expense ratios (net).

We have come to expect (unrealistically) low long-term macro inflation rates. Our economy, driven by consumer spending, requires a continuation of low prices. Businesses, including laundries, all face rising expenses, be it from raw materials, gasoline, rent, healthcare or the like, and find it extremely difficult to pass through those costs to customers.

Consequently, large swaths of American industry have learned to focus on increasing their productivity to manage their profit margins.These businesses are usually manufacturers or distributors, and they normally succeed on an enormous sales base.

Even as theirmaterial costs rise, they grow their profits through a combination of improved efficiency and top-line growth. In fact, when the most efficient businesses do implement a price increase, the result is often largely incremental pure profit.

Retail or service businesses that have thin profit margins, such as supermarkets and warehouse/club stores,must generate asmuch revenue as possible over as low a fixed cost structure as possible. They use low prices either as a draw or as their fullon sales pitch to woo the consumer, but cost control is always in the forefront of their back-office operations.

How can you emulate this strategy for your laundromat? To successfully implement the Low Cost Leader strategy, you should own a smaller store in a densely populated, highly competitive marketplace. Your store should be generating less than four turns per day on average over the past twelve months.

It would be extremely beneficial for you to have owned your store for a while. First, that means (I hope) you have already tried other pricing strategies, without success. If you just bought your store, don’t implement Low Price Leader without first knowing what kind of turns your store can generate as aMarket Price Follower.

Second, a longer ownership period should mean that you have significantly paid down, perhaps to zero, your acquisition or construction debt. This is important because you will need to be able to support a low fixed cost structure until such time as the strategy kicks into high gear.

Your closest competitors geographically— and by close I mean down the street or in the neighborhood—should have embraced a pricing strategy other than Low Price Leader. Ideally, they will be a High Price Leader; if they have a new store, all the better.

For Low Price Leader to be most effective, you must use price as a differentiating force to your customer base. As always, it is necessary that you have an intimate, and recent, understanding of all of your competitors’ prices (please see last month’s column formore information on the importance of surveying your trade area).

You must overcome the fact that price is not a determining factor for most of your customers when they choose where to do their wash. Your goal is thus to attract the segment of customers in your trade area that cares the most about getting a bargain. As a result, it will be insufficient to be priced one quarter less than the “other store” on each of your washers, particularly if the other store is bigger and nicer than yours.

Make a conscious decision to haveby far the lowest prices in your trade area. Low Price Leader works best for stores located in urban, low-income marketplaces, such that there are enough total customers who care deeply about pricing and do consider it a top factor when they make their choice to patronize a laundry.

If all this fits your store’s profile, there’s still work to do before you can implement Low Price Leader successfully. Just lowering prices is not a profitable strategy, it’s a disaster. You must be able to make up your lower profit per turn through much higher volume.

If you are not able to draw new customers away fromyour competitors to your store, you will have succeeded only in offering an unnecessary discount to your existing customers. You will be effectively stealing money from yourself. It is absolutely crucial that you support your strategy with ongoing marketing.Trumpet your competitive advantage to the consumers through signage,mailers, door-hangers, and/or any of the other of dozens of standard marketing ideas that you prefer. Hit your message that you are the lowest priced as hard and directly as you can. Yes, this will cost money, and you should be prepared to spend it upfront.

Let’s examine a hypothetical store by way of example. “Old Urban Coin Laundry” store’s toploaders (which it has lots of, likemost Low Price Leader stores) are priced at $1.25.The closest competitor, who opened a big shiny store a year ago, wisely embraced the High Price Leader strategy and priced its toploaders at $1.50.

We will further assume that after 10 years, Old Urban Coin Laundry’s owner, Lucy, is debt free. She bought some new tops on sale a few years back, but she only has five years left on her lease. She does not want to significantly re-invest into the store, and she believes, correctly, that she can not sell out for a premium.

Lucy’s store is currently doing three turns per day on her tops at a $1.25 vend. If she lowers her prices by a quarter, to $1.00, then she will need to generate one extra turn per day for the strategy to show a small benefit.

