This Will Make You More Profit Than 99% Of Businesses

Summary

In this video, Alex Rosi emphasizes the importance of strategic pricing for business profitability, asserting it has a six times stronger impact than customer acquisition. He introduces the concept of 'price to value discrepancy' and explains how to differentiate between one-time and consumable value in pricing. Rosi also discusses the benefits of annual billing over monthly or quarterly, highlighting its lower churn rate and higher lifetime value (LTV) for customers. He concludes with advice on finding business models where customers are less likely to cancel, advocating for a focus on cumulative value and quality over aggressive sales tactics.

Takeaways

• 📈 Optimizing pricing is crucial for business profitability, with a stronger impact than acquiring more customers or reducing churn.
• 🔢 Businesses often neglect the use of mathematical analysis in pricing strategies, which is a significant lever for increasing profits.
• 💰 Understanding the value delivered to customers is key, and differentiating between one-time and consumable value can lead to better pricing models.
• 📉 The price-value discrepancy can lead to customer churn, especially when the perceived value drops post-purchase.
• 💡 Introducing a startup or one-time fee for high-value, one-time products or services, alongside a lower recurring fee for consumable value, can improve customer retention and LTV (Lifetime Value).
• 📆 Billing frequency has a substantial impact on churn rates, with annual billing resulting in significantly lower churn compared to monthly or quarterly billing.
• 💼 The 'look back window' concept suggests that customers are more likely to renew if they perceive value over an extended period, which is influenced by the billing cycle.
• 🚀 Focusing on products or services with a naturally high customer retention rate can lead to a more stable and compounding business growth.
• 💹 It's essential to find the right balance between price and conversion rate to maximize revenue and ensure long-term customer retention.
• 🔄 Contracts can provide a sense of security for long-term customer relationships, but their effectiveness varies based on cultural and consumer behaviors towards commitments.
• 📊 Reporting cumulative value over time can help in extending the lookback period for customers, potentially increasing the perception of value and renewal rates.

Q & A

Why is pricing considered the most significant lever for increasing profitability in a business?

Pricing is considered the most significant lever for profitability because optimizing pricing has a six times stronger increase on profitability than getting more customers and two times stronger increase than decreasing churn or getting people to buy more times.

Who is Alex Rosi and what is his role in the video?

Alex Rosi is the owner of Acquisition, a portfolio of companies generating over $200 million a year. In the video, he shares his expertise to help viewers understand how to make their businesses more profitable through strategic pricing.

What is the 'Price to Value Discrepancy' concept mentioned by Alex Rosi?

The 'Price to Value Discrepancy' concept refers to the difference between the value a customer perceives they are getting from a product or service and the price they pay. Ideally, businesses want to have a high value proposition with a price that is high relative to costs, leaving room for customer surplus or goodwill.

What is the difference between one-time value and consumable value in the context of pricing?

One-time value refers to products or services that deliver value only once, like a course where the value diminishes to zero after consumption. Consumable value, on the other hand, refers to products or services that provide recurring value over time, such as a subscription to a community or software service.

Why is it important for businesses to differentiate between one-time and consumable value when pricing?

Differentiating between one-time and consumable value is important because it helps businesses to price their offerings appropriately, reflecting the ongoing or diminishing value to the customer. This differentiation can lead to better customer retention and higher lifetime value (LTV).

What is the 'Big Head Long Tail' pricing model and how does it work?

The 'Big Head Long Tail' pricing model involves charging a one-time fee for the initial high-value product or service and then a lower recurring fee for the ongoing consumable value. This model aims to match the price to the perceived value discrepancy over time, potentially reducing churn and increasing customer lifetime value.

How does billing frequency impact customer churn rates?

Billing frequency significantly impacts customer churn rates. Monthly billing has the highest churn rate, while quarterly and annual billing reduce churn rates to about 5% and 2% respectively. This suggests that less frequent billing can lead to better customer retention.

What is the 'Look Back Window' concept and how does it affect customer renewal decisions?

The 'Look Back Window' refers to the period a customer considers when evaluating the value they have received from a service since their last payment. Extending this window can increase the likelihood of renewal as customers consider the cumulative value over a longer period, rather than the value received in the most recent billing cycle.

Why is it beneficial for a business to focus on services that people don't often cancel?

Focusing on services that people don't often cancel can lead to a more stable and recurring revenue stream. This approach reduces the need for constant customer acquisition and allows the business to benefit from compounding growth as long-term customers continue to pay over time.

How can a business use the concept of 'cumulative value' to improve customer retention?

A business can use the concept of 'cumulative value' by reporting the total value delivered to customers over an extended period. This approach can help to frame the service's value positively, even if there are fluctuations in the value delivered from month to month, and can encourage customer renewal.

What are some strategies for raising prices in a way that maximizes profitability and maintains customer retention?

Strategies for raising prices include testing different price points to find the optimal balance between conversion rate and price, ensuring that the total revenue per customer interaction is maximized. It's also recommended to raise prices gradually and to provide clear communication and value justification to customers when prices increase.

