Why Your Best Customers Should Pay More — Transcript

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1. 0:00So, here's my rule of thumb for upsells,
2. 0:02taking into account that 20% of
3. 0:05customers have far more spending power
4. 0:08than the ones below. Now, remember, we
5. 0:09had $2 here and the next level had 28.
6. 0:11So, it was like 14 times more wealth
7. 0:13between just the bottom 50 and the next
8. 0:1540. But, just using the Pareto principle
9. 0:18in terms of how you can apply this to
10. 0:19pricing, like you not understanding this
11. 0:21is why your business is not making as
12. 0:23much profit as you want, all right? So,
13. 0:25my rule of thumb is that for every new
14. 0:26tier
15. 0:28is that
16. 0:29you want to 5 to 10x your price
17. 0:33and expect 20% of people to take it.
18. 0:36Okay?
19. 0:42So, here's how it works. So, let's say
20. 0:43that you sell 10 customers, okay? So,
21. 0:45you sell 10 customers, do do do. Let's
22. 0:47do it again.
23. 0:53Okay? Now, if you have eight of these
24. 0:56customers
25. 0:57at $10 per month
26. 1:02and you've got two of them at $50 per
27. 1:04month
28. 1:06how much am I making on these guys? I'm
29. 1:08making $80 per month in total on the
30. 1:12bottom 80. And then, I'm making $100 per
31. 1:15month
32. 1:16on my top 20% or my top two. And so, by
33. 1:19serving these two customers differently,
34. 1:22we double the revenue of the business,
35. 1:24which by the way, again, is my rule of
36. 1:26thumb. I want each tier
37. 1:29to bring me another double, like another
38. 1:31full amount of revenue. Otherwise, I'm
39. 1:33like, I don't know if it's worth
40. 1:34creating the actual extra constraint of
41. 1:36operations, right? But, here's where it
42. 1:38gets even nastier. Let's say that this
43. 1:40covers the majority of our overhead.
44. 1:43That means that this extra $100 might
45. 1:45contribute 10 to 1 compared to this to
46. 1:48our bottom line. And so, sometimes when
47. 1:50you make a move like this, if you were
48. 1:52here and you had $80 and you were living
49. 1:54your life on this 80, right? It's like,
50. 1:55well, maybe your your your cost is 70
51. 1:58and you're taking 10 home. If you add
52. 2:00this $100 in and maybe the cost on this
53. 2:02is 20, you've got 80 left over. We 5x
54. 2:05the profit. So, let's say our profit
55. 2:07before this was 10 a month.
56. 2:10And then we add this in and we have $80
57. 2:11a month in profit from this 100, right?
58. 2:15Look at the difference in profit. We go
59. 2:17from 10
60. 2:19to 90.
61. 2:22Just by adding this tier. And so, the
62. 2:24reason your business is not making as
63. 2:26much money and you're not making as much
64. 2:28money as you want is because you're not
65. 2:30priced appropriately for the people who
66. 2:31actually have the money to give you. And
67. 2:34so, to maximize revenue, you can think
68. 2:36of it with four tiers of pricing. And to
69. 2:38be clear, you don't need to serve
70. 2:40everyone and the first product you have
71. 2:42may not be your base tier. All right, so
72. 2:44you might start here. I don't know yet.
73. 2:45I don't know your business. But this is
74. 2:47what you can walk through in terms of
75. 2:49thinking through the pricing for your
76. 2:50products and services. So, let's assume
77. 2:52that we have 1,000 customers, all right?
78. 2:55So, on our on our our base tier, all
79. 2:58right? So, this is the lowest,
80. 3:00$10 per month and let's say we've got
81. 3:02800 customers at this level, okay?
82. 3:04Now, our second tier, we might have it
83. 3:07$100 per month. So, 10 times that price
84. 3:09with 20% taking it, all right? So, that
85. 3:12means we're going to get somewhere in
86. 3:13the neighborhood of 200-ish people who
87. 3:16would qualify for this tier. Okay. And
88. 3:18the next tier,
89. 3:20we still have to follow our rule, 5 to
90. 3:2110x. So, that means we're going to be at
91. 3:23500 to 1,000 a month for this next tier.
92. 3:25Just to keep it simple, I'm going to
93. 3:26just do 10x cuz it's
94. 3:28nice and clean.
95. 3:29All right? And so, here, we're going to
96. 3:31have maybe
97. 3:33around 40. Now, you're like, wait, I
98. 3:34thought we had 1,000 customers. This
99. 3:35would be 160. I'll redo the math then so
100. 3:37you can see it, all right? Now, our next
101. 3:39tier might be, again, 5 to 10 times this
102. 3:43and so, we might be somewhere in this 5
103. 3:45to 10,000 dollars a month, all right?
104. 3:47And so,
105. 3:51times around eight
106. 3:53Okay?
