National Clothesline

I am responding to the letter published in the April 2005 issue of the National Clothesline. Justice in economics is a noble concept written of (among other places) in Leviticus over a thousand years ago. There seems to be as much confusion about it now as two millennia ago.

A gentleman from South Carolina has been getting the word out about his unhappiness with his states’ drycleaner remediation plan. He seems to believe that it was put in place to change drycleaners’ behaviors. This is not the case. The program’s primary goal is to identify and clean up drycleaning job sites.

With this as a goal, it is necessary to raise funds. Economics is the social science about people responding to incentives, and when South Carolina set up its fund, in an attempt to tax equitably, they taxed only perc users. Perc users responded as rational businessmen — by switching to other solvents and becoming more efficient with their solvent use.

The fund immediately began underperforming as drycleaners altered their behavior. By the time the fund could respond (by attaching sales tax) the damage was done. Poor compliance and collections had become too common.

Now the fund has begun correcting its initial problem, by taxing all new cleaners. No one is being forced into the fund; he can open a dry store and continue his avoidance of these taxes.

Also, I question the assurance he feels from an insurance policy. Almost all policies have exclusion for pre-existing problems, and it’s likely that the incentive to find a problem as pre-existing will affect any claim’s outcome.

South Carolina’s biggest cleanup project is a case where the owner was spraying the weeds with perc; there is a lesson for all of us in this. This practice, today obviously wrong, was acceptable at one time and we cannot know what regulations will come to us in the future. Chemical responsibility is not a problem for the few; and I don’t believe in two types of drycleaners separated by solvent type.

Many drycleaners are frustrated with the need to match the 10 to 30 percent discounts offered by the competition across the street. Such discounts cut into already-thin profits.

And what about customer loyalty? Even with exceptional service quality, losing customers remains an issue. How can drycleaners keep customers loyal?

The top three airlines alone have more than 30 million consumers on their frequent flier rolls. By participating in value added programs like frequent flier miles, drycleaners can attract new customers and earn additional loyalty without engaging in heavy discounting.

Other established added value programs include contributions to local schools (eScrip — three million consumers), charities (Tricordia — one million consumers) and college savings accounts (Upromise — six million consumers).

Most large industries use frequent flier miles and other added value programs (such as those listed above) to acquire large pools of new consumers and win their loyalty. While some drycleaners use time-tested programs like frequent flier miles, most do not.

Why do only a handful of dry cleaners offer added value programs like frequent flier miles? The first factor is the administrative cost. The tracking of qualified purchases and paying out the benefits is burdensome to both counter staff and administrative staff.

Second, frequent flier programs have minimum purchase quantities that are too high for mom-and-pops to manage (e.g. you must purchase a minimum of 50,000 miles to buy Delta miles). Consumers typically want to be able to earn miles under more than one airline program, so the minimum purchase quantities can be even more burdensome.

Registered card programs that automatically provide rewards to only those consumers who want the reward have become a popular mechanism for administering and distributing added value. With these programs, everything happens behind the scenes as member consumers make credit card purchases — there is no administrative burden to the drycleaner. The administrators of these programs purchase multiple added value awards, in bulk and discounted rates, on behalf of the merchant participants.

For example, Idine (now called Rewards Network) is a program that sends 27 million registered cardholders and frequent flier members to tens of thousands of participating restaurants and hotels. It took time for the drycleaning industry to catch on, but now such programs are being made available to the drycleaning industry.

National added value programs can increase the loyalty of consumers because they leverage brand names that are highly recognizable to consumers. Consumers become more loyal because they see the same logos (and similar rewards) at a variety of participating merchants as they make everyday purchases.

The Upromise Dry Cleaning program, for example, directs its 6 million members to make purchases only at those merchants that provide a 3 percent contribution to the members’ college savings accounts. Drycleaners pay the contribution (and associated administrative fees) on qualified purchases made by Upromise members that have registered a credit card with the program.

Don’t discount simply for the sake of countering the competition’s discounts. Provide added value services that consumers appreciate. Discounts become ingrained over time and customers come to expect them from both you and your competition. Added value programs are unique and provide higher consumer loyalty at a fraction of the cost of traditional discounting.