Outlines

00:00

💰 The Power of Pricing for Profit Maximization

In this paragraph, Alex Rosi emphasizes the critical role of pricing in business profitability, stating that optimizing pricing can significantly increase profitability more than acquiring new customers or reducing churn. He introduces himself as a business owner with a portfolio of companies generating over $200 million annually and offers insights to help viewers grow their businesses. Alex discusses the importance of using mathematical calculations to solve pricing issues, rather than relying on intuition, and introduces the concept of 'price-dev value discrepancy' to illustrate the relationship between the price, the value provided to customers, and the cost to the business. He also touches on the difference between one-time value and consumable value, suggesting that businesses should differentiate between these two to optimize their pricing strategies.

05:00

🔑 Unlocking Profitability with Pricing Models

Alex Rosi discusses the concept of a superior pricing model that aligns price with the value discrepancy. He suggests a tiered pricing approach with a one-time fee for one-time value and a lower recurring fee for consumable or recurring value. This approach, he argues, can lead to higher customer lifetime value (LTV) and reduced churn. Alex also shares findings from a ProfitWell study that shows the impact of billing frequency on churn rates, with annual billing resulting in significantly lower churn compared to monthly or quarterly billing. He concludes that adjusting the billing cadence can greatly enhance LTV and business profitability.

10:01

📈 The Impact of Billing Frequency on Business Growth

This paragraph delves into the idea that the frequency of billing directly correlates with churn rates, with more frequent billing leading to higher churn. Alex explains the concept of the 'look back window,' suggesting that customers are more likely to assess the value they received over the billing period. He advocates for extending this look back window to increase the likelihood of renewals. Alex also shares his personal business philosophy shift towards focusing on products and services that people do not typically cancel, such as insurance and banking, as opposed to those with high cancellation rates like gym memberships. He concludes with a strategic approach to pricing and billing that prioritizes long-term customer retention and compounding business growth.

15:01

🚀 Strategies for Scaling Business Profitability

Alex Rosi provides a detailed examination of strategies to scale business profitability. He discusses the importance of separating one-time versus consumable value and suggests adopting a 'big head long tail' pricing model. He also emphasizes the benefits of extending the look back window to increase the likelihood of customer retention and renewals. Alex encourages businesses to consider annual billing over monthly or quarterly to frontload revenue and improve the ability to acquire customers aggressively. He also addresses the topic of contracts, stating that their value depends on the creditworthiness of the customer and suggesting that improving product quality and customer success is more effective than relying on contracts for retention.

20:03

📊 Maximizing Profit through Price Optimization

In this paragraph, Alex discusses methods for raising prices in response to inflation and general business growth. He recommends including a clause in continuity contracts that allows for price adjustments in line with the Consumer Price Index (CPI). Alex also suggests continuously raising prices until the conversion rate times the price equals less profit, advocating for testing different price points to find the optimal level for maximizing gross profit. He highlights the importance of starting with a lower price and gradually raising it, as it's easier to go from low to high than the other way around, and stresses the need to balance price with conversion rates for overall business growth.

25:05

🎯 Targeting High Retention Business Models

Alex Rosi shifts the focus to targeting business models with high retention rates. He advises finding products or services that people are less likely to cancel, such as essential services like insurance or utilities, rather than those with naturally high churn rates. Alex also discusses the benefits of annual billing, suggesting that it can lead to a higher lifetime value (LTV) for customers even with a 16% discount. He recommends associating additional benefits and status with annual billing to incentivize customers and increase the likelihood of them choosing this option. Alex concludes by discussing the importance of frontloading revenue through annual billing, which can significantly improve a business's ability to acquire new customers.

30:08

📚 Embracing a Data-Driven Business Approach

Alex concludes the video script by advocating for a data-driven approach to business, emphasizing the importance of understanding key business equations. He suggests that showing cumulative value to customers can help frame the value proposition effectively. Alex also mentions his video 'Seven Equations That Will Make You Money,' urging business owners to watch and memorize these equations as they are crucial for making informed business decisions. He positions this mathematical approach as a way to attract viewers who are serious about growing their businesses and emphasizes the practicality of this strategy for long-term profitability.

Keywords

💡Profitability

Profitability refers to the ability of a business to generate profits relative to the costs involved. In the video, it is emphasized that optimizing pricing has a significantly stronger impact on profitability than other factors like acquiring more customers or reducing churn. The script mentions that 'optimizing pricing has a six times stronger increase on profitability than getting more customers', highlighting the central theme of leveraging pricing strategies for enhanced business performance.

💡Pricing Strategy

Pricing strategy is the method by which a business sets the price of its products or services. The video discusses the importance of pricing as 'the largest lever for making money'. Alex Rosi, the speaker, outlines concepts such as 'price Dev value discrepancy' to illustrate the relationship between price, perceived value, and cost, which is crucial for developing effective pricing strategies.

