Pricing and promoting businesses

David Maister’s blog has an interesting post about the pricing and promotion strategy for a small home-based business. In this case, it’s a pre-school looking for a pricing and promotion strategy. As always, David Maister has some useful suggestions and no doubt his wealth of readers will add some real gold in terms of suggestions soon.

The case involves the pricing and promotion of a pre-school in an area where there are “informal” preschools with little or no qualifications, and formal preschools with highly qualified teachers. The different schools have different prices and demand levels.

I approached the problem by applying a model. In this case it was the “4 P’s of Marketing” model. It is by now an old model, but grew out of a very different time when it was assumed that if you have the best product, customers will beat a path to your door. This was followed by the idea of price competition and price being the all powerful tool to sway consumers in their decision to open their wallets.

Most people now realise that these ideas are too primitive. The 4 Ps are:

  1. Product
  2. Price
  3. Place
  4. Promotion

Some people add a 5th P called “packaging” to the list, which may or may not be useful, and could probably be added under product, with the idea that the product purchased is the full basket of utility attached to buying the item, or added under promotion as part of the more traditional selling process. It’s just a model after all.

I like to apply models to problems as it provides a framework to generate ideas. No doubt there are good models and bad models, and models will sometimes restrict thinking and options as well as freeing up the mind to think of new options. (I am also a big fan of brainstorming and other structured lateral thinking methods to generate creative ideas.) But without a model, it can be difficult to get everybody speaking the same language, and it is easy to look at a problem from only a single dimension. In most cases, applying more than one model is even better. Too many models and you don’t spend enough time applying your mind to the thought patterns under each model.

I mention “models” quite a bit on this blog. Here I am describing mental models for approaching problems, rather than computer-based models for figuring out the numerical answer to a problem. Different application, but both useful.

Here’s my response to the pre-school post:

The question was posed about both pricing and promoting, but then it seems that the rest of the comments all related to price. The 4Ps recipe is an old one, but is still a worthwhile place to start for an initial structure.

Product, Price, Place and Promotion

1 Product

A good product is important, but it isn’t going to sell itself. The analysis presents some information on pricing and supply / demand levels for various “products”, but it is unclear to me whether this analysis is systematic and representative or not. As tough as it is, this is something you need to look at through dispassionate eyes at times. Do other parents want qualified teachers? Or do they prefer a less formal approach. Maybe (and without children myself I am purely putting this out as a possible point of view for discussion) parents feel that they are not handing their children over to an institution if the teachers are less qualified and the setup less formal.

2 Price

Price has been given more airtime than the other components so far. Coming from outside the States, I have no feel for absolute levels of pricing. However, maybe this is an area to brainstorm a large array of pricing possibilities (and get David’s readers to suggest many more!). Maybe you offer reduced rates for the first 5 kids to sign-up, or a discount for upfront payment for a 3 or 6 month period. This could help finance the cashflows early on, encourage some interest and early adoption, but also make it a seamless process to go from discounted prices to a premium-priced service. I do agree with David’s point that it sounds like a tough ask to get a full house in a short space of time, but I suppose a preschool with 2 children isn’t much of a fun place for the children to play and learn.

3 Place

Is the place to which you’re moving right for a preschool? How much has the desire to start a preschool affected the choice of area? Are there other areas that meet all the other criteria (the writer’s own workplace, nearby schools, other amenities and “feel”) but are better suited to start a preschool? What sort of catchment area do you envisage? If the children’s homes are spread around, maybe some form of transport service could transform “place” into something more workable. This again needs a firm understanding of real demands of prospective customers (both the children and their parents).

4 Promotion

How you go about promoting the preschool will be crucial. Flyers placed on cars may be successful (I’m not convinced) but face to face visits to families in the area might add a personal touch, a relationship and trust-building touch that will go a long way to settling anxious parents’ minds and showing that you are serious about a quality, professional product based on whatever mix you are after. If your wife believes in a mostly play-based preschool, then that is what you must show. If it is going to be desks and chalk boards and 18 hours per day of advanced mathmetics lessons, then that is what you convey. Personal selling will allow time for the parents to ask questions and get to know the people who will be looking after their children. If the service fits, I expect the price will be less of a sticking point.

If you use a personal promotion strategy, it also gives you the opportunity to receive instant feedback early on, which you can use to adjust your promotion, pricing and even product strategy. Started early enough, it will advise you whether the “place” you have chosen is going to work to. This goes back to my allusion earlier on that you may need some more hard data and careful analysis before you set everything in motion. The odd discussion with friends over at a dinner party (I don’t mean to suggest you haven’t done more serious research than that, but hopefully you understand my point) does not replace carefully considered homework to make the launch a success.

Because the number of successful promotional visits is quite low (20 or so I gather) it is more sensible than if you needed to fill 5,000 seats for a convention!

A 5th “P”?

There is an occasionally added 5th “p” – Packaging. Unless you’re planning to wrap the kids in bubble-wrap to keep them safe, I think we can safely skip this one!

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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