Fast Beats Free Every Time | Ep 842

0:28What's going on everyone? Welcome back to the game. many automobile shops. And in talking to him more, it was a very razor thin margin business as he was detailing it. And one of the things that he had was a certain niche type of customer that had tremendous costs incurred for the amount of time that their trucks or cars were off the road, something to the tune of like$10 ,000 to$20 ,000 a day in lost income. And what was interesting is I said, okay, I'm guessing these guys are not price sensitive. And he was like, no. And I said, well, do you price it differently for them? He said, no. I said, but you have other customers or the vast majority of your customers that if it took a week to get their cars or trucks back, it wouldn't really make a difference to them.

1:11He said, right. I was like, okay. So what you're missing is basically a surge price or said differently, a speed pass. And so what I want to talk about is a couple of different ways you can implement this in any business. And what's really cool about this type of kind of offer or value consideration is that it's 100 % margin. So think about it. Like if you deliver anything, let's say you build decks for a living, it doesn't matter. And you have your standard, let's say you have a 30 % margin in the business after everything. Okay, fine. Great. If you build that in three months, cool. And maybe you can only take on a certain amount of projects.

1:48So you build them, let's say in sequence. So you build, you know, customer A, and then customer B, and then customer C. Well, it makes basically no difference to cost for you if you do A, B, C, or C, A, B, right? Like, it wouldn't actually change anything for you, you're going to have the same number of people, and you're going to deliver over the same time period. But the thing is, is that customer C might be willing to pay two times more to get it done faster. And so for us as business owners, having the offer available for people to get what they want faster, I mean, and you think about this in the e-commerce world, like you can obviously always pay for faster shipping.

2:21It's almost like a, it's an obvious thing. But for some reason in the services businesses, people don't do this. And I'm still always lost to why. Maybe it's because they don't think about it, which is why I'm making this podcast. But for this individual, when I was talking about the auto shop thing, it just felt like such an obvious thing. Well, okay. Well, if it takes you normally a week to get this stuff back and the vast majority of customers don't care, but a small percentage of customers do care very much about time and they're losing thousands of dollars every day or tens of thousands of dollars, then it would follow to have a speed pass that would allow them to get priority, right?

2:57Because somebody else doesn't really care if it adds a day to their service. And so they're willing to pay the standard rate, whereas somebody else, it does matter a lot. And so they're paying for fast shipping, right? Fundamentally, that's all we're doing here. I would say that for me, fundamentally, and I'll talk about the second way that you can use this in a second. But for me, fundamentally, I've really shifted, I mean, a lot of my thinking around creating products and services. I mean, I go back to the value equation because it's so core to how I do everything. But like, you've got the impact or outcome, you've got risk, you've got speed, and you've got ease.

3:29Like these are the elements of value. Like I have yet to find anything else that are not those four elements. The thing is, is that each of these elements can be traded in and out. In the services space, it's very common for people to add features or remove features of services in order to have different prices. That makes sense for a lot of people. But what they don't do is they don't actually change prices on speed or risk, right? And that sounds odd because those are huge elements of value. Just since I'm going to keep this conversation focused on speed for today, I think a lot about like, what can I do to do something faster?

4:02And sometimes to do something faster will cost you more. Like if you're in home services, for example, and let's say you do kitchen remodels. It's like, okay, I could do your kitchen first. And so either I use, you basically have two options. You're either using resources from another customer and deprioritizing somebody else who doesn't care about speed as much, which is the simplest option operationally. You just change the sequence of delivery, but your actual kind of like fixed costs say more or less the same, you're just changing orders up. So that's pure profit, which is awesome. The second way of doing this is that you have surge support, right?

4:38So you say, okay, well, what would it take if I were to try and get this person who normally I deliver this in three months to deliver it in one month? And let's say for that person, they're willing to pay two times to three times as much. Now you may be surprised by this. And I want to encourage you to not sell out of your own wallet, which is a pretty common thing for business owners, is they say, well, I would never pay for something like that. Well, good thing that you're not your customer because you probably already know how to fix cars or you probably already know how to fix, you know, or build decks or make, or, you know, make, do a kitchen remodel or provide whatever service you have.

