Finishing Line

Discounting - Beneficial Tool, but Avoid Excess

By Robert Roman

09/01/14

Future discounting is the rate at which someone is willing to trade something now for something in the future. For example, my wife buys a new car, usually cash, and holds on to it for a very long time. I can’t resist leasing and driving away in a new car with no money down, frequently, so I pay lots of interest.

Similarly, we see excessive future discounting with consumers who spend $100 today on their credit card and then pay $150 in accumulated interest and penalties in the future.

Spending is not a bad thing, though. Economists find people with a high propensity to spend, spend more time developing financial plans and this can be associated with increased wealth.

Consequently, one way to avoid excessive discounting is to spend more time planning. To illustrate, we examine discounts by referencing point in value chain and aspect of business model affected.

The most common car wash discounting is the coupon. Coupons encourage spending whereas direct-mail advertising is expensed when mailers are distributed. Thus, the coupon is treated as a cost of sales and not as a marketing expense against revenue when customers redeem them.

Another discount is multi-wash voucher books. Books are sold at face value and have no alternative use except for exchange at the store. Books have no expiration date and are liabilities.

Consequently, operators need to determine when to recognize revenue and when it becomes remote that redemption will occur so they may retain the benefit from unredeemed books. Additionally, some states require that retailers redeem a voucher value for cash if the amount falls below a certain level.

A warranty is a form of discounting. A warranty is a guarantee or promise by one party to another party that specific facts or conditions are true or will happen. A satisfaction guarantee is a form of warranty and federal law provides for enforcement. Basically, a car wash operator must refund the full purchase price regardless of the reason for dissatisfaction.

The advantage of a money-back guarantee (MBG) is it encourages customers to try new products and may allow a higher price because the MBG reduces the risk of uncertainty, which tends to increase people’s willingness to pay.

When a warranty is bundled with a product (e.g., 30-day hot wax), the cost incurred to fulfill the warranty (rewash) is charged to cost of sales as incurred. Whereas with an extended warranty (e.g., three-year paint sealant) the cost incurred to fulfill is extended. So, it is important to monitor and ensure the expected cost of fulfillment does not exceed the amount of deferred revenue.

Customer loyalty programs and unlimited wash subscriptions are forms of discounting. Loyalty programs grant members certain benefits (e.g., birthday wash, buy four get one free, 15 percent off certain items) that are redeemed in the future. Cost of membership may be free or comes at price, but the cost incurred to fulfill benefits is charged to cost of sales as incurred. It is important to ensure that expected cost of fulfilling benefits does not become onerous. Like loyalty programs, unlimited wash subscriptions hold advantages for consumers who use services frequently. Operators benefit from a more predictable and constant revenue stream (pre-authorized, recurring card charges).

In the final analysis, discounting is a necessary evil of the car wash industry. On one hand, most consumers prefer a discount, and experience has shown it does increase sales and promote the development of the market. On the other hand, it’s an evil because, on average, more than 20 percent of car washes are sold at a discount.

 

Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.



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