💡Customer Lifetime Value (LTV)

Customer Lifetime Value (LTV) is the amount of revenue a business can expect to generate from a single customer over their lifetime. The script uses LTV as a measure to determine the long-term worth of a customer and how pricing strategies can influence it. For instance, it is stated that 'you take price and you divide by churn and this gives you your back of napkin LTV', showing how the pricing model can directly affect the perceived value of a customer.

💡Churn Rate

Churn rate, also known as attrition rate, is the percentage of customers who discontinue a subscription or stop doing business with a company over a given period. The video script notes that 'if you build monthly the average turn across all memberships is about 10.7% per month', indicating the importance of understanding churn rates to adjust pricing strategies and improve customer retention.

💡Billing Cadence

Billing cadence refers to the frequency at which customers are billed for a service. The video emphasizes the impact of billing cadence on churn rates and LTV, stating that 'if you bill quarterly that churn drops to 5%' and further drops to 2% if billed annually. This concept is integral to the discussion on how adjusting the timing of billing can significantly affect customer retention and business profitability.

💡One-Time Value

One-Time Value (OTV) is the value that a customer derives from a product or service that is not expected to recur. In the script, Alex Rosi explains the difference between one-time value and consumable value, using the example of a course on building websites which has a high initial value but drops to zero after the skill is acquired, illustrating the need to differentiate pricing for such products.

💡Consumable Value

Consumable Value refers to the ongoing value that a customer receives from a product or service over time. The video discusses the concept in the context of services like community access or software subscriptions, which provide value on an ongoing basis. The speaker suggests that businesses should 'differentiate the value that you have in your business between one time and consumable or recurring value' to optimize pricing.

💡Price Elasticity

Price elasticity of demand is a measure of how sensitive the quantity demanded of a good is to a change in its price. The video touches on this concept when discussing raising prices until the 'conversion rate times price equals less money', indicating the need to find a balance where price increases do not disproportionately reduce the total revenue generated from sales.

💡Conversion Rate

Conversion rate is the percentage of customers who take a desired action, such as making a purchase. The script uses conversion rate in the context of pricing strategies, stating 'I encourage everyone to continue to raise prices until your conversion rate times price equals less money', highlighting the importance of understanding how changes in price affect the likelihood of a sale.

💡Cumulative Value

Cumulative value refers to the total value accumulated over a period of time. The video suggests reporting cumulative value to customers to demonstrate the overall benefit they have received, such as 'we have brought you 35,000 clicks to your website over the last 6 months', emphasizing the importance of showing long-term value to reinforce customer retention.

💡VIP Status

VIP status is a term used to denote a higher level of service, recognition, or benefits for certain customers. The video mentions the concept of offering VIP status to customers who opt for annual billing, which comes with additional benefits and a sense of exclusivity, thus incentivizing customers to commit to a longer-term engagement with the business.

Highlights

Optimizing pricing has a six times stronger increase on profitability than getting more customers.

Pricing optimization is two times stronger in increasing profitability than decreasing churn or getting people to buy more times.

Businesses can significantly increase profitability by focusing on pricing strategies.

The price-value discrepancy is crucial in understanding when customers cancel subscriptions.

Differentiating between one-time value and recurring value can help businesses price their products more effectively.

A superior pricing model matches the price to the value discrepancy regularly, with a higher initial price and a lower recurring fee.

ProfitWell's study shows that annual billing reduces churn to 2%, significantly increasing customer lifetime value.

Annual billing can lead to a five times higher lifetime value compared to monthly billing.

Churn is directly correlated with the frequency of billing; less frequent billing reduces churn.

Extending the look-back window for value assessment increases the likelihood of customer renewal.

Businesses should focus on products or services that customers are less likely to cancel.

Starting with a lower price and gradually increasing it is easier than starting high and reducing it later.

Including a clause in continuity contracts to adjust prices with inflation can help manage pricing changes.

Converting monthly or quarterly customers to annual billing can significantly boost cash flow and reduce acquisition costs.

Businesses should test different pricing strategies to find the optimal balance between price, conversion rate, and overall revenue.

