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Your Price Has Nothing to Do With Your Cost — Transcript

by MoreMozi · 2,635 words · 387 segments · language en · Watch on YouTube

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0:00Okay. A deep dive into how much to
0:02charge.
0:03Uh increase how much percentage and when
0:05if currently priced at commodity
0:06pricing. A formula which we can use. All
0:08right. Um
0:10Following topic will be related to each.
0:11I'm going to start I'm going to stop at
0:12the first one. So so pricing-wise, there
0:14is
0:20The reason that pricing can be somewhat
0:21amorphous is that
0:23in some ways, it's like
0:26pricing is speculative
0:29for many people and many businesses.
0:30Meaning, if you have a house in the
0:33middle of nowhere and there's no
0:34comparables,
0:36what that house is worth is directly
0:38proportional to what someone else is
0:40willing to pay. And that can have huge
0:42variety. If there's a billionaire who
0:43decides that that house is the house
0:45that he has set his eyes on, the the
0:47value of that house could be tremendous.
0:49Now, there are some hard costs that can
0:50be related to that, which is like how
0:51much would it be for him to buy, you
0:53know, the adjacent part of the mountain
0:55and build the house themselves. That
0:56would be kind of like the baseline. And
0:58then the the value on top of it is just
1:00how much time you're going to save that
1:01person for not having to do that, right?
1:03And so
1:04from a pricing perspective, there are
1:05very formal ways. There's entire books
1:07on pricing. Um but I would say that the
1:10back of the napkin way of coming up with
1:12pricing is typically the one that I use
1:15most often. So I'll give you two
1:16different ways of thinking about
1:17pricing. Um and then I'll give you a
1:18bunch of wrong ways. So wrong way number
1:20one of thinking about pricing is look at
1:22what everyone else is charging and then
1:23take the average. That's number one.
1:24That is how you guarantee that you are a
1:26commodity in a commoditized marketplace.
1:28Number two,
1:29do that and then do a little bit more
1:30for a little bit less. That's even
1:32worse.
1:33Number three, cost-plus pricing. This is
1:35far more common. It cost me $10. I have
1:37a fixed 50% markup, so $15 is what I
1:40charge for everything, and that's what
1:42it is. 50% markup. That is at least
1:44better in that you have some you've at
1:47least thought of your margin. Um but
1:49worse in that it's all about you, but
1:51it's not about you. It's about the
1:52customer. It's about what they're
1:53willing to pay, not what you're willing
1:54to charge. All All
1:56So
1:57the perfect price is one that a customer
2:00will buy that is the maximum that
2:02they're able to spend. The difficulty is
2:05that this changes
2:06within a customer's purchasing history
2:09in the moment and between customers. So,
2:12for example, if I've had a long day of
2:15skiing and I go to the lodge at the top
2:18of the, you know, the hill in the
2:19mountain and I want a beer, the value of
2:22the first beer is significantly higher
2:24than the value of the second beer. And
2:26the value of the second is is higher
2:27than the value of the third. And at some
2:29point, they couldn't pay me to have
2:31another beer.
2:33And so, value diminishes and this
2:36happens all the time within existing
2:37products. And so, how do you figure out
2:40if the if the beer is worth, you know,
2:42$7 for the first beer and then
2:45$3 for the second beer and $1 for the
2:47third beer and the fourth beer they
2:48don't want it anymore.
2:50Okay. Well, how much more is that first
2:52beer worth? And how many average beers
2:53do people buy? And so, we do some math
2:55until eventually say I think the average
2:57person will buy three beers if the
2:58average price is
3:00uh let's say $1. If it's $1, they're
3:02going to buy 1 2 3 and on the third
3:04beer, we get $3 total. We got three
3:06beers sold. Now, I said before the
3:08second beer was $3. So, if I price it at
3:10$3, I'm going to get three and then
3:12three. So, I have $6. So, at three at
3:14$1, I have $6 at $2. Oh, sorry. Uh $6 at
3:17a $3 price point. And then if I said the
3:19first two beer was worth worth seven,
3:21then I should price my beer at seven and
3:23know I'm only going to sell one beer cuz
3:24six seven is higher than six.
3:28That is how pricing can change within an
3:29existing customer's experience, which
3:31for many of you guys who sell recurring
3:33stuff, this is very real and this is why
3:35I'm such a big advocate of not having uh
3:37linear pricing when you can af- when you
3:39can afford to do it. Meaning, I like
3:41having onboarding fees. I like having
3:42upfront charges because in the beginning
3:44is when the person typically has the
3:46most pain. They're the most deprived of
3:49uh the service or or, you know, whatever
3:50promise that you're delivering for them.
