This Will Make You More Profit Than 99% Of Businesses
Summary
TLDRIn 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
💰 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.
🔑 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.
📈 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.
🚀 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.
📊 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.
🎯 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.
📚 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.
Mindmap
Keywords
💡Profitability
💡Pricing Strategy
💡Customer Lifetime Value (LTV)
💡Churn Rate
💡Billing Cadence
💡One-Time Value
💡Consumable Value
💡Price Elasticity
💡Conversion Rate
💡Cumulative Value
💡VIP Status
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
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