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MARKETING — How do you set a price that will yield a profit? First you need to find the ”base unit”

This is the term used for the product in your catalog that yields the greatest profit. This rule applies to rental laundries as well and gives the yardstick for the entire price list

by Italo Pace

After working in rental laundries, where I really got to see everything and where, depending on the period, I met a wide variety of people from the industry, I like the idea of giving my thoughts on the future of an industry that gave me so much, and which I think I repaid with my passion and expertise.
Those who know me, know that I have always defended the concepts I consider fundamental. For example, the fact that for some time now Italian laundries have lacked a further, major drive in R&D. That our company culture in general, and in a strictly business sense too, clearly reveals some shortcomings. And that unfortunately, there are no schools for this industry. And serious, chronic shortcomings because of this, such as a widespread lack of Documento8-001knowledge and cost analysis of items. An issue that I plan to look at here.
The majority of rental laundries have no clear idea what to charge for a service and usually charge prices that the market seems to accept. Some try to aim at a higher quality, or focus on expanding with new products in other markets in order to charge higher prices, whereas others price their products well below cost.
We all know that prices increase when market demand is high and supply is low, and that conversely, prices fall when there is too much supply. However, the important thing is to stay above your standard cost threshold. You could therefore say that the price depends on company costs. This is not always so and everyone normally has his own opinion. In our capitalist society, price is based on the free-market concept, that is on demand and supply, but establishing how much customers should pay for your work often becomes an emotional concept for sales people, who think they know exactly what goes on in the buyer’s mind when making a purchase.
In practice, price-setting is truly a very complex task, and since many laundries do not have a cost analysis center or department for this primary need, they have little chances of maximizing their profits.
In practice four main factors actually influence retail prices.
1) Customer segment pricing.
2) Average price charged by competitors in the same market niche.
3) Competitive constraint, that is, price-lowering.
4) Using real knowledge of costs as the yardstick to avoid any losses.
Some studies have revealed that for about 30-35% of the companies analyzed – not just rental laundries – some customers yield no profit at all and that this number increases in proportion to an increase in company sales. One should be very careful when the main and only goal of companies working at full capacity is to increase sales. Of course, the best thing would be higher sales each year, more profits, lower costs, a market monopoly, etc… E_Tech_01However, what really happens in most cases when growth is not well-monitored, is that the final result is almost always a loss in economic and financial profits. The first thing to do therefore is to maximize company profits and one of the functions that allow this to be done when working at full capacity, is to answer the question “how do you determine per-unit price”.
Price lists should always reflect the quality of the product/service being offered to your customers. However, we all know that customers can be:
1) Very price-sensitive and less quality-sensitive focusing more on low prices without caring very much about the quality.
2) Very sensitive about the price as well as the laundry, and end up asking for a good price list and a high quality product.
3) Not very sensitive about the price or the laundry, which is disheartening and requires no further comments.
4) Not very price-sensitive but very sensitive about the laundry.
The above shows that product price lists must necessarily be different unless you want to treat future customers like someone I know did. When asked if he would like to work for a big chain seeking low prices and high quality for one of his services, his answer was: “You say I should work with you because you’re a reputable customer, but the only reputable customer for me is someone who brings profits”. So you end up losing him!
The best thing to do is to charge for products based on your own product and sales mix, bearing in mind what the competition is charging and what the market will accept. Furthermore, you should also check that your product costs are lower than what you are charging; sometimes however, a package which includes loss-making items can be offered since this is offset by the mix of items with a high profit margin.
What could be useful is software that can quickly tell a company what its product costs are. It should also consider that these costs vary each month since fixed costs also have a significant impact as monthly revenues (sales) and the product mix change.
02 INTERNET 2015-001How can the per-unit cost be calculated if the monthly quantity produced and sold changes? We clearly need to have a monthly cost which, at the end of the year being considered – despite variations in the sales mix for the 13th and following months — will give a cost that varies very little each month (at full capacity).
Let’s consider the item that yields the highest profits for a company and call it “base unit”. All the base unit’s costs are evaluated (direct and indirect demand/supply, fixed and proportional costs, general expenses). You proceed in the same way item by item.
Documento8-001At the end, all the items are proportioned to the base unit (e.g.: “A” is worth 0.46 base units, “B” is worth 1.12 base units and so on). If done properly, the total monthly costs of a laundry should be the same as the single costs previously considered when we multiply each cost by the number of items sold during the period being considered, obtaining a per-unit cost for each item sold.
The result is an automatic table where only three figures need to be entered: total costs for the period being considered, average hourly labor costs, and the quantity of each item sold.

This model was adopted by a laundry whose business was 78% hotels and 22% restaurants and started using this method in September 2014. Once the costs for September have been determined they will be added to the costs for the following months, in order to have the widest, best picture of the whole business. After a 12 month period, cost determination will be perfect and the company can apply changes to its price list. This cost analysis will always continue over a 12-month period by removing the first month’s figures and adding the latest.

detergo magazine

february 2015

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