Transcripts

if you want to make more profit than 99%

of businesses you need to nail pricing

optimizing pricing has a six times

stronger increase on profitability than

getting more customers and two times

stronger increase of profitability than

decreasing churn or getting people to

buy more times and it is the strongest

way for businesses to make more money

and so in this video I will walk you

through on each page that I turn A New

Concept that you can apply to your

business that will make it more

profitable via price if you don't know

who I am my name is Alex rosi I own

acquisition. it's a portfol of company

over $200 million a year and these

videos are to help you show what we do

to grow our portfolio so that you can

make lots of money and then maybe

someday we can invest in your company

otherwise enjoy I take a weekly call

with a school uh communities in the

school group and uh I had like three or

four guys who asked me questions that I

was like these are not like Alex

questions these are math questions that

you can just simply solve by doing math

and so it's like should I do this price

or this price price it's like well

what's the conversion of this one versus

this one and then what's LTV on this one

right it's just you just solve the math

problem and I think a lot of businesses

are not using math to solve their

problems and with pricing being one of

the largest levers for making money not

one of it is the largest compared to

getting more customers uh increasing uh

how many times people buy and uh and

pricing pricing is still a three times

stronger lever on profit versus the

other two so let's talk about five

concepts of pricing that will make you

more money all right so the first one is

something that I like to call the price

Dev value

discrepancy all right and so if we

imagine here as the value this little

first Red Line This is the value that

the person gets this is our price

assuming that our price doesn't change

over time now if our price doesn't

change and the value does when will

people cancel here when the price and

the value were matched or when it's

underneath and this is our sad face as

business owners because we're like oh my

God I thought that I was making all this

money and so the thing is is that

there's a third line here that is

probably worth

understanding and this is our cost line

so ideally you want your cost to be here

your price to be here so this is your

profit and then over here this is your

something called customer Surplus uh

which is just a fancy word of saying

Goodwill or the value that people are

getting net of the price right so

ideally you have really high value

you've got a price that's still high

relative to your cost basis as a

business owner and so this is the

fundamentals of pricing individual now

one of the things that I see as a

mistake is how does this occur how do we

go from having lots of value to not

having lots of value well let me explain

so with onetime value versus consumable

value which is I like to think about it

all right so the reason that you have

those big

discrepancies is that usually you don't

don't understand the value that you are

delivering to a customer meaning if I

say hey let me give you this course

on you know building websites whatever

right then as soon as you learn how to

build websites the value of that course

drops to zero you already have the skill

like the day before you needed to learn

how to do arithmetic arithmetic is super

valuable the day after you learn it it

has zero additional value now that

doesn't ract from what the initial value

was it just no longer has value and so

what most business owners should do but

don't do so this is me telling you that

you might want to think about this is

differentiating the value that you have

in your business between one time and

consumable or recurring value all right

so let me explain so let's say I uh

let's let's let's use that example the

websites so my little my little course

right on website building is something

that would be one one time value once

you have

it that's it there's there's nothing

else but what are all the things that I

might have in my business for website

building that someone is going to

consume this month and next month and

the month after I might have a community

that's associated of people who are

trying to build Pages that's something

that I'll use this month and next month

I might have accountability if I have

somebody who's going to help me build it

right accountability SL support that's

something that I'll use this month and

next month right I'll have access to

those things what else would I use

probably website

servers to host my site right I'd

probably use software to host my site

I'd probably what else would I use um I

might want ads help right that I would

use on a monthly basis to help optimize

my ads right and so the big thing here

is that we have to look at the services

we provide and this is especially true

with education people because they have

lots of one time value and very low

recurring value is thinking am I pricing

these things appropriately so hear me

out I think that a superior pricing

model better matches the price to Value

discrepancy that you're shooting for on

a regular basis so it would make sense

for me to charge more here right my

price to be higher here and then it

would make sense for my price to be

lower over here so I continue to have

this Delta all the way through right and

so the question is how do you accomplish

something like that well what you do is

you have something called a startup or a

one-time fee which is associated with

the thing that has onetime value and

then you have a lower consumable or

recurring billing thing that's

associated with the consumable recurring

value and this is fundamentally why I

think there's so much churn in the media

or education or information space is

because people don't differentiate

between those things but your customers

sure do and so the customer says well

you want me to pay $1,000 a month for

this course but I already learned how to

do this and you want me to keep paying

for it for 12 months even though I

already went through it now you might

make the argument well it's worth

$122,000 but you know what as far as

they're concerned today it's worth

nothing and so this is why I like having

this this perception of I have a

one-time payment up front that's higher

and then I have a smaller payment that

is done every month that reflects a

price to Value discrepancy on these

recurring consumable things now one of

the things that people have a hard time

with is realizing that this is

significantly less valuable than this

and so what happens is is that this

might have to be $5,000 and this might

be $300 per month or $200 per month and

that's okay and so making sure that that

price Dev value discrepancy matches will

allow you to have really long LTV on the

side and so in so doing get way more LTV

overall because people don't leave and

if people don't leave they keep paying

if they keep paying you keep making

money okay now that is the onetime value

versus consumable valuable uh concept

this is the big head long tail which I

talk about in my offers book um in more

depth and I think a lot of businesses

are going to start switching to it they

already are the way that this is done in

the infos space is people sell a course

and then they have continuity or

community on the back end um and you

sell it as one thing but the they're

just priced differently so you pay

$5,000 today but then you pay x per

month over time okay now if you were to

switch to something like this let me

walk you through something that blew my

mind that might blow yours as well so

profit well did a really cool study on

this which showed the difference between

monthly billing quarterly

billing

and annual billing now you're like okay

well what's the point who cares well you

should care let me show you why so if

you build monthly the average turn

across all memberships is about 10.7%

per month that means if you have 100

people you're going to have 89 at the

end of the next month

all right if you Bill quarterly that

churn drops to 5% okay less than half

literally simply by changing the billing

Cadence now what happens if you Bill

annually it drops all the way to 2% now

you're like okay that doesn't seem like

a very big difference but let me show

you how big of a difference this really

is so we can determine LTV by taking

price and by the way you all wanted more

real business [ __ ] this is real business

[ __ ] okay so you take price and you

divide by

churn and this gives you your back of

napkin LTV all right meaning lifetime

value how much Somebody's Worth over

time and so that means that if my price

is $100 all right $100 and we'll use

that for all three of these examples per

month

right now if it's $100 per month here

I'm billing monthly here I'm billing

$300 every quarter here I'm billing uh

$1,200 per year all right just to be

clear now these turn rates R are

extrapolated back out to monthly so if I

have 10.7% churn 10.7 then it means that

my LTV is somewhere in the near but of

like 950 bucks somewhere in there okay

now if I have 5% churn my LTV is now

$2,000 if I have 2% churn my LTV is

$5,000 wow so we went from 950 to 5,000

just by changing the Cadence that we

built if you're listening to this and

you're like wait a second if I made five

times the money per customer guess what

that would do to my business you bet it

would 5x your business then you're like

okay well I'm going to do this tomorrow

not so fast there you know fast

Fred let's talk about the other side of

this two things real quick one if you

like this stuff uh the question that I

was citing at the very beginning of this

was from a school uh Q&A that I do so if

you're getting into business you want to

start a business you can join the school

games3 % of people make their first

dollar online very proud of that um if

they finish the first month of the

school game so pretty cool there if you

already are a business owner and you

like this more in-depth stuff in terms

of like scaling the companies uh and

increasing profit and eida uh we have

workshops that we just started uh

offering at acquisition. comom at our

headquarters in Vegas um and so if you

want to see if you qualify for one of

those uh you can go to acquisition.