5:09And that makes you not your customer because your customer doesn't know how to do those things, which is why they're paying you. Right. And for them, the value may be really big if it comes really fast. Let's just use a hypothetical here. Let's say that for you to build out a kitchen, right? It's going to cost you, if you wanted to rush, right? And say, hey, Mr. Marble Supplier, Mr. Granite Supplier, or Mr. Cabinet Supplier, whatever, I need these things by next week or by two weeks from now. What would it take? That's the question you ask. What would it take? What would I have to pay in order for that to happen?

5:46I have a customer who's willing to pay whatever price. I can do it within reason to make it worth your while. And so then it's back to them. And so what you might find interesting is that they might say, well, you know, I could rush it and it probably cost about 20 % more, might cost 50 % more. And you might say, cool, done. Because guess what? If you have to pay 50 % more for your cost of goods, and let's say you also pay 50 % more for labor, fine. Okay. But if you charge double or triple the price, not only do you make more absolute profit, if you try to charge triple the price, you're going to make more gross margin percentage too.

6:26So like you're going to make more money by percentage and absolute with this offer. And to make matters even better, you're going to be able to deliver something way faster than normal. And guess what happens then? You get more word of mouth. People are like, holy cow, this guy can deliver fast. And I'm telling you, having been, you know, I mean, I would say having been in business for so long, it's not true. I haven't been in business that long. I've been, you know, 13, 14 years, whatever it is at this point. Shoot it might be longer than that. Anyways point is is that speed trumps so much like When spotify was competing with the internet of online downloads, which were free Spotify beat free because it was fast Think about how crazy that is Like if you're I remember like I remember another time another example this For Halloween, Chipotle does the like, if you wear tinfoil or you dress up like a burrito, they give you a free burrito.

7:23They do it every year. I don't know if they still do it, but they used to do it when I was younger. And I remember thinking to myself, I went to it as a business owner later on in my life and it happened to be Halloween. For me, it was just whatever day of the week Halloween fell on and I just needed to eat lunch. And I saw this line out the door and I was like, my God. And I thought to myself, I was like, man, if I could just pay$30 to have my burrito now, I would so I don't have to wait in this line. But then it just got me thinking yet again of like how valuable speed is because fast beats free And so the thing is is that delay is the thing that people hate most like think about how amazon won and netflix won They won because of speed like you want to look at movies It's like instead of getting in your car and doing all that stuff.

8:02You just turn on your television You can browse an unlimited selection. It was fast It was right there and obviously convenience and ease kind of factor into play there as well It's immediately available and so So if you can, try and sell speed. Now, I told you there was two types of speed that are rather surge pricing that I wanted to talk about. The second is a little bit different. Okay. So the second here is, and now all of these are based on demand, right? So to be clear, like you have some people who want things faster, and so you give it to them faster in exchange for more money, everybody's happy.

8:37Another situation is where you have uneven demand cycles. So a very common example, this is like restaurants. And so I just did a Cash Cows episode this week. And if you don't know what Cash Cows is, it's the new kind of pseudo TV show that we've been producing. It's on my YouTube channel. I've been waiting to do this for like over, it's been more than a year. It's been probably almost two years now that I've been kind of like wanting to do this. And it just It takes a huge amount of resources for every one of the episodes, but the first two episodes are out. Basically, I kind of do like a mini shark tank, except I don't buy the business.

9:11I just help grow it. So it's way more tactical. It's the most positive feedback I've gotten on anything I've ever made. And this is specifically for business owners. So it's hardcore business content. I think you'll really like it. Anyways, I think some of you guys have heard the podcast version of it, but if you haven't seen the video version, I think the video is even better. But anyways, so we have a Cash Guys episode that's coming out, and it's my show, so I can spoil whatever I want. The restaurant owners came in, and there's a number of things we did to the business. But one of them was they had a lot of people come on weekends and not as many people come during the week.