3:52Um
3:53And this is also really common for
3:54service businesses that you actually
3:56have to front-load all of the work. And
3:57so it makes sense to have the customer
3:59pay for that additional onboarding cuz
4:00it can help you offset the cost of
4:01getting a customer
4:02um
4:04while also matching to their level of
4:05deprivation. And so the big breakthrough
4:07that I had in the gym industry, which is
4:08what I mean fundamentally changed a lot
4:09of your large group training space, was
4:11that when people came in, when I got
4:13into the gym business, people would try
4:15and sell them a trial. And I thought
4:16that was really interesting cuz it's
4:17like I paid all this money to get this
4:18person in the door. And the thing that
4:20I'm going to try and give them
4:21is free. Is a taste. But today is the
4:25day they're the most motivated they're
4:26going to be. They're in the most pain
4:27today. They're the most out of shape.
4:30They haven't done anything for
4:31themselves, and they've decided to get
4:32their butt in the car and drive to the
4:34gym. This moment is the maximum moment
4:36where I can charge.
4:38And so I flipped the model and I started
4:39charging for 500, 2,000, 5,000 on those
4:42first transactions, and then having a
4:44much cheaper price after the fact
4:46because the value that was conferred
4:47through a community of the gym was
4:49valuable, but less so than losing
4:51weight.
4:53And so what also happens with any kind
4:55of service, especially if it's
4:55recurring, is the nature of the
4:57deliverable will also change. The reason
4:58people buy is not always the reason
5:00people stay. And so we have to price
5:03based on the on the relative value of
5:04that specific moment.
5:06And so
5:07someone might come to lose weight, but
5:09then stay for friends.
5:10Losing weight is more valuable than
5:12making friends, and I'm only saying this
5:13based on what people are willing to pay
5:14for, not whether that actually is true
5:16for your life, but by willingness to
5:17pay, people are willing to pay more.
5:20And so
5:21it would make sense that I should have
5:22something that is my weight loss price
5:24and my community price.
5:25And then have those things reconcile.
5:28Now, the third element of this
5:30is between customers. So rich guy, poor
5:34guy, both get pitched the same thing.
5:36For me, if $2,000 comes out of my
5:38account and I'm rich guy, I might not
5:40even notice it. In fact, $2,000 might
5:42might be too cheap for me to even care.
5:44If I'm poor guy, $2,000 might be all the
5:45money in the entire world. And so, in
5:47which case, I'm not the right fit for
5:49this, even though the actual service is
5:50the same, and we still might both still
5:52need the the core deliverable. And so,
5:55all of this comes down to what's the
5:56sweet spot on pricing. How do we sell
5:58the most number of units with the
6:00maximum number of gross margin. And so,
6:03this is the this is the math. So, if you
6:04want the formula, it's number of units
6:06sold
6:07times gross margin.
6:10That gives you the highest absolute
6:11amount of money that you make in a given
6:12marketplace.
6:14Typically, and just so you get a little
6:16bit of uh you know
6:17uh you don't stress yourself out about
6:18this, it's a curve. Meaning, there's two
6:21points on either side where you will
6:22make the same amount of money selling a
6:24lot more units and selling fewer units
6:26at a higher price.
6:28The question is what type of business
6:30you want. And so, for most service
6:32businesses that include humans, I make a
6:33very strong argument for being a premium
6:35price leader because if you make the
6:37same money serving 10 customers as 100
6:38customers, wouldn't it be nicer to scale
6:40the 10 customer business?
6:42Because once you sell 100 once you're
6:43servicing 100 customers, you have the
6:44operational infrastructure of being able
6:46to deliver those to that 100 customer
6:48base, you're already 10 times as big in
6:49terms of absolute profit. And your
6:51ability to advertise those people, those
6:52people are willing willing to pay, etc.
6:54etc. down the road, right? And so, you
6:56can make the same amount of money on
6:57either side. And so, if you get stressed
6:59about this, remember that these these
7:01decisions it's a zone, not a correct
7:03answer, and it's going to change.
7:06The market changes. And so, you will
7:08never have a perfect price unless you
7:09have a pure marketplace function like
7:11Uber does in the moment for people at
7:14this at this minute in this micro
7:16locality, the band just came out,
7:17they're surge pricing. Unless you have a
7:19perfectly efficient marketplace like
7:21that based into how you charge, you're
7:22going to always have inefficient
7:24pricing. And so, the solve to this is
7:26having tiers of service that attract or
7:29clearly
7:31articulate or signal to a specific type
7:33of customer um
7:35that this [clears throat] is for them.
7:37Said differently, my favorite video that
7:39I made this whole year
7:40uh was I think called like the 511 rule.
7:43You can look it up on my channel.
