Key Moments
How To Ask For More Money (And Actually Get It)
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Key Moments
Most businesses are underpriced by 30%-300%, leading to the 'fear tax' and lost revenue, while excessive discounting, like Bed Bath & Beyond's, can lead to bankruptcy.
Key Insights
Most businesses are priced 30% to 300% below what they should be selling for, with 80-90% of pricing mistakes being underpricing.
Bed Bath & Beyond went bankrupt after becoming dependent on continuous 20% off coupons, training customers to buy discounts rather than products.
A business fully booked and operating at over 90% capacity may be underpriced, with a 20% price increase often leading to more revenue with less work.
If more than half of your deals only close when you (the owner) close them, your prices are too low to afford a salesperson, indicating a 'hero complex' pricing sin.
Value split pricing suggests charging 10-30% of the value created for the client, with the client retaining 70-90% of the upside.
Improving prices by just 1% can lift operating profit by 11% for the average company, even if volume remains flat.
The 'fear tax' is starving your business
Many business owners, like Jenny of Jenny's Splendid Ice Creams initially, suffer from the 'fear tax' by underpricing their products or services due to a lack of confidence. Jenny sold ice cream made with premium ingredients at the same price as competitors using lower-quality ingredients, earning only $600 a month despite selling out. This fear of charging what she was worth nearly bankrupted her business. It wasn't until she doubled her prices, aligning them with the cost of her superior ingredients and the value she provided, that her business, Jenny's Splendid Ice Creams, grew to $100 million in annual revenue. This highlights that price is a direct reflection of belief in your offer and yourself. Research indicates that on average, businesses are priced anywhere from 30% to 300% below their potential, with pricing mistakes overwhelmingly leaning towards underpricing rather than being too expensive.
Understanding pricing mistakes
Pricing errors are overwhelmingly on the side of underpricing. A McKinsey study found that 80-90% of pricing mistakes occur because prices are too low. This is contrary to common belief, where business owners often think they are too expensive. If a business has an 80% or even a 60% close rate, it's a strong indicator of underpricing. An optimal close rate, with a normal sales team, is typically between 30% and 45%. Chris Doe, a pricing psychology expert, emphasizes looking at what the best in the market are charging, rather than defaulting to lower prices. He advocates for an 'with or without you' energy, where the seller is confident in their value regardless of the client's decision, and aims to make the client slightly uncomfortable with the price, signaling its value.
The seven deadly pricing sins
The video outlines seven pricing sins that hinder profitability. 1. **Imitation:** Pricing within 10% of competitors out of fear of breaking rank, essentially letting strangers dictate your business's biggest decision. 2. **Delusion:** Charging 'market rate,' which is often the average of others' fear and poverty. The correct approach is to price against what the top performers in your market charge. 3. **Surrender:** Discounting 30% or more. Bed Bath & Beyond's demise is a prime example; their constant discounting trained customers to only buy on sale, eroding margins and leading to their collapse. Deep discounting trains customers to buy the discount, not the product. 4. **Hustle Poverty:** Being fully booked and at capacity but not raising prices. If a business is consistently at 90%+ capacity with a waiting list, a 20% price increase can often maintain demand while significantly boosting revenue and reducing work. 5. **Hero Complex:** When more than half of deals only close because the owner personally intervenes. This indicates prices are too low to afford a salesperson, trapping the owner in constant sales efforts. 6. **Doormat Work:** Charging standard prices for extensive customization requests. This effectively means donating margin to picky clients. The solution is to create clear menus with prices for standard offerings and higher prices for custom or 'off-menu' work. 7. **Self-Extraction:** When current prices don't allow for someone else to deliver the work and still leave profit. This makes delegation impossible and prevents the owner from taking breaks or scaling. Prices should enable delegation and eventual replacement of the owner with someone more skilled in specific areas.
