Mark, I am also a franchisee but I do detest cheap oil changes. It brings in a few good customer but a lot of bottom feeders also. I have found I do better by offering a moderately priced oil change ($25.95) with a FREE tire rotation. This drives enough new business and gives me a shot at a customer who is interested in something besides an oil change. I also get to look at his tires, suspension, and brakes when I am rotating tires. I used cheap oil changes early on but have moved away from that. We also tried "FREE DIAGNOSIS" but just could not figure out how to make that work profitably for us. We got too many old pieces of junk that were time wasters. They came in because they knew it was FREE and had no plans to fix anything.
We have built our business on repeat customers, referrals and word of mouth as much as anything and have done a good job with it. We won Car-x store of the year for our region in two consecutive years (2007 and 2008). We missed in 2009 but will have a shot at it again this year so it has worked for us. In February our store ranked 14th in sales out of 170 shops. However, I will say that I have a friend in the San Antonio/Austin areas who is doing much the same thing as you are and he seems to make it work. I am wondering if the size of the market you are in has a bearing on tactics. Our town is about 125,000 with around 200,000 in the metro area. How large is the market you are in? My thinking is that in a larger market word of mouth is not as effective and it may take a low ball offer to get people to try you.