This winter has been brutal. We have had more snow than the "blizzard of '78," which I have heard about for as long as I can remember. All kinds of records have been set this year: most snow, coldest days, most school days cancelled. But one thing I haven't heard about is how all of the trouble this winter has caused can be an opportunity for innovation. Innovation opportunities always exist, (click here for examples of innovation) but when we experience something as extreme as this winter was, innovation opportunities are even more present; the extreme amount of snow that we saw this winter has provided a great opportunity for snow removal businesses to hack their pricing models by implementing a focused pricing strategy.
This winter brought an excessive amount of snow. Amounts that were far beyond the statistical norm. So much snow, in fact, that there have been a number of problems resulting from this white winter. Heating bills have been though the roof. Schools are trying to decide how to make up missed days. And the problem businesses are facing? They have had to pay for all of this snow removal.
There has been so much snow to remove this year, that my homeowner's association actually ran out of money to pay to remove it. As the city doesn't really cover our streets, most homeowners associations in the area pay for their own snow removal. But, homeowner's associations like ours have a fixed budget; they collect an annual fee from each member once a year. Unless the bylaws permit a special assessment, that is it. When they are out of money, you better hope you have a four wheel drive vehicle because they aren't plowing.
The Pricing Model Hack
Since this winter has produced record amounts of snow, there is an innovation opportunity that snow removal businesses could capitalize on. The opportunity is to offer a set annual fee that would cover all snow removal for the entire year, regardless of how much snow needs to be removed.
Whenever something is so extreme, there is always a market for a solution that mitigates the risk of experiencing the same burden again. In layman's terms, there are many businesses right now who would be very open to the idea of paying a set snow removal fee rather than not knowing how much snow removal is going to cost them in years to come.
For example, a home owners association has a fixed income, meaning that they get dues from each member and that is it. The income only fluctuates slightly based on the number of homes that are in foreclosure. For these associations, an expense that cannot be predicted, or variable expense, is always a potential problem. If the variable expense is too high, there isn't enough money to pay for the expense.
The result is that a home owners association with a fixed income would very likely be interested in a fixed expense option for snow removal, even if it means they may pay more in the long run for that option. This hack really isn't a new idea as utility companies have been offering "budget plans" for years where customers pay a consistent amount each month that is based on the expense of the utility in the prior year.
The immediate opportunity for snow removal companies is that there is likely to be a fairly large demand for a fixed expense this year; the worst year for snow removal expenses. Had we only had four snows that required removal like we did just a few years ago, there wouldn't be a demand for this product. The opportunity exists because of the extreme conditions we experienced this winter.
The Perk for the Snow Removal Company
Of course we can see the benefit for the customer, but how does the snow removal company keep from going out of business in a bad winter? This question is the reason many snow removal companies have never transitioned to this model (at least in my area).
Insurance companies have mastered the art of statistical analysis. Actuaries crunch numbers and create complex algorithms to ensure that, based on statistics, the insurance company won't loose money in the long run. For snow removal companies, the idea would be to look at past winters and average out how many snow removals there were for each year.
Statistically, the odds of having another winter as bad as this one are very slim. In fact, there hasn't been a winter close to being this bad since 1978. Therefore, a snow removal company would generally price a "fixed" annual rate below the cost of the expected worse winter, but slightly above the expected average winter, based on the past history of snow removal.
The idea of this hack is that during some of the worst winters, the snow removal company won't make as much as they could have, but this difference will be made up during the average or below-average winters.
Selling the Mutual Benefit
Of course the cheapest route for the business who needs snow removal is to pay for the removal only when it is needed. This works fine for businesses that have a sufficient cash flow to cover an unexpected expense increase. Some businesses, however, find that unexpected increases in expenses can be devastating.
For the company that fears the fluctuation, the snow removal company offering a fixed fee product stresses the guarantee that their expense will remain the same, regardless of how many removals are required. The greatest amount of interest in this fixed-fee product is right now, as the statistically worst winter has caused hardships that are desired to be avoided in the future.
This means that selling a fixed fee product that costs less than what it cost this year for snow removal will be in greater demand than trying to sell it right after a winter that only required four snow removals.
Hack Take Aways
Even if we aren't in the snow removal business, we can all learn a few things from this pricing hack:
- Look For Opportunities. Whenever something appears to be out of the statistical norm, see what opportunities exist.
- Discover the Demand. A fixed income product won't be for everyone, but discovering who felt devastating effects of expense fluctuation will help to strategically target the right opportunities.
- Price it Correctly. When setting up a fixed income product, make sure that you price it above the average cost, but below the maximum expected cost. This will increase your revenue over the long-term, but provide a more consistent income in slow years.
- Keep Cash Reserves. If your product requires an expense to produce it (such as gas in snow plows and employee hourly pay), make sure that you keep a cash reserve from the slower years that can be used to cover a busy year. The goal is that you will generate more revenue in the long run, though you may experience less revenues when the expenses increase.
- Sell the Benefit. When selling a fixed expense product, focus in on the cost savings in the worst year. Also, sell the benefit of having a fixed expense and not needing to worry about fluctuation that may be well beyond the budget.
What opportunities have you seen to hack a pricing model during extreme times?