7:45Um, but basically it's about the fractal
7:46nature of customers. And so where this
7:48is really interesting is that if you
7:49were to spread out $100 on 100 circles
7:52that represent America, um, the bottom
7:5550% of those circles in terms of
7:57absolute wealth have something like
7:59$2.70
8:00of the $100 that's available of total
8:02wealth. That's crazy that is. The bottom
8:0450 Half the people, all of them. Now,
8:07the reason this is so difficult is that
8:08if you are poor and you only know poor
8:10people, you will look at all the people
8:12you know and assume that is how the
8:13world is, that no one has money, and
8:15that is not true. It's just that no one
8:16you know has money.
8:17So, if we look at the top 50%, the next
8:2040, so from 50 to 90%, that next 40 has
8:24some money in it but like 30-ish dollars
8:26of that total 100.
8:28The next 9%, so from from 90 to 99, all
8:32right, percentile.
8:33The next 9% has, I think,
8:37another like mid-30s dollars, and the
8:40top 1% has 30-something dollars.
8:44And so that means, in a very real way,
8:45the top 1% has
8:4911, 12, 13, whatever the math is there,
8:51times the money of the bottom 50.
8:55And so it makes sense logically, not
8:57because you're you're some person
8:59doesn't want to help poor people, but
9:00because that's where the money is. And
9:02so you go where the money is and service
9:04those customers because they will give
9:06some of it to you.
9:09And so having tiers of service that that
9:11appeal to different fractals of
9:13customers allows you to maximize the
9:15revenue you generate from an existing
9:17audience. And so for example, and
9:19typically, and I'll say the big mistake
9:20with a lot of pricing, and hey, he asked
9:22for pricing. I can talk about pricing
9:23all day. All right. The big mistake a
9:25lot of people make with pricing is that
9:26they do not go high enough and they do
9:27not go low enough. So what I mean is,
9:29let's say you've got A, B, C, D tier,
9:32all right, for prices.
9:34Whenever there's is tier increase, what
9:36most people do is is like, I saw this in
9:37the gym space all the time. I've got a
9:39I've got a uh, you know,
9:40129 a month for my A and then I've got
9:43149 a month for my B.
9:45Well, the thing is is that that's the
9:46exact same buyer. And so this is that's
9:49the person who's the the the gym owner
9:51thinking of selling from their own
9:52wallet. They're thinking about the cost
9:54basis of coming more times or whatever
9:56other doodads they added. But they're
9:57not thinking about the customer they're
9:59selling to. And so when I'm designing a
10:01pricing schema or offer schema for an
10:04audience, I have to think how valuable
10:06is solving this problem for this person.
10:08And I start with the price and then I
10:09work backwards. And so we know
10:13there's a buyer for a $9 a month
10:14product. And then the next tier of buyer
10:17for school for example
10:18might be $99. That's 11 times more
10:20expensive, right? Now, let's do again do
10:23the math on this.
10:26If I have 20% of customers buy something
10:29that's five times as expensive, me
10:31adding that 5x price point above my my
10:34core offer doubles my revenue. And so
10:37for me I typically like to make sure
10:38that every offer tier doubles my revenue
10:41overall of my core. And the only way you
10:43can do that is with basic assumptions of
10:45what the uptake rates are going to be
10:47for um
10:49for a given population. And so most
10:51upsells of customers you're probably
10:53going to be in the 20 to 30% range most
10:56times. And so if that's the range, then
10:58I want to make it worth it which means
10:59I'm going to 5x the price relative to
11:01the base. And then think what could I
11:02possibly deliver to this person that
11:04would be worth five times the price.
11:08So hopefully that helped. If you are a
11:09business owner and you are not growing
11:11as fast as you'd like, I'd like to give
11:13you a free gift. So my team and I put
11:15together the $100 million scaling road
11:17map, which is basically 200 hours of us
11:19looking over all the portfolio companies
11:20we've had and what stages of growth they
11:22went through and more importantly where
11:24they got stuck and how they got past it.
11:26And so we broke it into these 10 stages
11:28and we made this little kind of quiz
11:29thing where if you put in your business
11:31information, it'll tell you where you're
11:32at, and the most important part for you,
11:34what to do for each of functions of the
11:36business across product, marketing,
11:37sales, customer success, recruiting, IT,
11:39human resources, and finance. And so, no
11:41matter what you're struggling with,
11:43someone else has already struggled with
11:44it and solved it. And so, I'd like to
11:46give you this thing absolutely free. You
11:48can go to acquisition.com/roadmap,
11:50plug in your business information, and
11:51if you want us to actually help you
11:53deconstruct the business, and you're
11:55trying to scale, we'd love to help you
11:56out. On the thank you page, you can just
11:58book a call with my team, and we will
12:00look at the business, see if we can
12:02help, and if we can, we'll invite you
12:03out to Vegas, and we'll do this in
12:04person live.

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