$3 Wash? Pricing Pointers
By Ryan Essenburg

First, a word of advice: Price your wash for your market. I have heard stories of operators charging a $10 base price and selling RainX for $7. If you can, you should. For the rest of us who can’t, here, based on my experience, are my thoughts on pricing.

Consider the following when trying to determine price points:

• Gross margins
• Other (forgotten) variables
• Depreciation
• Cost per car

GROSS MARGINS

Last year, I listened to a trade association’s conference call, which included a discussion about increasing utility costs. I added this to the continued increases in the cost of chemicals and the jump, last year, in the minimum wage here in Michigan. So I thought it would be a good time to go back and analyze our numbers and compare them to what I had heard on the conference call. We were right in line with the figures discussed during the call: about $2.75 cost to perform a basic wash.

Let’s assume an average $2.75 total cost to wash a car. (It’s a pretty typical number, but do your own math to arrive at an actual figure for your operation.) At a $3 base price that’s $0.25 gross margin per car.

If you were to increase your base price to $4, the costs remain the same, but your gross margin would become $1.25. Therefore, a price increase of only 33 percent to the consumer equals a 500 percent increase in your gross profit.

To me that looks like a no-brainer. I therefore have to ask the question: Why not four? Putting a big $4 sign in front of your wash is sure to drive attention as well. It’s still inexpensive and it’s still going to make customers open their wallets.

When you try to gauge the increase in volume at your site by dropping to $3, consider that it would require five times the traffic at $3 to make your base-wash gross profit the same — not an increase of 30 percent like many would think (see Table 1, right).

OTHER (FORGOTTEN) VARIABLES

There are other variables that affect the pricing structure that are often overlooked.

Debt and Development Cost
I can think of a few $3-wash models that are better established and have a much lower debt load than your typical new investor. Hand in hand with the debt ratio is the total cost of development. Some successful $3 model washes and larger chains have better buying power for equipment, chemicals, and supplies, and also lower construction costs than a one-off developer.

Brand Recognition (Area Development/Critical Density)
Having multiple sites in a single community drives strong brand recognition and greatly increases the volumes of all sites in your market. Brand area development — or what we often refer to as reaching “critical density” — needs to be factored into the equation when comparing successful $3 multi-site chains to an attempt at a one-off $3 site. Critical density in this business usually means you have around three to five conveyor locations for every 100,000 people, and your sites are not much more than two to three miles apart. Reaching critical density greatly increases your numbers.

Quality Cost
The equipment package and the scale of clean/shiny/dry play a big part in the feasibility of the price structure. It simply costs money to clean, shine, and dry cars to the highest level. Therefore, with a $3 price structure, you need to make sacrifices — shorter tunnels and less equipment. You’re going to have to reduce your quality to make the numbers work. This requires reducing components like wheel cleaning chemistry, fewer blowers, less soap, etc. If you go through many $3 washes, the reduced quality is usually obvious. When you consider this trade-off, bear in mind that the International Carwash Association’s Study of Consumer Car Washing Attitudes and Habits clearly shows that customers care more about the quality of the job than they do the price.

Multiple Profit Centers
Some successful $3 models incorporate multiple profit centers that make the numbers work. We believe a gas/c-store/wash can increase the wash numbers by as much as 30 percent. Likewise, the wash will increase gas volume by 30 percent simply by having more traffic on the site and more profit centers. Driving traffic on a site with a $3 price point and then also gaining gas, c-store, and lube sales from that customer can make the numbers work nicely. When attempted as a single standalone express wash, it can be catastrophic because of the multiple-profit-center variable. Also, with a larger multiple-profit-center facility, the land typically costs less — the cost is divided among the profit centers versus that cost wholly accruing to a freestanding express.

DEPRECIATION

It’s all fun and games when playing with cash flow, bank financing, and the excitement of a new business, but the truth is that depreciation is not a perk on your taxes, it’s a real cost.