comom hit scale and uh hopefully we'll

talk to you then conversion rates and so

think about it like this let's say you

get

100 clicks or at bats or whatever to

pitch this thing right now before this

you used to say hey my thing is

$122,000 and you Bill you know a th000

bucks a month for a year okay fine now

the thing is is maybe you close 20% of

people on this okay fine now let's say

you have another 100 where you get on

the phone and you say for these guys

it's

$5,000 per year and it's up front now

the question is what percent maybe you

still sell 20% I don't know this is a

testable proposition but this is where

it gets really interesting is that for

everybody who knows that you you say hey

this is $112,000 it's 1,000 a month for

12 months we all know that this person

cancels at month

four you know what I'm saying so they

cancel it month four or five which means

the people are worth $4 to

$5,000 right now if you Bill $5,000 and

you Bill it annually and you say Hey you

have to pay this upfront maybe you have

the same Clos rate because the price

point is so much the perception of the

price is so much lower but here's where

this gets really interesting is that if

we look at this 12 months later and we

say hey what percentage of these people

are going to renew guess what the

percentage is way higher and that brings

me to my next point which I will

reiterate back on this one which is

let's think about what the mechanism is

that drives down this churn going from

monthly to quarterly to annual so let me

tell you what it is or at least my best

thought of it is that

churn churn is directly correlated with

frequency of

billing okay so hear me out if I bill

you every day the likelihood that you

turn is going to be significantly higher

than if I bill you every month and I

believe that that comes down to what I

consider the look back window so think

about it like this if I have a month

right or a period between billing one

and billing two doesn't really matter

what this period of time is on this

point I'm going to look back with my

eyeballs and say how much value did I

get between this billing and this

billing now if I'm billing monthly then

let's say I'm an SEO agency and I make

someone 10x their money on month one

great month two happens let's say I make

them 1X guess what they're going to do

they're not going to think oh well he I

10x my money on month one this guy's

already paid for himself for almost the

whole year no they're going to think

well I got a good return last month and

I got a crap return this month and so

I'm going to cancel it's about what have

you done for me lately it's about what

have you done in the lookback window

between billing Cycles the reason that

this frequency piece that I was

mentioning earlier is so important is it

extends the look back period and so if I

paid $5,000 a year to be a part of an

association and then it comes up to Bill

a year later that I might think to

myself

huh I look back over a year and say did

I make more than $5,000 now that 10x

month is going to be including uded and

the 1X month and the next month that was

a 3X and the next month that's a 1x the

next month that's a 15x all of those

months are going to be included and I'm

going to be like wow this is a banging

deal right and so for that reason

extending the look back window gives you

a higher likelihood that people are

going to renew and we already see that

it's five times more likely that people

Renew on an annual basis now you can

make also the argument someone who can

pay a fee up front can also afford to do

it so they're not just scrimping by to

try and barely afford whatever the

services and so there's probably a

number of reasons that annual does

better than monthly or quarterly but for

me as a consumer I think to myself I

think about what's this look back window

and I want it to be as long as humanely

possible for someone to logically say

this makes sense for me okay so from

there I have made a number of

conclusions for myself that I'd like for

you to consider oops that you can

consider for your business all right

which

is the difference this is kind of

counter internet marketing culture which

is originally you want to say you want

to sell it for as much as you possibly

can which I used to preach and I don't

believe that as much anymore and I

actually would much rather pitch

something that I know they're going to

continue to pay for right and so I spent

the first part of my career trying to

obsess about what gets people to stick

how do I get people to pay again and

again and again and where I have

switched to in my career is I just look

for things that people already don't

cancel from and then I just try and sell

those and so if I could do it all over

again I would only focus exclusively on

things that people already don't cancel

so if you look at alarm systems and

insurance and payment processing and

Banking and other things like that

you're going to find things that people

in general don't cancel or switch from

cable right like people don't switch

from these things uh cell phone service

like these are things that people don't

really switch of very often on the flip

side gym memberships are something that

people cancel all the time and that's a

structural thing people don't want to

work out but people do need insurance

people do need to watch television

people do need to use their phones even

more and so I would take all of my

emphasis and say why don't I just get

into the right boat that I already know

has really long LTV um and so that's

something that I've just learned in time

now now the other piece is I would

strongly emphasize the point that I was

making earlier about looking at quarter

annual and monthly is that I would

rather take less money on an annual

billing

and converted the same percentage so

it's like if it's 12K for a year versus

5K paid up front for a year I'd rather

