In a previous article, Is Now the Time to Increase Your Vend Prices, I showed that from 1997 to 2010 that the average washer vend prices kept ahead of inflation but fell behind to the cost of Natural Gas. I also stated that we should be using the Laundromat's cost of Utilities as the basis for increasing (or decreasing) our vend prices. We need to use all of our "overhead" costs to set our base vend price but any adjustments to our vend price should be made using the costs of utilities. In the purest sense, our customers are purchasing our utilities; they are renting our machines, but they are purchasing water, sewer, gas & electricity.
In preparing to increase laundromat vend prices; we need information before we can make intelligent business decisions. You need to know what your commercial laundry competition is doing. I suggest visiting all of your competitors at least once a year and recording their current vend prices and making notes of the strengths and weakness's of their store. (SWOT = Strengths, Weaknesses, Opportunities & Threats.) These should include the hours of operation, attendant or no attendant, price for WD&F, the overall appearance of the store and the cleanliness of the Laundromat. Once you know the how your Laundromat compares to your competitors you will be in a better position to evaluate your own business as a "price leader", a "price follower" or something in between. For more information on Laundromat "Price Leaders" and "Price Followers" please read the excellent series of articles by Jeffrey Barman printed in The Journal from December 2007 to June 2008. Mr. Barman does an excellent job in describing the many different types of Laundromats and their pricing strategies.
You want to be the "Best" Laundromat in your market place and thus be the Price Leader. Obviously it is better to set the vend price benchmark rather that always be a follower (or a non-follower for those operators who are asleep at the wheel). But there is a consequence of having the "Best" Laundromat in your market place and thus being the Price Leader. The consequence is no one else will raise their vend prices, until you raise your prices first. All of your laundromat competitors will wait for you to set the vending price benchmark and then react to your price increase. As a Price Leader you have a responsibility to make sure that you have the most current information for your market place and a responsibility to set a fair and reasonable vend price.
Before you do anything, realize that the best possible investment you can make for your Laundromat is to make sure the store is Clean, Safe and all of the equipment is operating properly. Your customers are coming into your store to perform a "cleaning function"; if the store is dirty, smells musty, has graffiti on the walls or has numerous machines out, then you have already lost the customer's confidence that your Laundromat can clean their clothes. If your store doesn't have a fresh coat of paint and if some of your lights are not working or working with different colored bulbs; then fix it!!! You know how your store looked when it was first built, and you need to keep the same look (or better) as the store matures. These are basic customer expectations for washing in a Laundromat. I should not have to mention this at all, but surprisingly many Laundromat owners just don't even provide these Laundromat basics.
Once you have cleaned up your own house (Laundromat), now we can start to look at raising your vend prices. There are several strategies for setting the vend prices including:
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.
Utility expenses are a variable expenses and directly related to the use of the store. The busier the Laundromat, the higher the utility costs. We want to make sure that the utility costs are in line with industry standards. Utility costs have a significant impact on the economic profitability of your Laundromat. If the utility cost become too high, then vend prices need to be increased to achieve the same profitability for the Laundromat. If you review the attached chart you can see National Coin-Op vending prices (as reported by the CLA) almost mirror the cost of inflation. I always guessed that my store's vend prices were always falling behind to the cost of inflation but once I produced this chart, I was pleasantly surprised to see that for the last 13 years the Laundromat national average for vend prices has kept slightly ahead of inflation.
I was not able to go back further than 1997 because the vend price data changed to a different format and is not compatible with the current data. As an old salt of the laundry industry, it would have been interesting to see what effect run away inflation in the 1980's had on washer vend pricing.
When we compare the last 13 years of Natural Gas cost vs. Laundromat Vend pricing you can see Laundromats fell way short in 2000 and again short between 2002 and 2009. Currently, Natural Gas is at a historic low and we just barely getting back to our vend price curve. The 8 years where Natural Gas prices were above the national average vend price line; the Laundromats were making less profit because of the increase in utility costs. In effect we were discounting the cost of the wash to our customers. This chart reveals a very compelling argument why every one in the Laundromat industry should be basing their vend price on the cost of their utilities.
Historically a Laundromat with all front load washers would have 20% of the gross revenue pay for all of the utility costs. Within the last 7 years and with the recent spike in Natural Gas costs, the same Laundromat is up at 25% utilities as a percentage of gross income. In my Laundromats, I do Not want my total utilities to be any higher than 25% of my gross income. If the percent utilities goes higher than 25% then I am using too much of my store's profit to pay for utilities. "Gross Income" is expressed as self-service income and including just the WD&F revenue to start the machines. If you have any Wash Dry & Fold business, the current vend cost to start the washers & dryers need to be included into the "Gross Income" figure. Gross Income should only include the washer & dryer revenue and should not include any revenue from soap or vending machines. 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 laundromat 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.
In the next article I will show how I go through the numbers of calculating what your fair vend prices should be and how to get there.