Value-based pricing and the value split model
A powerful strategy is value-based pricing, which focuses on the value delivered to the client rather than just costs or competitor pricing. Charlie, a client featured, transformed his business by shifting from charging $5,000 for a coaching program to proposing $40,000 (and potentially more) for writing proposals for authors. This shift resulted in over $400,000 in new client contracts within weeks, allowing him to quit his job and work fewer hours for significantly more income. The value split pricing model suggests determining the total value your work provides to a client annually (e.g., money made or saved). Then, your price should be 10-20% of that value if you're still learning, or up to 30% if you're highly confident. This leaves the client with 70-90% of the upside, creating a win-win scenario.
Controlling the comparison: The cost of doing nothing
When clients balk at prices, the key is to reframe the comparison. Instead of discussing price directly, anchor it to the cost of inaction or the problem itself. An agency owner successfully reframed a $5,000 monthly retainer by highlighting that the client's funnel was leaking $100,000 annually and their solution would add $8,000-$12,000 in profit within 90 days. The $5,000 fee suddenly seemed small compared to the potential $100,000 loss. This approach leverages the concept of opportunity cost, emphasizing what the client is missing out on by not using the service. A Harvard Business Review analysis found that a mere 1% price improvement can lift operating profit by 11%, outperforming cost cuts or volume increases.
A five-step framework for repricing
The podcast offers a five-step framework for repricing: 1. **Set Floor and Ceiling:** Define your ceiling as the full value you create for clients and your floor as double your current price. 2. **Gut Check Margin:** Aim for a 4:1 revenue-to-profit ratio (i.e., for every $4 in revenue, $1 is profit after costs). If your ratio is 3:1 or worse, you have room to increase prices. 3. **Leverage Your Network:** Contact your three favorite clients and ask for referrals. Your next high-value client is likely within their network. 4. **Ask Strategic Questions:** During discovery calls, ask about their desired future state, their current distance from it, and the dollar/hour cost of that gap. Recap their answers and ask permission to send a proposal without stating a price on the call. 5. **Present Two Options:** Send a one-page email with two pricing options: Option A (ceiling, uncomfortably high price, premium service) and Option B (floor, at least double your old price, the one you actually want signed). Include one sentence comparing your fee to the cost of doing nothing.
Take action and own your value
The biggest barrier to increased wealth is often a lack of swift action. Momentum dies quickly, and not moving fast enough is the primary reason many people are not richer. When repricing, do not discount, and if a client states a price is too expensive, ask, 'Compared to what?' – the expected price or the problem's cost. If negotiation occurs, reiterate the comparison and offer Option B. The core message is that no one will pay a price you are too scared to say out loud. Your price communicates your value to the world. Therefore, set it high, say it loud, and own the value you create.
Mentioned in This Episode
●Software & Apps
●Companies
●Organizations
●Books
●People Referenced
Seven Deadly Pricing Sins and How to Avoid Them
Practical takeaways from this episode
Do This
Avoid This
Sales Close Rates and Pricing Implications
Data extracted from this episode
| Close Rate | Pricing Status |
|---|---|
| 80% | Too underpriced |
| 60% | Too underpriced |
| 45-30% | Probably priced right |
Value-Based Pricing Multipliers
Data extracted from this episode
| Confidence Level | Percentage of Value to Charge |
|---|---|
| Unsure of delivery | 10% |
| Pretty confident | 20% |
| Awesome | 30% |
Revenue to Cost Ratio for Profitability
Data extracted from this episode
| Revenue per Customer | Cost to Acquire | Cost to Serve | Profit |
|---|---|---|---|
| $4 | $1 | $1 | $2 (4:1 ratio) |
Impact of Price Improvement on Profit
Data extracted from this episode
| Price Improvement | Operating Profit Lift |
|---|---|
| 1% | 11% |
Common Questions
Raising prices is crucial because your salary or day rate is a price. If you can't remember the last time it went up, you might be undercharging due to underconfidence. Pricing also reflects belief in your offer and yourself.
Topics
Mentioned in this video
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