107. 3:54And so, if you're looking at this,
108. 3:56you're like, "Holy cow, that's uh those
109. 3:58are very big differences in price." Yes,
110. 4:01but so they they reflect how different
111. 4:04the spending power that exists within
112. 4:05customers is. All right? And so, the
113. 4:08main takeaway from this and is that if
114. 4:10you're going to have an upsell, a very
115. 4:12small percentage of people are going to
116. 4:13take it. And so, you have to make it
117. 4:14worth it. And so, people will have these
118. 4:17I'll go 100 and 129. It's like it's the
119. 4:19same pitch. It's the same price. The
120. 4:21willingness to pay for that customer is
121. 4:22the same. Let me show you how I've
122. 4:25actually translated this into my own
123. 4:26business. All right? Well, this and you
124. 4:29can ignore the actual numbers of
125. 4:30customers, but what do we have here?
126. 4:33Ah.
127. 4:35We have school. And then at $100 a
128. 4:37month, what else do we have? We have
129. 4:39school. This is our hobby plan.
130. 4:41This is our pro plan.
131. 4:42And so, for me, the next number
132. 4:45is $5,000,
133. 4:49which is L1.
134. 4:51And what's the next number after that?
135. 4:54$35,000.
136. 4:55Huh? Almost like it's between five to 10
137. 4:58times the price, which is L2.
138. 5:01And then, what do we have after that? We
139. 5:02have something that's $135,000.
140. 5:06So, that's four times the price, right?
141. 5:08And this is L3.
142. 5:09And what do I have underneath of that?
143. 5:11No money because it's a portfolio
144. 5:12company.
145. 5:14And so, the thing is is it may take some
146. 5:16time to build out this entire thing. I
147. 5:18didn't start with school. I started
148. 5:20building, you know, uh you know, our
149. 5:22brand. Uh this is, to be clear, just our
150. 5:24advisory practice um that we have at
151. 5:26acquisition.com.
152. 5:28And so, I'm just saying like knowing
153. 5:29this doesn't mean you need to do all of
154. 5:31this at once. It takes years and it does
155. 5:32take operational chops to pull this off,
156. 5:34right?
157. 5:35You want to add tiers one at a time. My
158. 5:37tip though is to start as high up as you
159. 5:38can on this ladder for a few reasons,
160. 5:41right? So, the Tesla example I gave
161. 5:43earlier, the branding from top down
162. 5:45versus bottom up is much stronger. Like
163. 5:46Honda making a better car is tough
164. 5:48versus Rolls-Royce making a Rolls-Royce
165. 5:50light. It would be easier play for them
166. 5:52from brand position.
167. 5:53The next reason is that I prefer to
168. 5:55start with the unscalable. Why? Because
169. 5:57it's easier to operationalize it serving
170. 5:59these people because one, they actually,
171. 6:01believe it or not, as a percentage of
172. 6:03their net worth, this is actually lower
173. 6:04than what this is for somebody who's
174. 6:06poor. Right? If you have uh $10
175. 6:10uh 100 grand is 1% of what you've got.
176. 6:14If you've got $1,000,
177. 6:16100 bucks is 10% of what you got. And
178. 6:19so, for you, you will actually be more
179. 6:21demanding for that 10 that 10% or that
180. 6:23$100, reasonably so, than somebody who's
181. 6:25giving 1%. But, from a business
182. 6:28perspective, the 100 bucks versus the
183. 6:30100 grand, it's a gigantic difference.
184. 6:32You have an easier customer to deal with
185. 6:34that has lower demandingness, but it
186. 6:36requires, and to be clear, to get that
187. 6:37$100 to equal 100,000, you've got to get
188. 6:39a thousand of those people. So, is
189. 6:41serving the one customer for 100,000
190. 6:43easier than serving a thousand at a
191. 6:45hundred? As somebody who used to sell
192. 6:46$100 gym memberships, for sure.
193. 6:49And if we were to look at this from a
194. 6:51profit contribution perspective, like,
195. 6:53what is actually dropping to the bottom
196. 6:54line?
197. 6:55>> [snorts]
198. 6:55>> It would look like this.
199. 6:59All the profit is here. Just like all
200. 7:02the wealth is at the top.
201. 7:05So, you have to do more and charge more
202. 7:08for it to people who can afford it. And
203. 7:10the amount you do for a few people is
204. 7:12almost always worth it for the far
205. 7:14greater price for those people who are
206. 7:15willing to pay it. If you like this
207. 7:17video and you're a business owner who
208. 7:18wants to break through your current
209. 7:19revenue ceiling, I distilled every
210. 7:20lesson from scaling 10 businesses past
211. 7:2210 million and three businesses past 100
212. 7:24million into a completely free scaling
213. 7:26road map that I've used to go from zero
214. 7:27to one, zero to 10, and zero to 100
215. 7:29plus. And so, you can click here and you
216. 7:31can check it out. Again, absolutely
217. 7:33free. And since you're a business owner,
218. 7:34appreciate you and enjoy.