We all know there is some correlation between pricing and profitability.
Generally speaking, as you set higher prices, profitability increases as long as
service remain constant.
Of course there are always
mitigating factors. The frequency of
the price increase, the size of the
increase, the prices charged by
others in the market, the
demographics of the market, other
costs remaining reasonable, and the
list could go on. It is, of course, this
very list that makes many operators
hesitant to increase prices, and yet,
the results of this strategy often tells
a different story.
Historically, the basic pricing strategy has generally been a minimum increase
of about three
percent a year. This strategy often matches the historical inflation rate. The
price rises provided
enough money to offer wage increases to staff, offset supply cost increases and
increase to profits, flowing through to owners' income and reinvestment.
In addition, several studies show that in times of declining volume, the 1980s,
the 1990s and
even more recently, operators who maintained their price increase rates and
experienced the same volume drops as those who froze their prices.
There is no doubt that the price increases during these periods did not impact
drops, but rather it was entirely based on the economics of the times.
This article is not about applying normal price increases in the ordinary course
This article is about an unusual movement in your cost structure that must be
offset by pricing,
volume increases and productivity improvements.
The cost of labor has risen dramatically in all markets over the last several
years. A variety of
causes explain the rise, including rising legal minimum wages combined with very
unemployment rates, and even current immigration policies.
We could discuss all of the reasons that these events are true, but that's out
of our control.
What we have is a higher cost structure and a situation that foretells even
higher costs due to
the continuing labor shortage.
In the short term, significant increases in volume and productivity are hard to
come by. This
may leave pricing as a short term strategy to maintain profitability and provide
capital for the
longer term opportunities.
Several revenue/cost samples from around the country in upper-middle market
operations have been collected and tell the story of this rising cost.
First, in all cases, drycleaners are paying more than the legal minimum wage for
service representatives and have been doing so for some time in many areas. In
CSR is often paid less than pressers and other staff in the company, so it's
quite possible that
other wages have also risen disproportionately faster than other costs.
Second, although not usually discussed in these terms, there is a clear
relationship in these
examples between these wages, the base price of a pair of pants, and
As the ratio of price to wage increases, the profitability also tends to rise.
No surprise here.
Above are a few sample data points reflected in a chart and the results are very
only one case the pants price is above the average CSR wage, but in most cases,
opposite is true and, generally, around the country I would suggest that many
operations are in
Each company can conduct its own analysis and reformulate its pricing strategy
accommodate this jump in wages.
Going forward, is it possible to significantly increase your price points and
catch up for lost
time? Not usually without negatively impacting volumes.
How else do you catch up? Below is a list of successful strategies that have
been used over
the years by others. Although not every strategy will work for every company,
you can pick and
choose what you think might work for you. None of these suggestions provide an
to a problem that has grown over time, but they provide a positive direction.
Keep in mind that most customers do not know the price of drycleaning as they
in the exact same items every week so it allows for some changes without a
negative impact to
1. Start today with a small increase.
2. Increase a small amount every month.
3. Increase your add on prices (upcharges) at the same rate as your basic prices.
4. Run a sale, such as 20 percent off or three for two, but increase the prices
just prior to the
5. Review and increase prices on your growing product lines such as wedding gowns
household, which are less price sensitive.
The longer term
Taking a longer term look at pricing, the rising drycleaning prices will not
sustain a company
with shrinking volume. An increase in volume from other sources will be
required, such as wash
However, the growing product lines tend to have a higher labor content which
with the labor shortages and increasing costs. Productivity improvements will
have to be
aggressively addressed as these product lines grow. It is a never-ending cycle.