The dangers of discount carwashing
Discount carwashing is a threat when competitors voluntarily cut prices by a substantial amount (i.e. Detroit’s $2 carwash market) or when a new competitor introduces a much lower price point (i.e. $3 exterior carwash with free vacuums).
Discount operators are banking on price sensitivity to bring consumers to their sites and buy more often. Since the demand for carwash at the retail trade level is finite in the short-term, discount washing is often portrayed as being bad for the industry.
Wal-Mart & carwashing
Proponents of discount washing cite changes in consumer habits. A younger generation raised on ATMs and pay-at-the-pump doesn’t understand the value of service, while low-priced in-bays and exteriors pull more consumers from the driveway.
These proponents cite a new definition of quality service that stresses fast, no-frills service at cheap prices. They cite theory that lower prices result in higher volumes.
If Wal-Mart can use low-price technology and a low-road human resource strategy to become highly efficient and profitable, the same strategy should work in the carwash industry. This strategy can work — but there can only be one cost leader.
The discount model
The premise of a discount carwash is to indulge the customer with a very low price for the base service and the free use of vacuums. Pricing below the competition requires greatly increased volumes and greatly reduced costs because this price strategy reduces profit margin per sale.
Greatly increased volumes are something we should expect from express exterior. For example, industry averages suggest the demand for exterior carwash is very responsive to changes in price.
Nevertheless, discount carwash operators cannot ignore the cost of production when pricing services for profitability. The cost of producing a carwash is composed of materials, labor and overhead.
The model below includes an average price ($7), average variable cost ($2.97), average monthly expenses ($25,900), annual sales forecast (100,000) and elasticity (a 10 percent decrease in price results in a 20 percent increase in volume). Based on these parameters, our new $1.5 million express exterior carwash has a profit of $92,000 and break-even point (BEP) of 77,000 cars.
- Lower price by 5 percent. Results in annual volume of 110,000 cars, a profit of $94,000 and a BEP of 84,000 cars. Raise price by 5 percent. Results in volume of 95,000 cars, a profit of $105,000 and a BEP of 71,000 cars.
- Lower price by 10 percent. Results in annual volume of 120,000 cars, a profit of $89,000 and a BEP of 93,000 cars. Raise average price by 10 percent. Results in volume of 90,000 cars, a profit of $115,000 and a BEP of 66,000 cars.
- An elasticity of 4.0 (a 10% decrease in price leads to a 40% increase in volume). Results in annual volume of 140,000 cars, a profit of $155,000 and a BEP of 93,000 cars. A 10 percent increase in average price results in volume of 60,000 cars, a profit of $27,000 and a BEP of 66,000 cars.
- A 10 percent increase in average variable cost results in a profit of $62,000 and a BEP of 83,000 cars.
- Monthly expenses of $29,000 ($2m carwash) results in a profit of $55,000 and a BEP of 86,000 cars.
As shown in the first three simulations, lowering the average price (increasing volume) of a discount carwash does not necessarily lead to increases in profitability unless the responsiveness of consumers to changes in price is sufficiently high enough.
Pricing below the competition will subject a discount carwash to risk if there are sudden increases in average variable cost (i.e. an increase in chemical costs, labor, utilities, insurance, etc.).
Offsetting this risk by decreasing price (increasing volume) or increasing price (lowering the BEP) will also depend on the responsiveness of consumers to changes in price.
Since the price of commercial property is usually consistent with the strength of the retail market, sites capable of producing high volumes usually command a premium.
This creates a paradox for discount carwashing because one of the keys to success for pricing below the competition is to locate the business in an inexpensive area or facility.
And finally, low price can result in permanent damage to price integrity.
Once you have established low price, customers will come back and want more of the same. If you must raise prices later, it will be difficult to make all customers happy. Some will insist your price is wrong.
Bob is president of RJR Enterprises – Carwash Consultants (www.carwashplan.com). Bob is a member of PC&D’s Honorary Advisory Board and the International Carwash Association. Bob can be contacted at firstname.lastname@example.org.