Throwback: Quick Tips on Pricing to Make More Money This Week | Ep 947

0:00In this podcast, I want to give you a couple quick tips on pricing that will make you more money if you just do the stuff that I outlined in this podcast. Enjoy. Have something extremely expensive to sell that you never even plan on selling. I learned about this anchoring tactic from a friend of mine. And he said, listen, man, you can just put something on your menu of items or services that you sell that's 10 or 100 times more expensive. And just by having it there, it'll anchor everything else on your menu or the rest of the prices that you have. And just make it something that if someone actually bought it, you'd be stoked that they did.

0:37But what ends up happening is that one, you'll sell more people on your core offer because they have this big price anchor. Second, it allows you to nudge up your main offer's price because related to the big one, it looks like almost nothing. I was talking to a different friend of mine and I said, hey, you know, you should consider just adding one of these things in. And he had a weight loss business, a very generic online weight loss business. And so he added a six times higher price version of his offer. And then the craziest thing happened. People started buying that more than his core offer.

1:10And when he did that, he tripled his profit overnight. And so the thing is, is that it also breaks you, especially if you're starting in business, out of this fear of raising prices by just saying, hey, there's no way anyone's going to buy this. I'm going to make this so expensive, no one's going to buy it, and that's okay. So you give yourself permission to just fly it out there. But what you will find is that 10 % of customers just want to buy the most expensive thing. These are the whales. And the only thing worse than making a$1 ,000 offer to somebody with a$100 budget is making a$100 offer to someone with a$1 ,000 budget.

1:45Because in the first scenario, you lose$100. In the second scenario, you lose$900 of the money that you should have made but didn't. Raising prices almost always makes you more money, but you hear no more often. And so let me break this down. So I had a sales guy in one of our portfolio companies and we doubled the price of a product. So a lot of people are like really afraid of like 10 % or 20 % increases. Like I'll test 4X, 5X price differences. Pricing in many instances is far more inelastic than you think it is. All right. So elastic versus inelastic pricing. I'm not getting into that. But basically if you have a$5 sandwich going to$10 sandwich, there's a lot of elasticity with food, meaning people are very responsive to small increases in price.

2:27The classic counter example is if you have life-saving medication, it's not very elastic at all, meaning if you double the price, people still are going to pay for it because they need to live, right? And so the thing is, is that if you have a very valuable thing, the price is usually a lot more flexible than you think it is in terms of how much you can move it up, all right? And so I like making massive price tests, but the thing that you have to have when you do this is the balls or the stomach to deal with more no's. And so when I walked that sales team through, the price increase, I said, hey, we're going to double the price.

3:01I said, you have to understand that we're for sure going to get less or fewer yeses. But the question is, will we get half the yeses? So we had a 35 % reduction in conversion percentage, but we doubled the price. And so we made more money in multiple ways. So one, we made more absolute revenue. We literally just made more top line. But the magic of this is that, let's say the cost of our thing was$500 and we sold the thing for$1 ,000. Okay, so we have 50 % margins. Well, if we double the price, we go from making$500 in profit to$1 ,500 in profit. So I actually triple the amount of money I make by doubling my price.

3:41And so even if I have a 35 % reduction or a one-third reduction in sales, I tripled how much money I made on the other two-thirds of my sales, which means me doubling the price with a one-third reduction in sales still doubled the profit in absolute amounts despite selling one-third fewer customers. And one of the nice benefits of having fewer customers is that you have fewer costs associated with delivering on them. So not only is the gross margin per customer higher, your fixed costs that you have to incur to continue to expand your infrastructure go down. And fundamentally, a smaller amount of customers that make more money is an easier business to run than more customers that make you less money.

4:25And let me tell you how important this is, because this is specifically from all my 40 plus business owners. All right. So if you're 40 years old or higher, you tend to be more accepted to this concept. All right. I've seen businesses that have not changed their prices for five, six, seven years, right? Because they're afraid to do it, whatever. But I want to give you some real hard truth right now. In 2017, if you sold something for$100, that was your only product, and you were running 20 % margins as a business, if you did not change your price from 2017 until 2024, that$100 now means that your costs in that business have gone up by 20%, which means that your profit is now zero.

