Opportunity Cost Is Good/Better/Best Offer Best?
Opportunity cost is the cost of passing up on the next best alternative when making a decision. For example, if I decide to play golf on Tuesday, my opportunity cost may be money lost from not working.
Consider a person with an Escalade and one driving a Civic who each buys a $10 wash. The Civic customer may calculate opportunity cost as $5 because the Civic is half the size of the Escalade.
Opportunity cost also occurs from free-riding. This is when a company or consumer benefits from actions and efforts of another without cost equity, a way of reducing risk.
Consider a car wash owner incurring development, labor, and training costs to provide assisted-services to expand sales. However, customers — perhaps 20 percent or so — because of their own free-riding ways, may later buy from another wash selling at a lower price because its strategy is not to incur the same expenses.
This second operator is viewed as free-riding on the efforts/costs incurred by the first. If the situation persists, the first operator may not have the incentive to continue. However, the service provider can make a soft response rather than a harsh one, which enables it to charge higher prices and make positive profits that would have been forgone by lowering price.
Research suggests many consumers will stay put under these circumstances because they initially felt alienated from the marketplace. This is based on findings that people who feel alienated hold less favorable opinions of free-riding.
Essentially, loyal customers go through a matching process to find service providers based on informed choice, opinion, ethics, etc. The bond formed makes customers less likely to patronize lower-priced, limited-service retailers.
Consequently, limited-service pro-viders may be left in the unenviable position of maintaining a price low enough to sell enough units to cover cost of acquisition and production. Consider a $3 express wash that struggles to maintain an average of $5. Usually, these washes offer good/better/best pricing.
According to marketing gurus, 67 percent of people who are given a choice of three prices choose the middle. Because of this, conventional wisdom is to offer low price, middle price, and premium price.
The premise is some people will always want best, some will always select lowest, most choose middle. Proponents of good/better/best say it is better to give customers choices. However, let’s examine this from another perspective.
For instance, “best” is the best we have to offer, better is less than this, and good is even less. When consumers are not well served by good/better/best, the result is low average sales.
Some owners increase expense to give more free stuff to reduce economic distance (increase range) of the wash. Others juggle price and/or add another wash selection to get a better middle. Experience shows these tactics usually result in incremental gains.
In working with owners, we find the cause of low average sales is not price but rather that motorists have more needs than just clean.
When value proposition is structured with customized solutions, we find it resonates and results are robust. When this proposition is leveraged, results are even better. Furthermore, this is achieved with only a slight increase in expenses.
To provide a real example, we compare two express washes. The first, good/better/best, emphasized price tactics mentioned earlier. The second focused on value proposition, then leverage. Demography is equivalent.
As shown below, the opportunity cost of good/better/best, even with higher sales volumes, is net operating income of $106,000 (378,000 – 272,000).
By emphasizing value proposition rather than price, motorists will choose you as the seller with whom they want to do business. Once this decision is made, customers will continue to look to you for guidance and recommendation rather than the competition.
Car wash owners who pursue this strategy will find it is far less difficult to raise the bar when it is not weighted down by conventional wisdom regarding price.
Bob Roman is president of RJR Enterprises — Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org.