Price theory asserts that in a free economy the market price reflects the interaction between supply and demand functions. Here, the price is set so as to equate the quantity being supplied and that being demanded. In turn, these quantities are determined by the marginal utility of the asset to different buyers and to different sellers.
When a commodity is for sale at multiple locations, the law of one price is generally believed to hold. This law states the cost difference between locations cannot be greater than representing shipping cost, taxes, other distribution costs, and more.
So, if wash A and B are selling identical products and services at identical prices and wash A then decides to lower its prices, we would expect demand to increase for wash A if wash B doesn’t follow suit.
Consider the express exterior wash that began under the premise of a $3 base selling price, free use of vacuums, and pared-down operational standards. For example, in 2000, most express washes were small by today’s standards; captured a lower percentage of highway traffic, but greater than full-serve; and there were no products like total body protection to fatten average sales.
So, an express exterior might wash another 20,000 cars a year compared to a full-service conveyor but at a much lower average ticket ($4.15). I like to refer to this as the Choo-Choo model.
Next, the protection model came about as operators installed profit centers like Rain-X, tire shine, and hot wax. Newer express washes were larger and captured a greater percentage of traffic. Base price ratcheted up to about $5 or $6 and an average sale of $7.36.
Today, the glow model is becoming popular. Here, the emphasis is on show (lava bath, glowing lights), top package marketing, and multiplicity of online products (e.g., four-step paint sealant, buffing unit). The average sale amounts to $9.36.
The figure above provides an index to illustrate how financial metrics have changed as the express model has evolved over time.
Another development with express exterior has been unlimited washing. Since unlimited-wash customers visit an average of four to five times a month, a large membership base has the effect of increasing car counts significantly as well as lowering average sales revenue.
Perhaps this is the rub with express exterior. What’s next? For example, what more can be installed in a car wash tunnel to sell for an extra charge, and unlimited programs eventually mature and reach equilibrium.
So, what happens to price as costs rise such as labor (minimum wage), utilities (water and sewer), insurance, etc.? Since there are no labor positions to cut back on, surely price will have to rise.
Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org.