5:00And so if you feel like your margins continue to compress year after year after year, it's usually because you're not appropriately adjusting your prices. So to give you context,$79 in 2017 is the equivalent of$100 today. And so that would be like you going back in time where you had a 20 % margin business and running it at a$79 price point rather than a$100 price point. And so you just like that eliminate all the profit in the business. And so you have to do the reverse of that because inflation is a compounding threat to your business that every year stacks on top of itself. And so if you're not making 3%, 6 % increases in prices at least annually, you're not even keeping up with inflation.

5:42And to give you a little story around this, Warren Buffett, when he bought these candies, said that he only wanted to control one thing. And so what that one thing was is that every year he would look at all the prices of all the candies and he would ship them the new pricing. And he has raised prices 50 years in a row, sometimes in a single year as high as 17 % on to their pricing. and as a result of that, he's cleared himself a billion dollars in profit. And so if it was the one thing that he focused so hard on, it might be something worth thinking about. So if you do make a pricing change, there's two components to this.

6:15One is new customers. The other is old customers. The easiest thing to do is just change the price and just apply it to everyone who's new. That's simple. And if you're in a transactional business, then it's fine, even because the old customers come back and buy again, right? But if someone's on some sort of recurring service, it's a little bit trickier. Now, I have some tactics around this, but I'll just give you the high levels, which is you want to have a price increase letter. You want to talk about all the things that they're going to get as a result of the investment that you're now making into the business, and that it's the only way that you'll be able to stay in business given inflationary pressures, et cetera.

6:47All right. And so you just want to say, here's the thing. Here's the stuff you're going to get. I want to keep my promise to you, which is to keep our thing as good as possible. And only way for me to ethically keep my promise is for us to reflect that in the prices, which are now having to be changed effective this date. But don't worry, I've grandfathered you in to your old price by this time, and that's key, is that the old customers, you say, everyone wants to be grandfathered. You say, so I'm grandfathering you in until this date, and that way it's not like it's changing tomorrow, it's delaying the pain and giving them a gift right now as a way of honoring the fact that they've been loyal customers to you.

7:21Those are the main bullets of what that price letter would go out and say. And if you are going to raise your prices, You want to be measured about it. You should know what your conversion rates are prior to you making the price change, and you should be able to give a statistically significant sample size of shots on goal with the new price before you make a decision. If you get on the phone and the first two people say no, well, we, one, knew more people were gonna say no. We already expected that. And if you have, call it, 40 % close rates right now, well, if you make double the price and you go to 30 % close rates, then that's still a great deal for you.

7:56You might just be getting the first two no's out of the seven no's you already know you're going to get when you talk to 10 people. And so talking to two or three people getting no's doesn't mean you need to change your price. It might have just been the no's you were normally going to get even at your lower price. And so you can't be emotional about this. You have to be calculated. And this, in my opinion, is the reason most people don't raise their prices or can't do it successfully. Real quick, guys. I have a special, special gift for you for being loyal listeners of the podcast. Layla and I spent probably an entire quarter putting together our scaling roadmap.

8:29It's breaking scaling into 10 stages and across all eight functions of the business. So you've got marketing, you've got sales, you've got product, you've got customer success, you've got IT, you've got recruiting, you've got HR, you've got finance. And we show the problems that emerge at every level of scale and how to graduate to the next level. It's all free and you can get it personalized to you. So it's about 30-ish pages for each of the stages. Once you answer the questions, it will tell you exactly where you're at and what you need to do to grow. It's about 14 hours of stuff, but it's narrowed down so that you only have to watch the part that's relevant to you, which will probably be about 90 minutes.

9:03And so if that's at all interesting, you can go to acquisition.com forward slash roadmap. R-O-A-D map. Roadmap.