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Setting the best price

Knowing your costs is essential in setting optimal prices for your products, and so is knowing your customers’ willingness to pay. Here is where market segmentation comes in, even if you are not an SM that can offer its own branded products at lower prices.

Dogma Dog Care in Smyrna, Georgia in the US offers lodgings for dogs at different price points, from crates to suites, from caged to open boarding, and everything in between. Owner Robin Crawford, who used to run diversity programs for the likes of IBM and Coca-Cola, now utilizes her experiences to offer diversity care for pets.

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Diversity of care means diversity of prices. For Dogma, geography is key. Many customers who live near her place drop their dogs off in the morning and pick them up on the way back, making them less vulnerable to price increase. People who live farther away may choose a less costly option, so Crawford needs to come up with attractive pricing strategies.

“A business needs to be able to assess the price sensitivity of individual customers, segment the market into groups of customers whose price sensitivities are similar, and come up with a way to charge different prices to the different groups,” say business professors Michael Mazzeo, Paul Oyer and Scott Schaeffer in their book The Roadside MBA.

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Crawford does market segmentation using advertising in subdivision magazines or newsletters. For remote locations, she offers discount coupons to entice them to use Dogma; for places close by, there is not that much need for such coupons.

“Selective couponing connects prices to consumers’ price sensitivity (without explicitly charging based on a customer’s address, which would seem inherently unfair and discriminatory).”

What airlines know

The various options at Dogma are “really just the canine equivalent of an airplane’s first-class, business and coach sections.” Since Crawford’s customers (human and canine) are diverse, so is their willingness to pay for boarding options.

It may be tempting to eschew economy class in favor of suites, but as airlines know, you cannot ignore the lowest end altogether. “Sometimes, even if I have to cut my price by 50 cents to beat (the big chain) PetSmart, I will. For some customers, that seems to mean a lot.”

This strategy brings to mind what my friend Nancy (not her real name) does in her retail family business. Senior discounts used to be a convenient viable strategy, but now their business offers more: free upgrades or complimentary gifts on certain days.

Aside from seniors, the family has brainstormed creative ways to reach the market. Because they are located near schools, they also offer student discounts (upon presentation of valid student ID) on their products, which they report, have boosted sales.

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I ask them to offer teacher discounts as well.

Creating attractive bundles

I have friends who purchase pricey instruments for their kids (a violin, a drum set, even a piano) only to have their children lose interest after some months. Local companies should imitate Mississippi Music’s rent-to-own arrangements.

Mississippi Music in Hattiesburg, Mississippi sells musical instruments, primarily to students, since the store is located near schools. Geography is no problem, but the expensive prices can be a turnoff to cash-strapped families whose children may not stay in the band long enough to justify such investment.

“Parents pay a monthly fee to have their child use the instrument, and a portion of each month’s payment can be applied to the sale price. After a certain number of months of making payments, the would-be musician owns the instrument.”

The company offers add-ons. For a small monthly fee, parents can avail themselves of a maintenance and replacement service, in case, “say, their child’s trombone gets run over by a bus.”

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