have the five because I know that my

annual my renewal rate will be much

higher so let's let's finish out this uh

this little this little equation here so

here if this $5,000 is what I'm asking

for someone to pay for a year and we

have this look back a year later believe

it or not remember we have 2% a lot of

times this means you're going to keep 80

0% or more of the

customers and so all of a sudden wait a

second remember we had 2% monthly churn

but this is a 5K thing well that means

that this price point would be 5,000 /

12 can youone do that math for me that's

600 bucks a month 500 600 bucks a month

500 bucks a month 465 46

416 okay so

416 all right and then we multiplied

this guy by

50 because it's 2% churn right which

means they have uh what is that that's

going to be 20,000

something all right don't worry it's 2%

churn there we go so this is 2% which is

equal this times 50 same thing equals uh

20,800 all right the reason this is so

important the reason this is so

important is that look at the difference

between this

20,000 and this 4 or 5,000 that we have

here now this means that a year from now

you're going to have 80 out of the 100

people still paying you and then they

renew again and guess what if you keep

selling at this rate that means that you

get all of last year's sales to stack on

top of this year's sales and guess what

happens in the third year you have last

year's the year before and this year's

that stack on top of each other and so

this is what creates a compounding

business and the vast majority vast vast

majority of small businesses do not

understand this and the reason that they

stay poor is because they think that the

only way that they can grow their

business is to increase the number of

customers that they're selling every

month and that simply is a very terrible

way to live because the moment your

acquisition Channel your your YouTube

channel gets shut down your Facebook ad

account gets shut down you've got some

sort of deliver deliverability issue on

your domains if you're doing Outreach

right there's always something that can

happen and unless you have customers

that plan on continuing to pay you over

and over again it means your business

dies immediately that's not a very

valuable business it's also one that's

hard to sleep with at night and so the

idea is you want to find stuff that

people don't stop buying you want to

sell the crap out of it you want to sell

it at a price point that you know

they're going to continue to pay you

want to extend the look back window as

much as you possibly can so it increases

the likelihood that they're going to

convert and you also have a

bidirectional relationship between the

price and the conversion rate and so

maybe you do get more people to buy at

$11,000 down than you do at 5 grand

upfront but on the flip side $5,000 is

less than $12,000 for the year and so

you're going to have two forces that are

going to be working against each other

now for me personally I would rather

have the much higher quality customer

that's going to be in the most optimized

billing cycle and if I do think about

this with my thinking hat maybe I either

do the big head long tail which is if I

know my thing isn't tremendously

valuable then I might say my one time

upfront that offsets my cost to acquire

customers and then I have a very small

monthly billing after that that has a

big price to Value discrepancy on based

on the consumable value of my service or

thing or I know that my value is high

and it is high on a recurring basis but

it's volatile meaning some months it's

big some months it's not big this is

particularly true of things like ads or

organic like if you have something that

goes you know viral one month that's

going to make a lot of money for them if

it doesn't go viral the next month and

it doesn't now some of these things you

can't control and so by having an

extended look back window it increases

the likely that something good happens

during that time period it increases

like that they will build again in the

future and so the tldr for you number

one one separate out one time versus

consumable value and then if you can do

that you can switch to the big head

longtail pricing model which is one time

up front and then small recurring the

alternative is that you can consider

increasing the look back window right

between when people see value and when

they get value there's our little

eyeball looking back money and so what

we can do is trying to switch to annual

to the best degree possible

and billing based on what you think

someone is going to continue to pay for

what they're going to pay for on their

worst month rather than what you can as

much as you can get them to say yes to

today and this is something that I've

switched to over time the third thing is

making sure that you're in the right

boat and when I say that what I mean is

instead of trying to obsess about

getting people to buy more times go to

stuff that people

already don't

cancel and you'll be amazed at how much

easier it is to do business and how

those things stack on top of one another

by the way if you're wondering why my

eyes look back and forth between things

it's cuz I have three things I'm looking

at one is I have a bunch of notes cuz I

do prepare these for you guys cuz I

don't want to just like be off the cuff

and just rambling uh second is that I do

these uh with Instagram lives and so

those are on a separate camera than the

YouTube camera and I try to look at the

YouTube camera but I also have a hard

time not looking at the audience that's

onagram live and so if you see my eyes

darting back and forth that's why so now

we'll transition to questions from the

audience the question is one is how do I

know how to raise my price because of

things like inflation and how do I just

raise my price in general if I've been

in business for a period of time all

