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Are higher prices a good idea?

October 11, 2010
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The debate for or against low price usually comes down to a discussion of price versus the quantitative aspects.

Quite frankly, the ability to get a good price is not a major concern of all carwash operators. Many full-service operators prescribe to the higher return per customer philosophy. Using this approach, the operator focuses on service and learns how to make more money from their customers and keep them longer.

According to PC&D annual benchmarking survey reports, average revenue per vehicle for this segment has risen from $5.50 in 1990 to $20 in 2005 and there is no downward trend in average wash volumes.

Priced to sell
Higher prices help full-service operators reduce the contestability or vulnerability of their trade area. Contestability is the notion that service companies whose markets are relatively easy to enter can’t charge monopoly profits even if they have no current competition.

Price can be held down artificially due to just the possibility of rivals entering a market. Full-service and flex-serve operators have avoided this problem by creating a more positive experience, making the best use of available space, using the best equipment and products and providing excellent customer service.

Many self-service operators prescribe to the lower return per customer philosophy. Using this approach, the operator focuses on costs and learns how to make money by selling low price to a wider audience.

The problem with this approach is that the trade area for a carwash is relatively small. By most accounts, 80 percent to 90 percent of carwash customers come from within a 3 to 5-mile ring or the equivalent of 10 to 15-minute drive time. As such, the operator will eventually run out of customers regardless of long and how low price is kept.

According to PC&D benchmarking reports, average revenue for the self-service segment (wand-bays plus in-bay) has risen from $3 per vehicle in 1990 to only $5 in 2005 and there is no trend in annual average wash volumes.

Many exterior operators also prescribe to the lower return model. In the case of express exterior, the operator focuses on low price to drive higher sales volumes. This is achieved with a very low initial price (i.e. $3), free use of vacuums, coupons, bulk sales and a low-road approach to human capital (i.e. automated pay stations and no value-added services).

Unfortunately, cheap tends to attract cheap. This would include seniors, home washers, crossovers from the wand-bay and in-bay ranks and other economical shoppers who aren’t likely to upgrade their coupon washes.

Once the business becomes entrenched with these price-driven customers, the operator becomes more vulnerable to competition. Even in densely populated areas, the express operator is forced to discount heavily to produce consistently high sales volumes. If another competitor comes into the market, the express operator would have no where to run and any decrease in business would have a dramatic affect on the bottom line.

Join the crowd?
Investors need to realize that building a new low-price, high-volume wash does not create new demand in a trade area. All of the consumers who will buy a carwash from the new store are already buying all the carwash services they need somewhere else.

In a new, emerging or otherwise under-served market, a new express operator could expect to make abnormal profits. In a mature market, some companies may have a tiny monopoly because of the differentiation of their product.

Such is the case with firms that have established a strong brand and reputation for high quality and customer service. This allows these firms to have some control over price. In this case, entry for the new express operator would be more difficult because the owner could only expect to attract the competition’s least valuable customers, meaning those who are price-driven.


Robert Roman is a former carwash, express lube and detail shop operator and is president of RJR Enterprises (www.carwashplan.com), a leading consultant to the carwash industry. Robert is a member of International Carwash Association and PC&D’s Honorary Advisory Board. He can be contacted at rjrcarwashplan@yahoo.com.

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