MarketView

Setting Prices Isn’t As Simple As
It Used To Be: Monthly Plans and Automatic Billing Rewrite The Rules Of Pricing

Market View 2009: Price Change

December 2009

Cornell University conducted a ground-breaking study that applies well to carwashes.

Raising the price of a product or service will lower the demand for it.

Who could argue with this logic? Back when most purchases were made on a pay-as-you-go basis, it used to be axiomatic. Not anymore! At a time when unlimited calling plans and automatically recharged monthly passes are reshaping the way Americans buy goods and services, this pricing rule has been turned on its head. In this environment, higher prices will often result in higher levels of consumption.

Cornell University researchers, David R. Just and Brian Wansink, describe this phenomenon as the “Fixed Price Paradox.” According to this theory, carwash customers that pay more for a monthly pass plan will actually use it more often.

Just and Wansink proved their point not long ago at an all-you-can-eat pizza buffet in Illinois. In their study, one group of customers was given a 50% discount on the buffet, while another group paid full price. The group that received the discount consumed an average of 2.95 slices of pizza, which was 27.9% less than the 4.09 slices chomped down by the full price group.

The full-priced group of customers had a greater emotional investment in the buffet, according to Just and Wansink, so they were determined to eat more to get their money’s worth. A lesson that carwash operators can carry out from this pizza buffet: if you want to discourage over-use of your monthly pass plan, give customers a discount when they sign up!

What You’re Selling Vs. What Customers Are Paying For

The Fixed Price Paradox is only one of the new rules of pricing that have resulted from the trend toward “unlimited” option plans and automatic monthly billing. In the traditional pricing model, carwash operators and other business owners looked almost exclusively at what they were selling. How much did it cost to offer? What was the competition charging for similar products or services?

These are still important factors, but competing in today’s market often requires a broader view. Businesses that want to maximize their opportunities in this environment, must not only look at what they are selling, but what their customers are paying for. The distinctions may be subtle, but they make a world of difference when developing a successful pricing strategy.

For example, you may see your business as selling carwashes, but your customers really aren’t buying carwashes from you as much as they’re paying you to keep their vehicles clean. When you look at things from this perspective, it’s easy to see why the speed and convenience of a monthly pass program appeals to these customers – it reflects what they are really buying.

If you accept this theory, you will view your monthly pass pricing not in terms of what it costs to deliver each individual carwash, but what it costs to keep each loyal customer coming back to your site. Click here to read more about the SiteWatch Automatic Recharge Module® and monthly passes.

Other businesses in other industries have followed this strategy with impressive results:

• General Electric – When GE wanted to expand its aircraft engine business. It took a hard look at what its customers were buying, and came to the conclusion that it wasn’t engines, but the ability to fly aircraft reliably and safely that aircraft makers and airlines wanted. So GE implemented its Power By The Hour program that included a flat fee for unlimited engine service and maintenance with its products so they continued to perform dependably long after they were purchased. 
• America On Line – Early in its history, AOL charged customers by the individual's email. Then it realized that what its customers were really interested in buying was the ability to stay connected to the world wide web. So it scrapped its pay per email plan for a flat monthly internet service billing. The response was so overwhelming that AOL had to shut down to catch up to the consumer demand.
• Major Phone Companies – Spurred on by upstart Internet-based competitors like Vonage, all of the major phone companies switched to unlimited monthly calling and texting plans. They realized that consumer weren’t paying for individual calls and text-messaging, but for the ability to communicate with friends and family around the clock.

Monthly Passes At The Carwash

A growing number of carwash operators are applying the same line of reasoning to selling monthly passes with the SiteWatch Automatic Recharge Module (ARM). These operators recognize that their customers are really more interested in maintaining clean vehicles than buying individual washes, so they’ve adjusted their pricing strategies to reflect the cost of satisfying this demand, rather than pricing on a per-wash basis.