Most people think this nice little deduction on your income statement saving you tax dollars equals free money. Unfortunately, for every car that drives on your property you are paying a price. This is typically not recognized by new operators.

Renewal
Having toured hundreds of car washes and studied operators around the world, I have come to realize that without regularly reinvesting in and uplifting existing car washes, they can quickly become worthless.

Consider McDonald’s as an example to follow. They gut or flatten even their good stores, and in four months they’ll have a brand new facility with better layout, better processing, new look, less labor, smoother flow, and therefore a better bottom-line generator. This is exactly what we should be doing. The car wash market isn’t oversaturated; the problem is many washes have been robbed of their cash by letting their image go, and have been left for dead on corners around the country.

If they’re good sites, tear the buildings down or gut them, and build new, fresh washes that have better processing, lower labor, and can produce four times the bottom line.

I believe whatever you write off in depreciation on your income statement should be put aside into a savings account. You will need that money someday to reimage, reequip, rebuild, etc. Take whatever you expense for depreciation and put it in a certificate of deposit or investment account. Unfortunately, most operators today have to go to the bank and borrow just to reequip.

Quantify
Come up with a cost per car for your real depreciation expense, consider bearing wear, cloth, pumps, asphalt, garage doors — all equipment. The car wash is a different kind of business where the cost of our service lies greatly in the wear and tear of the equipment doing the cleaning, supplemented by the cost of chemicals, water, and electric that we can clearly peg as variable costs. This contrast with a restaurant, for example, where the costs are more weighted on cost of goods sold and labor and less equipment wear.

Maybe your depreciation looks something like Table 2, above.

Add this “real” cost to your proforma and cost per car analysis before diving into a $3 price point.

The wash is similar to a jet, a high depreciation cost per unit. For every hour a jet is used, money is set aside going toward engine rebuild as an actual cost. Hoteliers offer another example: They budget for an overhaul typically every five years to keep up to date with the latest furniture, colors, and trends. Consider your business 25 years from now when you’ll need to spend $300,000 per location to get up to par.

Tie this depreciation concept in with the wash-package sales breakdown. Sure, you might be averaging $6, but is it really worth the depreciation on your facility to have half of your customers washing at or near cost?

COST PER CAR

Now I understand the idea of offering a $3 base price is to up sell, but surely it’s better to up sell from a higher base than from a lower one. Besides, most $3 operators see 30 percent to 50 percent of their customers buying the base wash. Therefore, at $3, their only option would be to reduce costs and quality, which will make customers one-time visitors.

Table 3, right, shows actual data from multiple car washes around the country averaged together over a few years. When looking at this data, consider that these are high-end larger-scale washes, not $3 washes with auto cashiers. They also represent longer tunnels and factor in the cost of chemicals, water, claims, gas (hot water and heated drying), and repairs and maintenance. Chemicals include tire-shine and RainX sales. Obviously, not all of these costs are variable per car costs. However, administrative overhead in many ways does relate to the wash volume; therefore it’s beneficial to review all expenses in cost per car terminology as shown.

The total depreciation of all parts of the site came out on average even higher than the few items we looked at earlier. Another interesting cost item is repair and maintenance. In a new facility this number is often $0 for the first three to four years and then will begin to increase as the facility and equipment gets older.

FOLLOW SUCCESS

Arguably the most successful car wash chain in the country, on a per store basis, also happens to be a freestanding express model: Mike’s Express Car Wash out of Indianapolis, IN. The secret to their success, I believe, is that they produce the absolute cleanest, shiniest, driest car you can imagine. It is an example to follow. Spare no expense, and produce topnotch quality using hot water, heated drying, and lots of soap. That approach lines up with the results of the ICA’s study of consumer habits: Customers care more about quality than they do price.

Ryan Essenburg is COO of Holland, MI-based Tommy Car Wash Systems. He recommends that operators use their best judgment in pricing their services for their marketplace and seek out local consultants who understand their particular market. You can contact Ryan at (616) 494-0771 or via e-mail at ryane@tommycarwash.com.