Consider the pricing problem of a lawn care service for its lawn fertilization service. A do-it- yourselfer can fertilize her/his lawn at about $20 per 1000 square foot per application, so that a 5000 square feet lawn requires $100 worth of fertilizer per application.
A lawn requires 4 applications per year. The value of time spent fertilizing the lawn depends on the segment that the consumer belongs. There are two major segments in the market.
Garden Enthusiasts: This segment, mainly made up of younger couples with no children, was found not to have any significant concern with the time spent in caring for their lawns and gardens. There were about 90,000 properties in this segment, with the average lawn size being about 3,000 square feet.
Weekend Warriors: This segment, mainly made of dual income families with young children was found to have severe time constraints. They were often found to pay about $15 for the labor of fertilizing their lawn to neighborhood teenagers. There were about 60,000 properties in this segment, with the average lawn size being 5,000 square feet.
The total cost of labor and material to the firm was $10 per 1000 sq. ft. per application.
Assume that the lawn care company can charge a separate price to each segment. (This can be feasible when the company does not advertise its prices and the consumers in one segment do not interact with consumer in the other segment.)
What price should the lawn care company charge to each segment? Assume that the lawn service company will need to charge a price of at least $1 below a segment's value-in-use to get that segment to use the service.
The value-in-use function is (Purchase case of Y + Start-up Cost of Y + Post-Purchase Cost of Y) - Start-up Cost of X - Post-Purchase Cost of X + incremental benefits of X (calculated by using benefits of X - benefits of Y)