Yet Another Lemonade-Stand Parable

Update 8/28/2011: I saw a recent article in Times

that was about how we seem to find economic lessons and parables from  children’s literature. The author nicely summed it up as,

“It’s just that once economics is on the brain, it suddenly seems to pop up a lot in children’s literature.”

Here is a pricing lesson I found in one of the books my child read.

Almost an year ago, I wrote about a children book called A Dollar for Penny. This is a step into reading book for early readers that tells the story of a little girl who runs a lemonade stand. A smart little girl, the protagonist in the story, sells the same  product to different customers at different prices. Prices start with 1 cent for some to 50 cent for the one with most willingness to pay.  That is first degree price discrimination (or is it Price Harmonization?).

I would like you to compare this lemonade stand with the two other illustrated by  Mr. Seth Godin:

1. A standard lemonade stand offers fast service and sells at one price $1 per cup.
2. An unconventional lemonade stand that serves hand-crafted lemonade and the little girl talks to you. The surprising part is there is no set price, you pay what you want.

Which one of the three entrepreneurs have a bright future? The one from the book or one of Mr.Godin’s?

I will state the caveat that future success cannot be predicted based on a single event.

Your gut might tell you that  it is that little girl who sells the experience and not the lemonade. This story is heartwarming and the possibility that some customers will pay $5 for the experience may make it look profitable as well.  If you are a marketing romantic you need no further convincing.  But if you are analytically inclined you need to look more carefully at all three cases.

Standard Lemonade Stand: Selling a standard product at one low-price and little or no-service  is not a bad idea as long as you target the right customers with this offering. If this lemonade stand has operational efficiency it can serve a large number of customers and take in considerable profit. For some customers a lemonade is just a lemonade, for quenching thirst and not about the experience.

Custom Lemonade Stand: Selling the experience and not just the product is a splendid idea (like Starbucks) if (once again) you are targeting the right customers and you are able to charge for it. The wrong part is not setting a price and leaving it up to the customers to pay for the lemonade. Customers do not know what to value a product, no one walks around with an internal value meter that tells them what to pay for each product. Customer willingness to pay is shaped by marketing and reference price. Pay what you want may look very much like first degree price discrimination except it is not.

Differential Pricing Lemonade Stand: Lastly what about the one that priced the lemonade differently for each customer? She should not have started with a low price  of 1 cent. While this may work for this little girl, pricing at each customer’s willingness to pay, it is not possible in practice. But she is  on the right track to profit maximization – defining product versions for different customer segments and offering at prices they are willing to pay.

The moral from all these lemonade stand stories is that – entrepreneurial success depends on strategic marketing,  which is nothing more than segmentation, targeting and positioning.