9:47And this is pretty common for restaurants, right, is that they get more demand on Friday, Saturday, sometimes Sunday than they do the rest of the week. I said, well, do you have the same menu on weekends? And they said, yeah. I was like, well, have you considered just taking, just reprinting the menus and having a weekend menu that has, you know, 10 or 20 % higher prices? And they're like, huh? I was like, if you have a line out the door that lasts an hour, right? And you can't even service the demand, then when price and demand, sorry, when demand goes up on a price curve and it surpasses supply, you shift price up.

10:21Like that's just, that's fairly standard. But I say this, you know, quote, fairly standard, but the vast majority of businesses don't do it. So very standard from a theoretical perspective, less so from a practice angle. And the thing is, is in a business that's like food, where you're running usually paper thin margins, you know, if you have 104 days a year, so two days, you know, your two weekend days per year, and let's say that on those days, you do half your volume, right? Remember, you're doing more volume in those days than you do the other five days of the week. So 50 % of your volume, if we can add 10 or 20%, if a business is running 10 % margins, then us running just a 10 % price premium on those days adds 5 % to the absolute margin.

10:59And so what does that mean to the business? It's a 50 % increase in profit. If we had a 20 % increase in price, then it would be a 10 % absolute increase because it's 50 % of the revenues coming on weekends, which would double the profit of the business. And so the thing is, is that there's all these tiny little levers that exist in a business that I think a lot of business owners underappreciate, or they're honestly just too afraid to implement. They're so afraid of, you know, what happens if someone says no, it's like, well, are you offended when you buy a physical product and it says fast shipping for an extra 299?

11:29No, if you don't want to just don't take it, right? Like if you're at the mechanic shop and he says, hey, how important is this for you? You know, how fast you need this done? Because we can basically we can prioritize your thing and do it like literally we can make yours next in line as in like, it's the first thing we worked on. Or we have our standard turnaround, which is, you know, you're fifth in line right now and we'll probably get it to you by end of day tomorrow or whatever, right? If someone says end of day tomorrow is fine, then you say, cool, that's great. But if someone's like, no, I really need it back because I got to pick my kid up and it's the only car I have.

11:59It's like, okay, well, then here's the fast pass price. And they might be like, great, because I don't want to have to pay somebody else to do this. And this actually saves me money. And so again, this is where like, you just don't want to sell out of the wall to the customer and assume that you know what they want, that you know what's best for them. I can say the vast majority of human error that exists, you know, from a politics perspective is people making rules for other people and assuming that they're the same. People are very, very good at allocating their own capital and their own time for their own benefits.

12:29Like capitalism is built on this idea. Like we're pretty good at getting what we want for ourselves. And most people are very bad at determining what everyone else in a wide population that doesn't represent them do want, right? This is why I'm an advocate of smaller government personally. Anyways, every business, so zooming back out, whether you're in physical products, whether you're in SaaS, whether you're in services, you should consider two different lenses for surge pricing. One is the fast pass, which we talked about first, which is, is there some way that we can either reorder our delivery for customers or drag our customer delivery up faster and be willing to pay maybe a small premium in cost in order to get a big premium in price that would immediately drop to our bottom line because speed is 100 % profit.

13:12Think about that. speed is 100 % incremental margin, especially if you just do the reordering of customers. If it makes no difference for some and it makes a big difference for others, all profit. If you have to do surge support in terms of added cost, then sure, you eat a little bit of margin there, but you still can make more absolute money. And you serve those customers better. And I think you'll get more word of mouth. And then obviously on the surge pricing side, if you have uneven demand or you're seasonal in the nature of how your business runs, or it's end of the month versus beginning of the month, things like that, every business is different.

13:42Consider having pricing that affects that. And I'll give you a different example. So it can also be on a micro level from a day-to-day perspective. So in the gym space, the 5 p.m. class or 6 p.m. class is usually, you know, those two classes are some of the most, you know, packed sessions, as you might imagine. But, you know, it was never crowded, 7 a.m. It just was the deadest time that we had, right? And so when I think about that, I think, okay, well, then maybe there should be two memberships. We should have peak hours pricing and off-peak hours, right? And so for people who do care about, I can only come in this time, then they can pay the premium.

