Are you leaving money on the table? If you haven’t optimized your car wash pricing, the answer is probably “Yes.” Even if you recently changed your pricing, there is nearly always room for optimization.
Simply raising your prices by $1 across the board won’t get you optimal results, though. Nor will aligning your prices with your competitors. To get the maximum impact, a more strategic approach is needed.
WHEN SHOULD YOU CONDUCT A PRICING ANALYSIS?
Virtually any car wash can benefit from looking at their pricing, but there are a few signs that you should analyze your pricing sooner rather than later.
•. You’re ramping up marketing efforts — Before you spend money to bring in more people, it makes sense to optimize the traffic you already have. Plus, when you do drive in new traffic, you will be maximizing the return from each customer.
•. You notice customers flocking to one package — If one of your wash packages is disproportionally popular, statistics tell us that a number of those people will be willing to pay more. It’s more complex than just increasing prices across the board. All of your prices relate to one another, and it’s the relationship between the prices that’s going to impact behavior.
•. If you haven’t looked at pricing in a couple of years — Consumer behaviors and other factors are always changing, so it’s very common for the pricing that was optimal a couple of years ago to have optimization opportunity today.
• If you are considering increasing prices — It’s common to want to raise prices to keep up with the competition or make more money. But before you do, run a pricing analysis. There’s often a lot more revenue to be made through optimizing prices rather than simply increasing them.
So, say you’ve determined it’s time to change prices. How do you adjust them? Most operators rely on guesswork and common beliefs about pricing that often prove to be inaccurate. We call these pricing fallacies.
Pricing Fallacy #1: My Competitor Is Doing It, So Should I
In the absence of data, the path of least resistance is to simply copy a competitor. The minute a competitor raises their prices, you may think you need to as well. But just because they raise their prices doesn’t mean they are going to make more money. They could end up losing business, negating the profitability they expected from their increase.
Along these lines, don’t assume that if a competitor has a high-priced item on their menu that it’s selling. We have found that high price points may make an operator feel good, but they don’t tend to sell much.
But don’t higher prices give customers the impression that you are a higher-quality car wash? Not necessarily. In some industries, such as the auto industry, this may be the case, but customers likely aren’t researching price and quality when they choose a wash.
Don’t try to win on price. Win with customer service.
Pricing Fallacy #2: My Costs Have Increased, So I Have to Raise My Prices
The cost of everything related to running your business seems to be increasing, so you have to raise your prices to compensate, right? That depends on what your data is showing you. The last thing you want is for your expenses to go up and your demand to go down at the same time. Make a decision based on what your data says about your customers.
Pricing Fallacy #3: You Should Never Lower Prices, Only Increase
In general, you do want to raise prices. People are used to prices going up over time. But again, it depends. Look at the data first. Going back to the demand curve, sometimes you do need to go down to capture more revenue.
Pricing Fallacy #4: Maximizing Ticket Average Is Most Important
Yes, you typically want to increase what customers are spending. But if your price is too high, your demand will be lower, so having the highest ticket average ends up being counterintuitive. Ticket average is just one piece in the larger puzzle. Volume, memberships, retention, and other factors also should be considered.
So, if these strategies are less than optimal, how should we approach pricing? For that, we’re taking it back to Econ 101 and the demand curve. In the graph below, the y-axis on the left is the price. The x-axis on the bottom is quantity. This shows that at the lower price, you have high demand but a low profit margin, and at the higher price, you have a high margin and low demand.
Below we have the demand curve again but with the addition of the blue rectangle representing revenue — price times the number of people who will purchase at that price. Here is what it may look like if we were to charge a higher price.
Alternatively, if we were to charge a low price point, then that revenue cube is going to shift as shown below.
The key is to determine the price and quantity combination that will result in the highest possible revenue. But once we determine that for a single offering, there is still revenue left on the table, represented below with triangles above the cube and to the right of it. Those represent the dollars that customers are willing to pay or the quantity that they’re willing to buy.
This is why most car washes offer multiple single-wash packages and corresponding monthly unlimited plans. Those who are willing to pay more will select the higher package that offers more. Alternatively, those people who want to pay less will select a lower package.
The reality is you would have to have an infinite number of prices to capture all the potential revenue. That’s not going to happen, but you want to implement the pricing structure that allows you to capture as much as possible.
DESIGNING PRICING SUCCESS
As a side note, it’s not just optimizing pricing but how you present that pricing. We have found that your wash menu design significantly influences consumer behavior as well. You can increase revenue by simply finding the right combination of colors, fonts, and layout for your menu. For instance, displaying tiers in gradually increasing sizes can help influence customers to buy the higher-priced package. We have found that strategic wash menu design alone can increase ticket averages by around 12 percent.
REAL-LIFE PRICE OPTIMIZATION SUCCESS
Most owners that we work with are shocked at how much money they’re potentially leaving on the table. One such example was a family-owned operation that was adding sites regularly and had about a dozen when we looked at their pricing.
About 36 percent of their customers were picking the top wash. As we discussed above, that can be a sign that it’s time to look at pricing. By optimizing their prices, they increased their ticket averages by nearly $2 — which was $3.5 million in annualized revenue.
What’s interesting to note here is that this business was already doing well, but they were leaving this much money on the table in annualized revenue. This illustrates that your business does not need to be underperforming to benefit from pricing optimization. The impact will vary depending on the size of your operation, but you can see how simply optimizing pricing without washing any additional vehicles can drive significant revenue.
DON’T LEAVE MONEY ON THE TABLE
You have nothing to lose and everything to gain by strategically looking at your pricing. Before you invest any time or money into other marketing efforts, consider price optimization to give your revenue a boost.
Kayla Ivey is product marketing manager for Akron, OH-based DRB. Kirk Fletcher is director of data analytics for SUDS, DRB’s marketing agency. You can visit these firms on the web at www.drb.com.