There are only 3 variables pertaining to profit:
Ask yourself the following question on each of these:
Cost: How can we lower our costs on the product/service or business costs (administrative fees)?
Sales: How can we increase our organic marketing leads and improve our conversion to sales?
Price: How can we increase our price to align with the value we provide to those we serve? (It’s all about alignment)
Create a simple spreadsheet for your company budget. Put everything on it. Then, sort it by the highest costs. Focus from the top down. Can you lower the highest expenses at the top of the list? (Best resource: Profit First)
Increasing sales is all about removing friction from the buyer journey. Can you grow organically by making marketing and sales more connected in the buyer’s mind? (Best resource: Never Lose a Customer Again)
Pricing is the one that we all avoid. Yet, if you dive into the data, increasing your price leads to higher profit margins than saving on cost or increasing sales. For the rest of this post, we will dive further into pricing.
I don’t know about you, but when I started my business, I set the price best off a feeling. I “thought” it “seemed right/fair.” But I was the first and only business of its kind in my market. So I had yet to learn what would be right or fair. I based this on what legacy businesses in my space charged; I averaged it out, then removed a chunk because mine was an automated software versus a manual process.
There were better ways to determine my pricing. I know that I priced my product far too low, and most potential buyers didn’t take it seriously as a result.
I should have taken a systematic, data-driven approach to pricing.
How to properly determine the price for your product/service:
Pricing defined: Price sets an expectation of the benefit and quality in the minds of potential buyers.
Therefore, your job is to accurately describe the benefit and quality for potential buyers to understand. Here’s how you can do that:
Step #1: Measure the value of your product/service. To do this, you need to get feedback from your ideal avatar. Find 100 people who perfectly match whom you serve with your product/service. Ask them for a high and a low dollar amount that they’d pay for the product/service that you’re offering. (The way you ask these questions is KEY to getting the right answer, read his book: The Mom Test)
Step #2: Remove outliers from the list, then average out the high and the low amounts of the 100 people you talked to (or slightly less after removing outliers). The number you come up with as the average is the price!
Step #3: Pricing is not a “set it and forget it” type of thing. No, the more value your product/service generates, the higher the price should become. However, you have to quantify this. The value and the perceived value are very different things. At this point, you can ask your internal members/customers, “What else would you like to see to make this even more valuable?”
Step #4: Make improvements to your product/service based on the feedback that you’re receiving. Following what your current customers are asking for as your product roadmap ensures that you’re further serving your avatar.
Step #5: If your current customers cannot notice a difference or don’t realize you have “improved something,” you haven’t. The perceived value has stayed the same, and if that’s the case, it’s not worth more to non-exciting customers yet. You have to find a way for the benefit and quality to increase in the mind of your current customers. Once you can quantify that your existing customers have noticed the increase, repeat Step #1.
STEP #6: The first time you go from Step #5 back to Step #1, you’re going to do one thing slightly different. You will track the percentage increase of perceived value from ideal avatar feedback. If, say, the increase in perceived value was 4%, and it took you 12 months to make those improvements, then, in the future, if you continue on the same track of product improvement, you can raise your prices by 1% each quarter safely, without having to go back. (NOTE: this only works if you continue improving simultaneously.)
Measure the value. (Get feedback from your ideal avatar, but no one that you work with or know)
Increase the value by adding what people want. (Your exciting customer’s feedback)
Increase the price as the value increases. (Ask ideal avatars for a second time, then find your percentage)
Quick hacks that help:
Offer a guarantee – They work well. (Here’s what I did on this: PodMatch Guarantee)
How people feel matters – Figure out how people feel about you and what you offer, then make them feel better about both! (Find ways to do this through your website, social, and branding)
Brand consistency is key – There’s much mistrust in the world today. You can earn more trust with potential buyers if you consistently deliver what you promise through social media, testimonials, etc.
Responses to the cheap/free competitors:
I have many thoughts on this group, but I’ll keep my comments minimal. When your ideal avatar/potential clients bring them up, here’s what you can say:
“How do they support you?”
“If you’re using the free/cheap version, I imagine they treat you poorly to focus on another group, right?”
“Are you worried about their company shutting down because they’re going to run out of investor capital?”
“How are they keeping the lights on?”
“That model seems unstable; are you not worried about what will happen with your data when they shut down?”
The final test (are you doing it right):
Because most education on pricing is all feeling-based or an “educated guess,” there are many questions if what I’m sharing works. Here’s how you can test it for yourself:
The value of your product/service is directly measured by your confidence in sharing the price and deliverable. Your confidence is directly correlated to the number of words you use.
If you’re new to the wedding catering space and attempting to land your biggest job, 25k for dinner for 100 people, how many words do you need to use to sell this to the bride?
If your chef is Gordon Ramsey, you only need to say four words: “I have Gordon Ramsey.”
^ BOOM. You’re completely confident that the value is 100% there. You say those four words, then all you have to do is slide the contract in front of the bride, and she will sign it.
Alternatively, if your ex-convict brother-in-law is your chef, four words aren’t going to cut it when trying to sell at that 25k price point, are they?
“Well, while he was in prison, he really changed his life and became passionate about cooking and enrolled in some classes. He’s a really great guy, just made some bad choices early on. He’s doing so well now, and cooking is his future. I think giving him this chance would be good. Oh, by the way, I’m sure you want to know why he was in prison…………”
^ Those words are just the beginning of a very long conversation. You, the reader (and me, the writer), have no idea if it’ll happen or not.
The point again is this: The value of your product/service is directly measured by your confidence in sharing the price and deliverable. Your confidence is directly correlated to the amount of words you use.
If you have to give long, drawn-out explanations as to why you charge what you do, you’re charging too much. Grow in your confidence, but make sure what you price your product/service at aligns with the benefit, value, and deliverable for your ideal customers.
If you want to start making exponentially more money in your business, find a way to increase the value (and perceived value) of your product/service and raise your prices!