What To Do When Your Pricing Model Doesn't Match Your Avatar | Ep 865

0:01It becomes very dissatisfying because your team gets burnt out because they're like I feel like all we're doing is onboarding new customers all the time and they're just walking out the back door and they're just walking out the back door. match your avatar. That's what I want to talk about on today's episode of The Game. I have been doing these deep dives into kind of like growth sins. And obviously, I talk to a lot of business owners on a regular basis. And there are very common themes that come up for why there might be, let's call it structural difficulties to growing the business. And there are a lot of different, you know, forms of this.

0:51But today, I want to talk about this one, because I think it affects, you know, a lot of small businesses, which is that the business has trouble scaling because you sell the wrong type of service to the wrong type of avatar. And this often comes up when you want to do everything for everyone. And this isn't a, you know, you need to be narrow on your avatar, which I cover at length and in other podcasts, but this is more a difficulty with how you deliver times how you price times how many people you have to do it for. All right, So let me explain. So if you have a low-end customer, so let's call it prosumers or small business owners as a customer, for example, that's going to be a VSMB, so very small business owner.

1:37And the problem with VSMBs is that they have inherent volatility, meaning because they are small, they will go up and down on a regular basis. They have good months and bad months. And on bad months, they will take a real hard look at their expenses, sometimes including your business, and decide to cut, right? And the same thing happens on the business consumer business. But the issue is that most of these businesses who sell to these customers would be significantly better served. Basically, there's a fork in the road, right? So either you sell more templatized, higher volume, more scalable products and services, Or you go up market in pricing and avatar to sell more customized solutions.

2:22The problem is most people kind of end up somewhere in the middle. And this is the very painful no man's land where these customers, because you offered customization, but you don't have scalability built into it, end up getting upset with you that they're paying$20 and don't have it entirely custom whatever it is that you deliver. right and so it's like they have unrealistic expectations and since you didn't start with I'll call it a tech first approach it just makes it a very painful business to run and every year the difficulty is that it's very easy to acquire these customers because these customers there's a lot you know boatloads of them the problem is that they're very hard to keep and so you end up getting into this kind of hamster wheel of getting lots and lots of customers but them falling out the other side and you bang your head against the wall because you're like, I need to look at these turn tactics.

3:14I need to look at these revenue retention, you know, metrics and activation points. And the thing is, is all that stuff is the correct thing to do, but you might just be missing the big obvious one, which is that these people aren't going to stay. And as tough as that is to hear, it's just the reality of it. And so I'm going to give you two, two very different examples. I've done the right way. And then, and I'll give you some examples that done the wrong one of the best prosumer businesses or, you know, VSMB businesses out there is Shopify, right? They're considered, you know, gold standard for providing a great, you know, product for small business owners.

3:46But they keep on average like 50 % at month 12. I have to double check, but it's between 50 and 60%, which is considered best in class. So that means that they lose half of their new customers every year. Now, after that point, they get people to stick and then it becomes really valuable, right? But the first year, they lose like half the customers who sign up who are brand new. But they're able to build an entire business around this because it doesn't really cost them that much to add another customer. And this is kind of the problem. So let me give you a services example of this. I'll say an acquaintance of mine had a very large agency, right?

4:24So this is, you know, your standard high touch, or I'll put high touch in quotes here, high touch services business, which would be agency work for small businesses, which sounds like a complete nightmare. But here's the thing that he did that was really clever. He figured out that he had to be really low priced. We're talking like$200,$300 a month for services. Now, most of you might hear that and be like, well, that's impossible to deliver any kind of service there. Aha. And this is where it gets interesting. So what he did was he just looked at what most business owners think they need to do, which is, you know, think Main Street.

4:58So they have to optimize their, you know, their Google reviews, they have to, you know, do a little bit of management, responding to DMs, things like that. It's what I consider a nuisance business, right? It's stuff that a business owner knows they should do, but aren't doing. And you can absolutely sell them on$1 ,500 a month for that same thing. The problem is they turn out. And so the question is, how can you deliver or how did he end up delivering those same services for less? Well, he built his entire business around cost so that he could charge a very small amount of money to these businesses.

5:33And because of that, they're like, yeah, I mean, if I get one customer a year, two customers a year, this thing pays for itself, right? And so you want to have such an easy ROI argument that it would be stupid for them to cancel. And so his average stick was like 38 months. That means that, call it$300 times 38 months. I don't know what that math is, but$9 ,000 plus$2 ,400. So$11 ,400, right? So$11 ,400. Now, if you could sell something for$200 a month, you could sell a lot of people at$200 a month. And if you know that you're making$11 ,000 plus on each one of these customers, that's a pretty interesting business.

6:10Think about it like this. If I wanted to guesstimate how high that business could grow, the question is just how many$200 a month business owners could I sell? Probably a lot, right? Like hundreds and hundreds, thousands per month. And so if you sold a thousand of those small business owners per month and you had a $11 ,000 LTV, you'd be looking at 11 million a month,$100 million plus business, right? Just from doing this. But that'd be easy to do. That's not hard. Now, the vast majority of Business owners, though, that sell to SMBs are typically in that$1 ,000 to$3 ,500 a month range. And it's because you can sell them there.