right so those are two separate

questions I'll answer each to them

individually so from an inflation

perspective uh every continuity contract

I would include a clause that says that

you can match the CPI or the you know

consumer price index that allows you to

map up uh the price with inflation

that's up to you now having that Clause

doesn't mean necessarily mean that you

have to always do it every month or

every year but it means every two or

three years you can just update your

pricing accordingly people don't like

pricing changes and so uh I would do it

less frequently rather than more

frequently uh so that's number one in

terms of inflation in terms of thinking

about one to raise prices in general uh

I encourage everyone to continue to

raise prices until your conversion rate

times price equal less money meaning if

I can sell now again this doesn't take

into effect uh into account uh hard

costs all right so I'm just going to

assume that the cost of our thing is

zero let's say it's a it's a digital

media thing just for sake of simplicity

so if I can sell if I get on the phone

with with 100 people and I can sell 10

people at

$10,000 uh I have a you know 10%

conversion rate which means I make

$100,000 from $100 from 100 calls that's

1,000 bucks a call now if I can all of a

sudden get to 30% uh close rate with a

$5,000 thing then it means that I make

$150,000 on those 100 calls and so then

I would make 1,500 bucks per call and so

I try and level out the uh cost per or

Revenue per uh phone call or

conversation so that I can understand

What's the total amount of money that

I'm making so it's not necessarily about

raising prices or lowering prices it's

about what is the total absolute amount

of gross profit you can maximize and so

this is a math problem not a Alex what

should I price it at problem and I will

tell you exactly what we do with every

company which is we just [ __ ] test

the price and so we get on the phone and

we say and I will say this it's way

easier to go low to high than high to

low all right and so if you if you sell

at a price that's more expensive over

time that works out okay if you if you

go the other direction it can kind of

suck and so um I think going up because

think about it you're like yeah well

that's what I was selling at last month

we have more demand now we're better at

our stuff like it makes sense like if

you bought a Apple stock at 10 and now

it's 20 like you're not going to be

upset like in time prices change now the

flip side is when prices come down uh if

you if you are in that position then the

reason behind it would be useful to tell

the other people but usually you're

going to have to downgrade those people

if they're still in your business uh

because if you did figure out some

technological thing which would be

probably your big reason why if like hey

we figured out how to make this more

efficient so we can lower the price we

pass the savings on to you uh then you

have to pass the savings on to them uh

otherwise if you sold someone last month

at 20K and this month at 10K very tough

if it's for the same thing uh and so

that's why I like starting low and then

raising it and then usually at the very

end I'm going to have to do tiny little

adjustment of like okay I I realized I

went over the hump of maximizing my

profit and so then I back step and then

I refund these people the difference

where I give them a bonus in practice

most businesses will have a monthly and

an either or quarterly or annual it's

usually not one or the other and you'll

probably know your avatar uh if if if if

prepaying 12 months at a time is too uh

arduous for them uh then it might it

might be better to just have quarterly

billing um as the primary way and I

would say that as I'm as I'm explaining

this right now you might be able to just

get away with pure quarterly B billing

and not have monthly or annual like you

just do quarterly um and that might be a

kind of a nice blend for a lot of people

as like the Middle Ground um but it's

very typical to have monthly at this

rate annual at 16% less because it's uh

you know buy 10 get two free um and by

doing that though if you get people onto

that annual remember you're giving them

a 16% discount but the likel that those

people recur and the LTV on those people

still might be 10 time uh five times

higher than these people so you take a

5x increase in LTV and then apply the

16% discount to the fact it's a lower

price and then you'll get probably

something closer to a you know 4 and

1/2x so it's still worth having that

quote discount for the annual rate if

you want to incentivize people to go to

the annual first off you have the

discount so that's you know thing one um

and I like to associate as many benefits

assumably possible immediately for

making the decision and so I want bad

things I take away so discounts would be

a pricing thing that I a bad thing I

take away and then I also want to add

good things so it's like um if I had a

call it a call it a customer

appreciation thing or I had uh I had

specific times or sessions that only VIP

customers so basically consider it like

you even name it something so it's like

you have your standard and your VIP even

if it's the same pricing you'll get way

more people to take it because they want

the status Associated and then VIP get

these other three benefits it's like

they don't have to wait in line they can

get the session times they want or we

have a special Saturday session or

Sunday session that's only for VIP and

they get you know Tow Service whatever

you just think about anything that's VIP

two or three things that ideally give

them status in the community for

for being a VIP which you have now

associated with the annual billing which

has the highest stick rate so not only

you providing more value to these people

they pay a little bit less and they get

the status and that's okay because they