Looking outside the carwash industry, recent market success stories support the notion that monthly pass plans are in keeping with the demands of today’s consumers. Consider the following:

• Netflix – Founded in 1999 on the premise that consumers weren’t interested in buying individual DVDs as much as they were in having ongoing access to home entertainment, Netflix pioneered the concept of charging a flat monthly fee for unlimited movie rentals. The number of Netflix subscribers grew from 1 million in 2003 to 10 million in 2008, a year in which its sales jumped 13%, despite an overall 10% decline in DVD sales. Meanwhile, Blockbuster, which built its business model on pay-as-you-go individual video rentals, closed over 900 stores because of slumping sales. 
• CiCi’s Pizza – This upstart company grew almost overnight to a 650 site chain in 30 states powered by the success of its $3.99 all-you-can-eat pizza buffet. CiCi’s recognized that consumers weren’t interested in buying pizza as much as having a satisfying meal. For some consumers, this may have meant one slice of pizza, while others would need a larger share of the pie. On average CiCi’s has made enough profit on its customers to become one of the fastest growing restaurant chains.

Whether they’re renting videos or selling pizza, companies that have succeeded with new monthly or flat-rate billing strategies have adhered to the same basic principles.

• They’ve offered a real value to consumers, while still maintaining a fair profit for themselves.
• They’ve simplified life for customers, who no longer have to think about how many DVDs or slices of pizza they should purchase. Instead they allow customers to focus on bigger picture issues like home entertainment and having a satisfying dinner.
• They save consumers time by streamlining the purchase process. Click here to read how SiteWatch FastPass can save time for your monthly pass customers.

Maintaining Profits in Passes

There’s a simple reason why monthly fixed price plans have become more popular – they fit the consumer’s lifestyle. A study conducted by A.J. Miravete and published in the American Economic Review found that consumers preferred flat rate cell phone plans because they were convenient, even when the savings over pay-as-you-go plans was less than $5 a month.

Monthly passes may be good for your customers, but how do you price them in a way that protects your profit structure without detracting from the plan’s marketability? Based on the experience of businesses that have successfully implemented new pricing paradigms, there are four keys:

Selling monthly passes with SiteWatch ARM does more than create a weather resistant revenue stream it also helps you reach the large number of young customers who are accustomed to buying DVDs, music downloads and cell phone time on unlimited monthly plans.

1. Consider The Average, Not The Extremes

Any business that offers fixed pricing will have some customers abuse it, while others will under utilize it. (Some patrons load up on the all you can eat buffet line, while others take only salad!) The overwhelming majority of customers, however, will be somewhere in the middle. Businesses that have succeeded with pass plans, say they base pricing on this average, what it costs them to keep the majority of customers happy, not worse case abuse scenarios.

2. Have A Realistic View Of What You’re Offering

There is not an exact correlation between sales made through a fixed price unlimited pass plan and pay-as-you-go programs. Since customers tend to buy more when they’re part of an unlimited pass plan, you shouldn’t assume that every pass transaction would have been a full-priced pay-as-you-go sale if the pass plan wasn’t in place. For example, suppose your standard price for a wash is $8, and you charge $21.99 for an unlimited monthly pass. When a pass customer visits you four times in a month, you aren’t trading $32 in pay-as-you-go sales for $21.99 in pass dues. That customer may have visited only twice (not four times) if a pass plan wasn’t offered. In that case, you were really trading $16 in individual wash sales for a $21.99 monthly pass. More significantly, though, $21.99 was what you needed to charge to keep the customer happy.

3. See The Big Picture

When customers sign up for a plan, they tend to use it more frequently, then taper off. This has been demonstrated by numerous studies of health club plans, where visits to the club are highest immediately after enrollment. So, you can expect your carwash club plan members to become more profitable the longer they stay with your program.

4. Increase Volume

Fixed price plans tend to generate more volume, which makes up for their slightly lower margins. This is one of the reasons all-you-can-eat restaurants seem to defy logic and prosper, even with some patrons piling plates high. The fact that patrons don’t have to wait around to have their orders taken, or have their food prepared in the kitchen means that these eateries turn tables much faster than other restaurants, so they’re able to make more transactions in a day.

DVD powerhouse NetFlix offers another example of how the volume generated by monthly plans increases overall profits, even if the size of the average transaction decreases. Between 2006 and 2008, Netflix’s average revenue per customer dropped from $16.34 to $13.75, because of extensive price promotions. At the same time, however, the number of users jumped 40%, and operating income increased by 26%

As NetFlix’s experience illustrates, the relationship connecting pricing, sales and profits takes on new dimensions when a business moves from a pay-as-you-go model to an unlimited monthly pass strategy. Learning how this relationship works will help you maximize the opportunities that selling monthly passes offers your carwash.

Learn more by contacting DRB Systems.
Click here or call 1-800-336-6338.