Case Study: The Price is Right

June 1, 2020

There’s a lot of strategy behind the right pricing strategy. This is how one new operator arrived at the dollar figure that customers see.

SHOP STATS: Easy Lube On-Site Oil Change   Location: Albany, N.Y.  Operator: Don DeMarco  Average Car Count: 6  Staff Size: 1  Shop Size: 120 square feet Average Ticket: $67.49  

What sets up a price on your service? Lots of operators will say that it’s the convenience—not the preventative maintenance—that is the real product of a quick lube.

This means that customers can go to many places for an oil change or related service, but what the quick lube offers is the chance for customers to arrive on their schedule and always get through in a reasonable amount of time.

This is the customer perception of the cost of service. They’re paying for convenience and maintenance. The price you set for service conveys that value to the customer.

Of course, it’s much more complicated from the operator’s perspective. That money covers parts, payroll, marketing, rent and any number of other overhead items that amount to the cost of doing business. The costs eat perilously into profit margins at all times.

But for operators who are just starting out or moving into a new market, a decision needs to be made about the retail cost. That decision doesn’t just come from the cost of business; there are many factors to consider.

Let his case study be a guide through the mind of a new operator, who used traditional considerations to help him launch a nontraditional business model.

The Challenge

Don DeMarco launched Easy Lube On-Site Oil Change in 2019. A retired law enforcement officer in Albany, N.Y., DeMarco wanted a stream of income and a way to keep busy. He landed on a quick lube—a mobile one.

DeMarco envisioned a low-overhead quick lube service that meets customers on their turf, which would make an added level of convenience.

“To me, it’s about making money, of course,” DeMarco says. “But I just want to be able to be doing something useful. Getting engagement in a community. More so than that, provide a service that when people drive away they can be happy and proud that they called me.”

DeMarco had to price himself in the market to be competitive with brick-and-mortar quick lubes. He had lower overhead, but he wasn’t able to hit the car counts that regular shops do. So he worked to find his own price point.

The Solutions

Shop around on costs.

DeMarco’s first challenge was to sign with a distributor who would work with his business model. He knew that he wouldn’t be buying oil and filters in bulk amounts like a traditional shop, so he shopped around to find the best deal for this variable cost.

“They were inquisitive, because it was new to this area,” DeMarco says. “They do business in the area. They know. It was just negotiating a price that I felt was appropriate. We were able to do it.”

He also shopped around for a main fixed cost: insurance. He says he initially saw some high estimates before landing on his current provider.

Include indirect cost items.

The costs of doing business include more than just goods, labor, insurance and taxes. There might be hidden costs throughout your operation.

In DeMarco’s case as a mobile operation, gas for his van is a big consideration.

“I have to add in my expenses for my insurance and the overall cost for my parts,” he says. “And then the gas to get to where I'm going.”

To keep that cost in check, he imposes a 20-mile radius for service coverage. He might charge a fee—a dollar per mile, perhaps—for services that fall outside of that perimeter.

Indirect costs that any shop would consider come from promotion and advertising, which are not directly tied to a profit center but can increase business down the road. The return on investment isn’t immediate, but it’s worth the expense.

Determine your margin.

This is the most subjective part of finding a retail price and will determine your profit margin. In addition to the cost of goods and other expenses, you need to determine what added value your service provides.

“I can recall, I had my expenses drawn out. And then I would put a percentage on what I wanted my oil change to be,” he says. “But I want to be honest: I started high and I worked down.”

Another big consideration for quick lubes is service time, because that determines volume. The car count is what’s going to drive the margin that you expect. Increase the car count and you might be able to reduce the retail price a bit and achieve the same profit margin.

Check the competition.

While DeMarco’s main strategy was rooted in cost-based pricing, there’s always a bit of competition consideration to know where your operation stands in the marketplace. DeMarco’s business model might be different, but he’s still up against traditional quick lubes in the Albany area.

“I looked at what the prices for these oil changes are locally,” he says. “And it’s all over the board.”

DeMarco landed at a price point that was at the upper limits of average for a semi-synthetic or synthetic oil change. With a low car count, it still left him with a smaller margin, but he felt he wanted his prices to be as attractive to customers as possible, especially early on in the business.

The Aftermath

Working out of his van, DeMarco set four service packages, with a synthetic blend service at $49.99 on the low end and a full synthetic european formula at $84.99 on the high end of the menu. He says most people order the normal full synthetic service, which is priced between the highest and lowest items.

The prices reflect the need to cover his cost of business, and the margin therein reflects the value DeMarco places on his model of meeting customers where they are.

“It’s not a high profit margin getting an oil change,” he says. “I was going on the aspect of providing convenience. I could base my price off the convenience factor.”

The Takeaway

Still early in his tenure, DeMarco expects it will take a long time before he starts seeing real returns from the business. This is typical of brick-and-mortar operations, too. 

“It’s been challenging. But at the same time, it’s been fun. It’s my first true business venture to be my own boss,” he says.

But the key is that putting a retail price on your service is so much more than just covering costs. A traditional quick lube will have normal variable costs like parts and labor, as well as fixed costs like rent, taxes and insurance. There are also lots of ancillary costs, which are unique to each operation. They could be sump pumps, local resort taxes, power washing or any other item that needs to be covered.

This cost pricing strategy should also take into account the local market and nearby competitors to strike the right balance between profitability and customer attraction.

About the Author

Matt Hudson | Content Director

Matt Hudson is the former content director for National Oil and Lube News.

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