Preparing for the Price Increase - Part 4.
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 continue in Preparing to Raise your Vend Prices.
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.
Laundromat with all front load washers would have 20% of the gross revenue pay for all of the utility costs. Within the last 10 years there has been a constant, steady increase in water & sewer rates. Since there are no National figures on water & sewer rates, I have been unable to compare them to Laundromat vend price, but I have very modest Laundromats were we pay over $40,000 a year in water & sewer costs and the rates only increase over time.
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.
Let's compare the same Laundromat with 2 different economic circumstances, in one case where the utilities are 32% of Gross and the other case where the utilities are only 25% of Gross Income. In these Laundromat examples the Gross Income and the rest of Laundromat expenses are exactly the same. The only difference is in vending price of the laundry equipment which directly affects the percent utilities for each example. We are assuming the same number of turns and the same expenses. In the situation where the Laundromat's utilities are at 32% of gross income we notice that the profit has decreased from 22% down to 15%. This is a huge loss in profit. With a $5,000 a week Laundromat, this loss would be 7% of the annual gross income or a loss of $18,000 per year. This example shows how important it is to run the most energy efficient Laundromat possible and to make sure that your vend prices are tied directly to your utility costs. The choice is simple. You either have the customers pay the utility companies or it comes out of your profit.
I can not emphasize this statement enough, if we allow our vend prices to remain static while the cost of inflation and the cost of utilities increases, then this is the beginning of the end for your Laundromat. If all of the Laundromat costs are increasing between 3-6% a year then we need to keep our vend prices ahead of this curve. If we start to fall behind, then we are accepting reduced profits and we will be accepting less of a return on our initial investment. This business model is un-sustainable and will lead to the Laundromat eventually going out of business. Laundromats that are barely making a profit are stores that have no reserves and can not withstand any major un-anticipated expenses such as cosmetically overhauling the store, replacing a broken water heater, or purchasing replacement laundry equipment.
Price increases are a fact of life. Accept it and deal with it and deal with the few customers who will complain. You responsibility is not to be "buddy-buddy" with every one of your customers, but to produce a fair and reasonable profit for you, your family and you employees. People will pay for quality and accept the price. People will complain at a low price and a compromise in services. Give the customers what they want, but get a fair vend price.
(Article to be continued Next Week)
Chart Showing: Laundromat with 25% Utilities as % of Gross Revenue
The Green slice denotes "Profit" for the Laundromat at 22%.
Chart Showing: Laundromat with 32% Utilities as % of Gross Revenue
The Green slice denotes "Profit" for the Laundromat at 15%.
This is a loss of 7% of your Profit because
your Vend Prices did not keep up with your Expenses.
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