The Price Isn’t Right - Raise Prices, Lower Prices, or Stay the Course?
By Anthony Analetto
The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” Thus spake Warren Buffett.
What works for Warren Buffett may not work for everyone, but he has a point. How we price and structure wash packages is probably the single most common question I field from car wash owners. Price too high and you stand to lose business. Price too low and you may not be as profitable as you would like to be.
I’ll be the first to admit that pricing can sometimes present itself as a real conundrum but one that can’t be ignored. Just the other day, a fellow car wash owner contacted me to let me know that a nearby rival wash owner was doing more volume since dropping his prices.
When I hear about two car washes in relatively close proximity to each other doing markedly different volumes of business, I immediately question whether we are talking apples to apples. Most of the time, we are not.
ALL WASHES are NOT CREATED EQUAL
The car wash owner who contacted me turned out to be a creature of habit who had not altered his service offering for a long time. After digging deeper, it became clear it wasn’t just about lower pricing, but the competitor was offering customers more “value” in each wash package across the board — quality chemistry, entertaining lighting, and better customer service.
Economic conditions are relatively decent now, so why was a local competitor lowering the price of its base package?
Unlike commodities such as gasoline, car washes offer a service-based product, and raising and lowering prices to meet local market price structure — like gas stations do — can be harmful to your brand in the long term: meaning if a competitor lowers price, avoid knee-jerk reactions.
It’s much better in the long run to figure out your competitors and what they are doing better than your car wash or find ways to cut costs without degrading your service quality or your brand.
FOCUS ON THE BIG THREE
Before you start tinkering around with price adjustments, it’s best to review how businesses set prices using three major pricing strategies, and possibly decipher what tactic the wash down the road is employing to compete with you.
This model is very simple. If your customers don’t see a benefit or value to using your wash, they will go to a competitor.
As I mentioned before, all washes are not created equal. Some raise prices without offering value. That’s generally the wrong thing to do for long-term growth. With this model, you need to know how much value consumers place on benefits they receive by doing business with your wash.
Consider why customers flock to luxury brands — beyond the purchase making them feel good. There is the prestige factor in knowing they are purchasing an exclusive item or service that not everyone has. Then there is the perception of value. Full disclaimer: I do not promote or disparage any make of vehicle, but it’s the reason why some drivers opt for a luxury brand over an entry-level economy sedan.
If those two vehicles were to cost the same and both had similar features, do you think the customer would still perceive value in the luxury brand? They might, but the point is to be careful lowering your prices due to temporary market conditions or other competitor practices.
This model is a bit harder to pin down than it seems because it requires you to have the right marketing variables in place before setting prices. In other words, you’ll need to do some research on your customer’s purchasing habits and their perceptions about your wash versus competitors. You’ll need data and lots of it.
When I describe competition-based pricing, it’s going to sound at first a lot like matching offerings line by line with competitors. But it’s much more than that. Competition-based pricing is a lot how the gasoline industry works.
Setting prices based on this model will result in the tightest of profit margins because if your prices are too closely aligned with competitors, customers are much more likely to scrutinize and base their purchasing decisions on who provides the best value in their minds.
If you are doing business in this type of market dominated by low-price competitors, you need to find ways to clearly identify “why” your wash is better. Enticing promotions or other incentives to differentiate your wash are important. You could also consider identifying underserved niche markets and offering value-added services priced accordingly.
Cost-based is the opposite of customer-value-based pricing because instead of setting prices according to perceptions of value, your cost of doing business is the primary consideration. This model is based on costs for producing and selling your service and charging with the expectation of a fair rate of return.
This strategy is similar to what stores like Walmart do. They pursue a low-cost strategy whereby they are willing to accept smaller margins but rely on greater sales volume to generate profit. This model can potentially be very successful in markets with primarily lower-income customers or where the local area is highly saturated with other washes.
MAKING SENSE OF THE PRICING CONUNDRUM
If you are confused about how to price your wash package in the face of direct competition or uncertain economic conditions, don’t be. You must, however, be proactive about pricing as it relates to market conditions locally, regionally, and nationally, in some cases.
Should you raise prices, lower prices, or stay the course and hope to ride it out? Should you juggle prices periodically to get the right balance of volume versus your share of expected profits? Should you have a pricing strategy in place for uncertain economic conditions? The answer to all three questions is yes and no.
Menu pricing should always be a moving target, especially during rocky economic conditions. Always be prepared to get out your calculator and crunch numbers. But don’t just price based on what the guy across the street is doing.
Think about which pricing model suits your wash the best. Think about what your brand stands for and the value of the customer experience you deliver. Think about the cost of raw materials and ways to leverage automation to reduce overhead. Have a long-term pricing strategy that is malleable enough for changes in the economy, material costs, labor, or all the above.
I was recently at two restaurants in California that had discreetly posted signs adding a 3 percent and 4 percent surcharge respectively to all guest checks, which they said was to cover increased minimum wages. While I find that to be an entrepreneurial way to adjust to minimum wage hikes,
I still question how this pricing tactic works in the professional car wash industry.
Some customers are put off by the idea of a surcharge. Its very definition is to charge an “extra” fee. Will your customers still see value despite the extra fee or is it better to build the surcharge into your pricing structure somewhere else?
Another point I can’t stress enough is the benefit of starting your workweek for payroll purposes on Thursday because by Sunday, many of your staff will have accumulated close to 40 hours. This enables you to staff appropriately during the lighter days of the week and save more money on labor.
Lastly, the most important thing to remember when settling on your price structure is that pricing requires a strategic plan that accounts for economic and other variables not entirely in your control.
Good luck and good washing.
Anthony Analetto has over 35 years’ experience in the car wash business and is a partner at SONNY’S The Car Wash Factory. Before coming to SONNY’S, Anthony was the director of operations for a 74-location national car wash chain. Anthony can be reached at (800) 327-8723 x 104 or at AAnaletto@SonnysDirect.com.