14:17And for other people who have more flexible schedules or work from home or work for themselves or they have shift work or whatever it is, then they might be willing, they might be happy to get a discount to come to the less packed times, which is good for you as a business owner. Because think about it like this. Let's say your 6 p.m. class is oversubscribed, right? So you only have, let's say, 30 bikes, you know, and so you can only fit 30 customers there. But let's say that if you had availability there, you could fit up to 40 people. All right. Well, the thing is, is that there might be people who are in that class who could otherwise come at different times.

14:49They just have no incentive to. But if you gave them the incentive, then you would be able to service more customers because the 10 who can't make any other time go to another gym because it's not convenient for them. And so you make it convenient for the most amount of people by appropriately pricing your supply to meet the demand. And so again, this literally works in any business. If you're a hair salon girl, like everyone who's listening to this, it's like, well, this doesn't work for me. It works in every business. Like, stop. Speed is always a component of purchasing, period. If you're a hair salon girl, I'm going to bet that your Friday and Saturday probably is more busy for cuts and colors than Wednesday afternoons.

15:32And guess what that means? Your cut and color on Fridays and Saturdays should probably be 20 % higher. And for people who doesn't matter or they're not doing it because they're going out that night, but they're doing it because they just need to get their monthly cut and color, then you charge normal. And you charge surge pricing for Fridays and Saturdays. And for those of you who have this weird issue with thinking that, what will my customers say? It's like, well, your demand will go down on those days. And then that means that you will not have to turn customers away. And then you can adequately serve everybody.

16:01You can literally, like the perfect pricing model, which is very difficult to do in reality, is that every single person would pay what their maximum willingness to pay is. Now, that is theoretically great, but practically impossible. And so this is where data is useful. So we can just get our best pockets where we know that these are indicators of high demand, like weekends or like, you know, peak hours at the gym. There's always these types of pockets that exist in any business. And we just try to, and you think Facebook doesn't, for example, when you're running ads, what do they do? Surge pricing is during Q4 when all the Christmas shopping happens.

16:36Cost per impression skyrockets. If you're an Uber, like if you order an Uber at Friday night at 10, you're going to pay two and a half, three times more. So like, like, are you offended? I mean, if you are, then you don't understand how capitalism works, but maybe you're offended, but you still buy and you still don't use anything else. Right. And so I just, I would, I would encourage you to one, if you're a chicken about it, just change it for new customers. And then it'll slowly like new customers, you know, old customers will slowly over time cycle out. Um, and then new customers will cycle in at the higher price.

17:07Um, but I would encourage you to just say like, listen, and you can always like, you can blame it on inflation if you want. So you can blame it on costs of goods going up. You can say that you only have, you know, your rent got raised, blame it on whatever you want. If you want, you can put it to an outside power because you're afraid of just saying, I decided that I wanted to charge more. But if you want to blame it on something else, you can. Fundamentally, I think that if you have more demand than you have supply at given times in your business, then it means that you were mispriced. And so you should consider maybe just raising prices at those times.

17:40So that being said, I hope this found value. If you are a business owner and you like this type of stuff, we have our advisory practice, which we set up last year, which is honestly been really amazing. The reception has been exceptional. I've been really stoked about it. It's one of the business I've been most excited about starting. But yeah, we have business owners out here. I think the last time, I think I took a, I looked at the data from four consecutive days and it was the average person in the room was 4.1 million. Median was 1.2 to give you an idea. So we do have big businesses in the room as well.

18:14And so if you're a business owner and you like these types of kind of profit driving tactics, you know, this is a podcast. But if we do two days and we know what your business is, we can probably help you out a little more. I'm sure you can find it online, acquisition.com. Just click around. If you can't figure it out, then it's not for you. I hope you guys have an amazing day. Share this with your friends. It's the only way that this podcast grows. and so thank you. Love you all and talk soon.