Profitable Pricing For Two Very Distinct Customer Personas
Recently I was at both the Great Lakes Floral Expo (hosted by the Michigan Floral Association) and the Michigan Florists Association Spring Conference. In talking to the florists at these events some similarities immediately became apparent.
In both states, Michigan and Maine, many shops had a year round local clientele that was hurting a little. In Michigan a lot of it gets back to the auto industry, and in Maine much of it gets back to mills closing. The end result is the same – a local population of year-round residents that often don't have a lot of money to spend on flowers. We'll this group the locals.
In both states there were also shops that dealt with a second, very different, type of customer. This group is made of seasonal residents – people that choose to spend much of their summer in the beautiful country that makes up the Upper Peninsula of Michigan and coast of Maine. This group, which we'll call summer people, typically have more money to spend.
This creates a pricing problem. These stores depend on the locals all year long, and they need to price in a way that works for them. They reported using markups that were generally lower than what is seen elsewhere in this business. They don't really have a choice – if they price higher their customers won't be able to afford flowers.
Selling to the more affluent summer people at these lower prices is not desirable. At the very least it leaves money on the table. Imagine someone from Boston who typically buys their flowers from an upscale shop like Winstons. They're used to spending more for flowers, much more, and would willingly pay more than the discounted prices the store charges the locals.
But leaving money on the table is not the biggest problem. The bigger problem is perceived quality. Price is generally considered the most reliable indicator of quality. This is particularly true of discretionary products and/or products that the customer doesn't really understand. Both apply to flowers. That means that the customer who is used to paying big city prices is likely to assume the prices discounted for locals mean that the quality must be lacking. And in this case perception is everything – the low price means that regardless of the actual quality the customer is going to perceive them as being lower quality.
There are other businesses that have figured this out and we can learn from them. One great example involves ski resorts.
Ski resorts are generally located in smaller, out of the way towns. They are supported primarily by commuter skiers from larger, more affluent cities nearby (people that come up to ski each weekend) and tourists that come from longer distances.
These people tend to have disposable income and place a very high value on skiing. They're commuting or travelling long distances, own weekend chalets or rent hotel rooms, etc. They're prepared to pay to ski.
The people who live at the base of the ski hill generally place a much lower value on skiing. Maybe it's because they see the mountain every single day. More likely is the fact that they tend to have less disposable income. Whatever the reason they typically aren't prepared to pay as much as the out-of-town skiers.
But they can still be profitable for the resorts, so the resorts often make special discounted passes available to the locals. How do they avoid cannibalizing full price sales to out of town skiers? Most often they require proof of residency – something like a drivers license. This is an example of Price Discrimination – charging different customers for the same product.
They also introduce a number of hurdles. These passes are usually only sold for a very brief time – often a single night or weekend, and always well outside the ski season. These hurdles effectively deter local residents that are not as serious about saving money – if a local is prepared to pay full price they are likely to just skip all the hurdles. Only the locals that are most serious about saving money will take advantage of the deal.
The ski resort wins both ways. They sell passes at full price to everyone that is prepared to pay full price. They get additional profits by discounting to locals that would not pay full price.
This idea – a discount for locals – is just one approach. Another is to attributes that have proven to be attractive to people that are willing to pay more.
What do any products that are labelled local, organic or sustainable always have in common? They are always more expensive! And they should also be more expensive.
They are also very appealing to people that are willing to pay more. This is another way for a florist to offer higher priced (and more profitable) products to summer residents without alienating the locals.