Lucy knows that being one quarter lower will not be enough to draw much new business away from the High Price Leader store, so she lowers her price by two quarters, to $0.75. Now she will need to generate two extra turns per day to break even on a revenue basis fromher original pricing.

It is no small task to achieve the required growth. To go from three to four turns is a presumptive 33 percent increase in sales, and to go from three to five turns is a 67 percent increase.

Only a few businesses grow anywhere near that fast in a short period of time, and you will not do so overnight either. But it is not an insurmountable task if your marketplace and your store both have the right characteristics to support the strategy.

You need to push your turns from under four to over six, a major increase. It will not be enough to just improve your weekend traffic. Unless you own your building free and clear, have no attendant labor and know how to performyour own repairs, you will need to average over six turns daily on a consistent basis for this strategy to show a profit.

As for all pricing strategies, youmust still offer your customers a positive store experience, particularly versus the ones provided by your local competitors who are Market Price Followers.There are few women who will bring their children to your store for over an hour every week to save a dollar or two per visit. If you can offer an above-average store with belowaverage pricing, then you will have achieved your leadership requirements.

A final caution: Most owners who aspire to be Low Price Leaders have old equipment and few large washers.This means poor energy efficiency, resulting in high variable costs.With elevated energy costs, it’s not hard to lower your toploaders’ vend price to the point where you actually losemoney per turn.

Additionally, if your strategy works well, your old, out-of-warranty equipment is going to be taking a usage beating.That’s great for revenue, but how high will your parts and repairs bills be? If you wish to try Low Price Leader, please first review my column in the December 2007 issue for a detailed discussion on why maximizing your turns does notmean you will maximize your profits.

Just lowering prices is not a profitable strategy, it’s a disaster.

You must be able to make up your lower profit per turn through
much higher volume.

Recalling that you do need to tightly manage your costs, take the time to improve your store’s efficiency. For example, have your dryers (and ducts, vents, traps, etc.) professionally cleaned, especially if you haven’t done so for a while, which will produce an immediate return on your investment in lower gas bills.

Generally speaking, Low Price Leader owners want to put the bare minimum into their stores, and have a particular aversion to new capital investment. Doing just that might be a ROI-positive move, so long as you own the building or have a solid lease. Remember, you’re not just lowering your prices, you’re doing so as a leader.

If you’re committed to the strategy, consider buying some new tops, a few well-chosen larger washers, and a new boiler if you need it.While you’re at it, throw up some new paint, wax the floor and invest in new signage.

You should be able to finance most, or all, of the purchase through the manufacturer, receive immediate benefits on your next tax return from accelerated depreciation (which is further improved by the February 2008 Federal stimulus bill), dramatically lower your energy usage per turn, thus raising your profit margin, and receive the benefit of a warranty right before your store is about to double its average daily turns. Most important, you’ll be able to accurately state in your advertising and signage that you have new equipment and low prices.

A vast majority of laundry owners lower prices purely as a reaction, not by design or strategy.They notice a decline in revenues, so they lower their prices. A new store opens a quarter mile away, so they lower their prices. Their rent goes up, so they lower their prices. I assure you that precious few of these owners have completed a turns per day analysis, implemented amarketing campaign or have any idea what their profit margin per turn might be.

They have chosen a fool’s path. Even worse are the owners who see the first store lower its prices, and so they do the same in turn.There is not strategy more likely to result in failure in the laundry business than Low Price Follower. Don’t be that guy.

We can all name fantastic American companies that are huge successes by being a Low Price Leader. Successful low price retailers monitor and manage their expenses with a ferocious intensity, strive to offer their customers a positive shopping experience so that the value of their products is not the consumer’s only determining factor, and generate huge revenues on which to leverage their fixed costs. If you can do the same, then you too can be a Low Price Leader.

Low pricing definitely has its place in our industry, but it is the best choice for only a small percentage of stores and requires those owners to execute on supporting the strategy. Next month we will continue our review of the three remaining profitable pricing strategies.

THE JOURNAL • MARCH 2008