Maybe customers don't care exactly how much you're charging--they just want to know why.
Sometimes customers don't need lower prices—they just need prices they can easily understand.
That's a lesson Brian Altomare, brand manager and co-founder of LugLess learned recently. He started out with a company called MadTravelers that shipped and stored college students' belongings under the brands BoxMyDorm and Ship2School. It was a solid business, though obviously highly seasonal.
A new opportunity
Then, in 2007, airlines began charging for the privilege of traveling with luggage, and Altomare saw an opportunity to branch out. Since 2001, companies had sprung up to transport travelers' bags to and from their destinations, reducing the hassle of travel in a post-9/11 world. But this was considered a luxury service, and the firms that offered it charged luxury prices. Altomare knew he could charge less and even undercut the airlines themselves in certain situations. And his service would have a lot more appeal. "Travelers are schlepping bags to the airport and then paying the airlines to carry them," he says. Instead, they could use LugLess, launched in 2009, to have their bags transported from door to door, saving the 15 to 20 minutes it typically takes to retrieve one's luggage from baggage claim.
But for how much? MadTravelers uses Federal Express, UPS, and many local courier services to transport students' belongings. These shippers charge by weight, and so do BoxMyDorm and Ship2School. It seemed logical for LugLess to do the same. "We started out with a simple algorithm for what our rates were with major couriers, where we could still run the business profitably," Altomare says.
Why it didn't work
But paying by the pound didn't seem logical to travelers accustomed to a flat fee for airline baggage. "We were seeing a lot of site traffic but not a lot of orders," he recalls.
So about a year ago, LugLess switched to a simple three-level pricing system: Within the continental United States it costs $39 to ship a small bag, $59 for a standard bag, and $79 to $89 for things like skis or golf clubs. The goal, Altomare says, was to set prices at a level where the company would still make an overall profit shipping luggage, even though some of the longest trips might not be very profitable.
The new pricing did the trick. "Traffic stayed the same but orders increased," Altomare reports.
There was an added benefit: "People stopped calling up and asking all these questions about our per-pound pricing, or what if it's a pound over?" he says. Since the company's No. 1 cost center is customer service, this added directly to the bottom line.
The lowest price of $39 is somewhat higher than the $25 or so that airlines typically charge for a first or second bag. But it's lower than the $50 or more airlines often charge per bag for travelers with more than two bags. As prices for additional bags go up, LugLess becomes a less expensive option. And many customers are willing to pay extra to avoid dragging their luggage to and from airports.
And the pricing picture is about to get better. LugLess will be lowering its prices in the next few months probably by $10 or more. Simplified pricing led to more orders and higher volume with LugLess' shipping partners. That, in turn, has led to a more generous volume discount. It's also helping to build revenue: LugLess is on track to bring in $500,000 this year and about $1 million next year, with projected revenues of $10 to $30 million as the service gets more established, Altomare says.
Volume should continue to grow, since those who use the service typically become repeat customers, he adds. "Once you use us once, you use us for the rest of the year."