Jay-El-Kaake-and-Mike-Rossi

When Waterloo, Ont.-based entrepreneurs Jay El-Kaake (left) and Mike Rossi founded Sweet Tooth three years ago, their goal was to offer a complete customer-loyalty program for web retailers. Problem was, no comparable product existed on the market, so it wasn't immediately obvious what price the market would bear. The duo consulted their advisory board and asked prospective customers what they'd be willing to pay. Since most customers offered low-ball responses, the results weren't very helpful, says Rossi: "We probably priced too low when we started out."

As the firm grew, the partners began looking at the problem more systematically and arrived at a way of deriving an answer. First, Sweet Tooth partners tried to quantify the tangible benefit their program offered customers in easy-to-understand metrics, such as the number of work hours the client would save per year. The partners also sought to estimate what it would cost a customer to build an e-commerce rewards system on its own. In addition, El-Kaake and Rossi decided to segment their market, offering three pricing levels: for startups, more established e-tailers and sizable businesses requiring custom solutions.

Finally, Rossi added one other element to the price-setting formula: customer feedback. If no one is griping about price, he says, that may mean the price points are too low. He knows his company has hit a "sweet spot" when some customers are complaining and requesting discounts, but new clients also are signing up.

Today, Sweet Tooth's loyalty software is used by more than 4,000 e-tailers worldwide.

Read the main article: How to Price for Profit

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