6:51You just can't keep them there. That's the issue. And so when I said at the beginning, you have basically a fork in the road, right? So either you say, you know what? We're going to do services. We're going to do real work. And if you do that, then you've got to go up market to an avatar that their volatility does not preclude them from affording your services. You have to price to their worst month. And that can be really hard for you from a margins perspective, which means if you want them to stay, you either got to go down market and then make your price so cheap, which then means your services need to be absolutely templatized and built for volume and scale.

7:32with high amounts of tech and huge amounts of operating leverage, meaning one rep can manage 300 accounts, 500 accounts, a thousand accounts, or you say, you know what, we're going to have, you know, one rep can manage five accounts. And in that instance, we need to go to businesses that if they have a bad month, they're not immediately looking at their bill and saying, hey, we're going to cancel, right? And so either you go custom and you go up market, or you go templatized and you go, you know, smaller, low market, but you still have, and here's the key point, is you still have high gross margins on that low ticket.

8:06And so that's okay. That's fine. Let's say it costs you 10 bucks a month and you charge 300. Good business model. It's just that these small businesses typically cannot sustain high prices on a continuous basis. So you end up just creating this churn factory that becomes very dissatisfying because your team gets burnt out because they're like, I feel like all we're doing is onboarding new customers all the time. And they're just walking out the back door between three and four months later. And if you're listening to this and being like, oh my God, this is my life. It's probably because the model you have, the services you deliver, and the prices that you charge do not match the avatar that you are selling to.

8:42And it's just one of the most common mistakes that I see, especially in services businesses, because you have less operating leverage because you have people that you have to train up in order to deliver whatever you sell. I might make a series out of these kind of like little growth sins, but this is one of the big ones. And the thing is, is you can fix it. You just have to decide, am I going to change my services and price? Or am I going to change my avatar and maybe also your price and go up, right? Do I go up market, charge more and do it custom? Or do I go down market, which you might already be selling to, which means you're keeping the same customers, charge less, but maintain higher gross margins, as in percentage of dollars kept of dollars made, by scaling back my deliverables.

9:32And you're able to do that with a smaller price tag. So a lot of people will see a business that charges$100 a month and let's say has 80 % gross margins, meaning it costs you 20 bucks to deliver the thing that you charge 100 for. Okay. Which by the way, Alex's rule of thumb for services is it must be at least 80 % gross margins for me to be interested in it personally. At least. I prefer to be, you know, at 90 or 95. Now, when you hear 80 versus 90, you might think, well, that's just a 10 % difference. That's twice the operating leverage. So think of it differently, is that my cost basis is 20 % versus 10%.

10:10So it's half, which means double the leverage. And so again, also, the difference between 90 and 95 % is another double. So if you're like, okay, well, I'm looking at a business and it's got 95 % gross margins versus 80, the 95 % gross margin business has four times the operating leverage. And so this might seem like a small, irrelevant thing, but it can very well make the difference between you having an unbelievably scalable business that can print money versus one that just, you always get stuck in this hamster wheel of, you know, the revolving door of customers in, customers out, you know, team getting frustrated, you feeling like you're always having to think about your next marketing campaign rather than just knowing that you have this bolus, this stacking of customers that are either coming back on a monthly basis or on some sort of membership subscription that just keeps building, right?

11:03And so this is just one of the big sins that I see in growth, which is just that you grow quickly in the beginning because you can sell customers easily in this space, but churn catches up real fast because they walk out the other side. And then you just think, okay, well, I could just keep increasing advertising, which is what a lot of people do. But then the difficulty is that your cost of acquisition starts going up, your gross margins start shrinking because, because cags increasing, right? And you start hiring this team and all to sustain the new customers that are coming in, but they're costing more, they're more of a pain in the butt, they know you less because you're going to colder and colder markets, right?

11:39And because of that, you have more volatility in your acquisition. So you have, you know, when you're selling 10 customers a month, if you have a down month of call it 20 % and you sell eight, it's probably not going to make a big difference in the business. But when you're selling, I don't know, a hundred customers a month and there's 20 fewer, all of a sudden you've got like four reps or three reps that would have had customers that they need to be serviced or onboarding and they're just sitting there twiddling their thumbs, right? And God forbid you have a 40 % decrease. And now all of a sudden, instead of a hundred, you sell 60, right?

12:11But if you go from 10 to 6, not a big deal. When you go from 100 to 60, a very massive deal, especially if that's basically how you make your money and you're living paycheck to paycheck because you need to sell every single month to keep the lights on and pay this massive team that you scaled up because you scaled too fast the wrong way to the wrong customer. Anyways, this is just one of the major growth issues. It is fixable though. So I don't want you to lose faith if this is you or you're like nodding your head up and down and be like, oh my God, this guy's explaining my life story. I get it.

12:43And it's solvable. We have to make a few strategic decisions about which direction you go to, depending on the market that you're in and how to recombine the services offering so that it is even more compelling at a different price to the right customer. And so anyways, this was top of mind for me because I talked to a couple of businesses last week that was suffering from the exact same issue. And so I figured I'd make a quick pod for you guys. And yeah, you guys rock. Appreciate you. If you feel like having us take a look under the the hood, you can always come out to one of our, one of our events here at our headquarters, where we kind of look under the hood.

13:17My whole team does. I check the businesses out as well. And we help you scale. Hopefully, that's kind of that's kind of the jam. So anyways, I think it's acq.com forward slash go, I think you can go there. And then you can you can grab a time if that's interesting. Otherwise, keep enjoying your day. And I'll see you next one. Bye.