Preparing for the Price Increase - Part 3.
In the previous HK Newsletter articles we discussed that Laundromat Vend Prices have kept up with inflation and also have kept ahead of Natural Gas prices. Unfortunetely there are no good standard benchmarks for historic Nationwide Water & Sewer costs. We know that Water & Sewer costs are increasing faster than any other expenses.
This week we - Preparing to Raise your Vend Prices.
In preparing to increase vend prices; we need information before we can make intelligent business decisions. You need to know what your competition is doing. I suggest visiting all of your competitors at least once a year and recording their current vend prices and making notes of the strengths and weakness's of their store. (SWOT = Strengths, Weaknesses, Opportunities & Threats.) These should include the hours of operation, attendant or no attendant, price for WD&F, the overall appearance of the store and the cleanliness of the Laundromat. Once you know the how your Laundromat compares to your competitors you will be in a better position to evaluate your own business as a "price leader", a "price follower" or something in between. For more information on Laundromat "Price Leaders" and "Price Followers" please read the excellent series of articles by Jeffery Barman printed in The Journal from December 2007 to June 2008. Mr. Barman does an excellent job in describing the many different types of Laundromats and there pricing strategies.
You want to be the "Best" Laundromat in your market place and thus be the Price Leader. Obviously it is better to set the vend price benchmark rather that always be a follower (or a non-follower for those operators who are asleep at the wheel). But there is a consequence of having the "Best" Laundromat in your market place and thus being the Price Leader. The consequence is no one else will raise their vend prices, until you raise your prices first. All of your competitors will wait for you to set the vending price benchmark and then react to your price increase. As a Price Leader you have a responsibility to make sure that you have the most current information for your market place and a responsibility to set a fair and reasonable vend price.
Before you do anything, realize that the Best possible investment you can make for your Laundromat is to make sure the store is Clean, Safe and all of the equipment is operating properly. Your customers are coming into your store to perform a "cleaning function"; if the store is dirty, smells musty, has graffiti on the walls or has numerous machines out, then you have already lost the customer's confidence that your Laundromat can clean their clothes. If your store doesn't have a fresh coat of paint and if some of your lights are not working or working with different colored bulbs; then fix it!!! You know how your store looked when it was first built, and you need to keep the same look (or better) as the store matures. These are basic customer expectations for washing in a Laundromat. I should not have to mention this at all, but surprisingly many Laundromat owners just don't even provide these Laundromat basics.
Once you have cleaned up your own house (Laundromat), now we can start to look at raising your vend prices. There are several strategies for setting the vend prices including:
- Match the lowest vend price in my market,
- Pick a nice round number,
- Use inflation, CPI or another benchmark,
- Set the prices based on utilities as a % of gross income,
I use total utility costs as a basis of determining my vending price structure. As mentioned in the previous article, there are 4 major expenses in operating a Laundromat. Rent, Labor, Loan & Utilities. If any of these expenses becomes too large the entire profitability of the Laundromat is in question. Rent and Labor are closely tied to inflation which averages about 3% a year. Loan payments are either fixed interest or are tied to the prime interest rate and could go up or down depending upon inflation. But Loan payments are mostly a fixed payment per month. Rent, Labor & Loan expenses are generally the same month to month and can be considered part of overhead. We can assume that you have sharpened these expenses to a bare minimum. The largest monthly cost that has the highest fluctuations is utilities.
Utility expenses are a variable expenses and directly related to the use of the store. The busier the Laundromat, the higher the utility costs. We want to make sure that the utility costs are in line with industry standards. Utility costs have a significant impact on the economic profitability of your Laundromat. If the utility cost become too high, then vend prices need to be increased to achieve the same profitability for the Laundromat. If you review the attached chart you can see National Coin-Op vending prices (as reported by the CLA) almost mirror the cost of inflation. I always guessed that my store's vend prices were always falling behind to the cost of inflation but once I produced this chart, I was pleasantly surprised to see that for the last 13 years the Laundromat national average for vend prices has kept slightly ahead of inflation.
I was not able to go back further than 1997 because the vend price data changed to a different format and is not compatible with the current data. As an old salt of the laundry industry, it would have been interesting to see what effect run away inflation in the 1980's had on washer vend pricing.
When we compare the last 15 years of Natural Gas cost vs. Laundromat Vend pricing you can see Laundromats fell way short in 2000 and again short between 2002 and 2009. Currently, Natural Gas is at a historic low and we just barely getting back to our vend price curve. The 8 years where Natural Gas prices were above the national average vend price line; the Laundromats were making less profit because of the increase in utility costs. In effect we were discounting the cost of the wash to our customers. This chart reveals a very compelling argument why every one in the Laundromat industry should be basing their vend price on the cost of their utilities.
Historically a Laundromat with all front load washers would have 20% of the gross revenue pay for all of the utility costs. Within the last 7 years and with the recent spike in Natural Gas costs, the same Laundromat is up at 25% utilities as a percentage of gross income. In my Laundromats, I do Not want my total utilities to be any higher than 25% of my gross income. If the percent utilities goes higher than 25% then I am using too much of my store's profit to pay for utilities. "Gross Income" is expressed as self-service income and including just the WD&F revenue to start the machines. If you have any Wash Dry & Fold business, the current vend cost to start the washers & dryers need to be included into the "Gross Income" figure. Gross Income should only include the washer & dryer revenue and should not include any revenue from soap or vending machines. For the economics of a Laundromat to work and to make money, certain numbers need to be kept in balance. The total monthly utilities should Not be more than 25% of your Gross Income. When these numbers start to go above these percentages, then profit from the business is going to pay for these increased expenses. In effect, the money is coming directly out of your pocket.
(Article to be continued Next Week)
Inflation & Natural Gas Prices vs. Avg. Laundromat Vend Prices
(Avg Vend Prices as reported by the CLA)
Fun Stuff ...
To add insult to injury, Ghost could see Granny setting up the ironing board.
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