pay four and a half times more over

Lifetime and so this is how you stack as

much as you can in the annual uh so that

you can just make a lot more money and

the other really big benefit that I

didn't hit on at all in the video that I

should have is that annual if you do

increase the conversion percentage there

in in a real way you're frontloading a

year of Revenue meaning your ability to

offset the cost to acquire Customer

skyrockets because you get so much more

cash collected up front so you can get

really aggressive in the acquisition

even if you have a small like let's say

you convert half as many into the annual

billing it's like okay well I get half

as many but I get 10 times The Upfront

cash so I still get 5x upfront cash as I

did before into monthly and so if that's

the case then I'm still crushing it the

question is is it better to Bill upfront

versus bill monthly and get the contract

because then with that in theory the

contract plus the lower rate would

convert a higher percentage people and

it would extend the LTV so I'm going to

give a two-part answer to this number

one is the contract that you lock

someone in on is only worth the quality

of the signature on the contract meaning

the person or the prospect who buys it

is their creditworthiness that matters

now for example in Europe uh contracts

matter a lot more and people actually

adhere to them like it's there's not a

really big you know churn rate on people

saying that they don't make they don't

with their commitments in the US it's

just a different culture in terms of how

credit and contracts work like people

get out of and cancel contracts or ghost

or cancel their credit cards all the

time and this is because visa and

MasterCard and those companies have

become a very Pro consumer uh basically

uh cover for people to not stick with

their commitments because they will

always side with the consumer on

chargebacks and refunds and so it allows

people to make purchases without

consequences and so I like the people

where contracts matter is like

Enterprise customers if you have a

massive company that you're doing

business with contracts matter if you're

dealing with like consumers contracts

don't mean anything and if you look at

the biggest companies that deal with

consumers the vast majority of them

don't even bother doing contracts

because what ends up happening is that

PE it let me say it this way it will

decrease sales to such a larger extent

that just billing month-to month and

then focusing on improving the quality

of the thing you have because at the end

of the day if the contract doesn't

matter either way all the does is

decrease sales because people Factor it

in to their purchase but they don't

Factor it into their cancellation and so

it's like you increase friction on the

front end but you don't decrease

friction on the back end now in general

will someone who signs a contract stay

longer than someone who is month-to

month yes but the question is what's the

trade-off on conversion and is it worth

it versus taking all that effort and

putting it into how do I improve the the

quality of the prospect uh product um

how do I in improve the quality of the

prospect as well in terms of targeting

and messaging

but the big one is is there a way that I

can just pick something that people

already don't cancel the question was is

there a way to extend the lookback

period beyond the billing cycle meaning

can you accumulate saving you know time

saving if you had a software or money

made if you had an agency or anything to

that degree or you know pounds lost if

you did weight loss whatever you know

marriage is saved you know fights

avoided if you're in marriage counseling

whatever um I think that the the the the

best thought process that I would have

around this is yes I would try and

report that data on a cumulative basis

as much as humanly possible because then

it allows me to at least try try and

price or at least display my value

relative to price on a longer time rizon

like hey uh you know we have brought you

35,000 you know clicks to your website

over the last 6 months now it doesn't

like it might look like this in terms of

the volatility it might be up and down

but if you look back cumulatively

relative to what you paid it's still you

know a great deal and so I think that is

where customer success and having some

you know Tech and how you're reporting

and how you have those conversation with

the customer is super important in terms

of framing so I think there are huge

benefits to trying to show the

cumulative uh increase but just being

really real most people don't care that

much so I think it might lift you a few

points but the big big is they're still

going to think well you know you build

me last month and this month I only got

one X and it's not worth it for example

if you look at instacart they say we

saved you this many hours of going

shopping and driving or whatever and so

it is over the duration of the time that

you've had instacart they will show you

what your savings are not what I saved

you this month hey if you like this more

mathematical approach to business by the

way this is how I actually do business

that's not the YouTube version and the

reason that these videos will always get

fewer views is because it's actually for

business owners uh that being said one

of my favorite videos that I've ever

made uh is seven equations that will

make you money uh it is fours business

owners that want to make money you have

to know these equations I do them in

every business that I invest in like

watch it memorize like you should know

these like they you should know them

like the back of your hand you shouldn't

just like memorize them like you should

understand them uh because that's how

you will ultimately make a lot more

money in your business by looking at it

like an investor and investing

accordingly