Question

Paul Bowlin owns and operates a tree removal, pruning, and spraying business in a metropolitan area with a population of approximately 200,000. The business has grown to the point where Bowlin uses one and sometimes two crews, with four or five employees on each crew. Pricing has always been an important tool in gaining business but Bowlin realizes that there are ways to entice customers other than quoting the lowest price. For example, he provides careful cleanup of branches and leaves, takes out stumps below ground level and waits until a customer is completely satisfied before taking payment. At the same time he realizes his bid for tree removal jobs must cover his costs. In this industry, Bowlin faces intense price competition from operators with more sophisticated wood processing equipment, such as chip grinders. Therefore, he is always open to suggestions about pricing strategy.

What pricing strategies could Bowlin adopt to further his long term success in this market?

Answer 1

As mentioned in the brief, Paul is already facing intense competition from players having a similar offering equipped with better machinery. Hence, Paul should make use of ‘Competitive Pricing Strategy’, wherein in order to maintain the profitable sustenance of the business, he should set a price that covers the production cost, any overheads and also offers a sizeable profit.

With the competition at hand, Paul has three options in front of him to set the right price for his service offering –

1.       Price the offering above that of your competitors. This involves considerable risk of losing out on substantial business, especially with competitors having modern equipment, which would inevitably lower their variable cost. In order to charge this premium, Paul would need to bring in additional features and improvements in the service, pretty similar to the complete cleanup of the place to the satisfaction of the customer. Paul should be capable to understand the perceived value that customers have for this additional offering. If the perception is that of a sizeable value, this could prove to be a decent differentiator. However, imitating the same would not be difficult for a competitor.

2.       Pricing below the competitor’s price. If all costs could be covered and a profit extracted in every transaction. Paul can opt for this Market penetrating strategy. However, with competitors having better equipment, they can lower the cost further coming to a point where Paul would run into losses if prices are reduced further.

3.       Setting price equivalent to that of your competitor, then the differentiating factors cease to exist. The entire focus would then shift to the offering itself as to who can offer additional features at the same price. Paul could incorporate some innovation in the form of service warranty of say 6 months, or additional 10% off in the next transaction to lock-in the customer.

Overall, seeing the broader picture, Paul can actually employ different strategies in the different services like tree removal, pruning and spraying. In order to lock the customer and block the competition, he can look at having a loss leader, wherein he makes barely any profit in an activity. However, once the customer is lured into a particular service full efforts are to be made to cross-sell other services in order to maximize the returns from the individual customer. Since this also a repeat purchase activity, it is important to give the customer the best possible experience so that he returns back to Paul when the garden needs a re-look.