In this insightful episode, the host discusses the often-overlooked power of pricing strategies in maximizing business profits. He shares a transformative experience from acquisition.com, revealing how a single pricing adjustment can significantly increase a company's profitability. Using a hypothetical business model, he explains three potential growth strategies: increasing customer base, extending customer lifespan, or raising prices. He advocates for the latter, demonstrating that raising prices can exponentially boost profits due to the perceived value of the product or service. The host emphasizes the importance of understanding market willingness to pay through Van Westendorp pricing surveys and strategically communicating price changes to teams and customers. He also touches on the psychological aspects of pricing, ensuring that both the sales team and customers are appropriately aligned with the new pricing structure to maintain business integrity and fulfill promises to consumers.
"If you sell something for twice as much money and you get one third fewer sales, so you have two thirds what you used to sell in terms of units, it might freak you out. But if you sell it at twice the price, you make more money."
This quote emphasizes the trade-off between pricing and sales volume, highlighting that a higher price point can lead to more revenue even with a reduction in sales volume.
"I always wish bezos, musk, and Buffett had documented their journey. So I'm doing it for the rest of us."
The speaker expresses regret that the business journeys of famous entrepreneurs were not documented and shares an intention to document their own journey for the benefit of others.
"We doubled the profits of one of our portfolio companies in less than eight weeks. And we made one single change."
This quote illustrates the potential of a strategic change to rapidly increase a company's profits, showcasing the effectiveness of the speaker's business approach.
"And so what I want to do is break down what that change was and how you can apply it to your business."
The speaker indicates an intention to explain a successful business change and how listeners can implement similar strategies in their own businesses.
"So I want you to imagine that you have a business, or you'd like to start a business that has 100 customers that pay $100 a month."
This quote sets the stage for a hypothetical business scenario that the speaker will use to demonstrate the effects of different growth strategies.
"You need to tell me which way you want me to do. And so you're like, okay, how do I do it?"
This quote introduces the critical decision point in the hypothetical scenario where the business owner must choose the best strategy to double their business.
"And so if you can double the lifetime gross profit per customer, that that's what that does, then your cost of acquisition can be bigger than it could in the first example."
The speaker explains the benefits of increasing customer retention, emphasizing that it allows for higher customer acquisition costs due to the increased LTV.
"So we six x'd the profit of the business with one change."
This quote highlights the dramatic impact that a price increase can have on a business's profitability, demonstrating the effectiveness of this strategy in the speaker's experience.
"We literally did nothing but add 50% to the price and changed nothing about the product. Literally nothing."
The speaker shares a specific example where a significant price increase led to increased profits and sales, emphasizing that no changes were made to the product itself.
"Now, most times in most markets you have supply and demand. And when the price goes up, demand goes down." This quote explains the basic economic principle that as prices increase, consumer demand typically decreases.
"So if you double the price, sometimes you sell a third fewer. But if you double the price and you've six x the profit potential on a customer, if I six x my profit on a potential customer and I do it at two thirds the price, then I tripled the profit of the business." This quote illustrates that raising prices can disproportionately increase profits, even if sales volume decreases.
"And so finding the absolute perfect point of profit many times comes from raising the price." This quote emphasizes that the most profitable pricing point may be found by increasing prices.
"A lot of people are very afraid of raising the price because they don't want to break it." This quote acknowledges the emotional hesitancy often associated with raising prices due to fear of negative outcomes.
"Which is why the number one lever that you have on profits is pricing and constantly testing." This quote identifies pricing as the most influential factor in determining profits, highlighting the importance of ongoing price testing.
"The thing that they forget to test is their price. And it's the strongest lever of all three levers of getting people to buy more times, getting more customers, versus just charging more for the same thing." This quote points out that while businesses often test various strategies, they frequently overlook the importance of testing price changes.
"A good where you increase the price and the demand goes up is called a Veblen good." This quote defines Veblen goods and explains the counterintuitive phenomenon where higher prices can increase demand.
"Chanel can take a bag and go from 2000 to 10,000 and all of a sudden more people want to buy it." This quote provides an example of a Veblen good, where increasing the price of a luxury item can make it more desirable.
"So the first thing I would recommend doing is not necessarily changing your existing audience because changing expectations on people can be tough." This quote advises against immediately increasing prices for current customers to avoid upsetting established expectations.
"You market it. And so what you do is you advertise the fact that you're going to change the price it's about to increase." This quote suggests using marketing to announce impending price increases to incentivize purchases before the change.
"You send a survey to your customers and you say, hey, you ask four questions." This quote introduces the Van Westendorp Pricing Survey, which is used to understand customer price sensitivity.
"So when you have those four data points, you then can graph those, and you actually get the edges of something called WTP, which is willingness to pay." This quote explains how the survey results can be graphed to determine the range of prices that customers are willing to pay.
"If tomorrow we were to eliminate everything from our service except for one thing, which would you want us to keep?" This quote highlights a question aimed at identifying the most valuable element of a service or product to the customer.
and say, okay, if we raised it here, this percentage of customers would buy. So you multiply number of customers by number of people willing to pay the price, and that will give you the gross revenue, and you should know your cost of fulfilling, and that will give you the maximal profit point.
This quote outlines the process of calculating the maximal profit point by considering the number of customers willing to pay a raised price and factoring in the costs of fulfillment.
On the flip side, if you say, what is the lowest bargain price perspective? You multiply the number of customers by the number of people willing to buy at that lowest price. And again, you multiply it by the gross margin.
This quote explains how to determine the lowest price at which a business can still make a profit by considering customer numbers and the willingness to buy at this price point, multiplied by the gross margin.
And then strategically within your business, you find the sweet spot where with your strategy of growth, where it makes the most sense.
This quote emphasizes the need to strategically find a pricing sweet spot that aligns with the business's growth strategy and objectives.
Guys, you guys already know that I don't run any ads on this and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the word so we can help more entrepreneurs make more money, feed their families, make better products, and have better experiences for their employees and customers.
This quote highlights the speaker's request for listeners to support the podcast by sharing it, which in turn supports the entrepreneurial community.
Because we were coming in and we hadn't done pricing surveys yet for that business, but we really felt it was underpriced based on what we knew.
This quote reflects the initial assessment of a business's pricing before conducting formal pricing surveys, based on market observations and competitor pricing.
If you, the founder and your team is not sold on the price point, it will not work because the psychology still matters more than the math.
This quote underscores the importance of the team's belief in the product's value at the new price point for successful implementation of a price change.
So how do you communicate the price increase to current customers?
This quote introduces the topic of how to effectively communicate price increases to current customers, which is a critical aspect of maintaining customer relations during pricing changes.
"And you need to write a letter and you want to hand sign it." This quote underscores the importance of a personalized approach when communicating price changes, suggesting that a hand-signed letter conveys sincerity and dedication to customer satisfaction.
"If this is going to materially affect your life, as in like, you won't be able to buy groceries or pay your rent, please let me know and I'll see if I can figure something out." This quote shows empathy and responsibility towards customers, offering to assist those for whom the price change may cause significant financial strain.
"So the first thing we would do is we'd survey the existing audience using the Van Westendorp pricing survey." This quote introduces the Van Westendorp pricing survey as a tool to assess customer price sensitivity and gather demographic data, which is crucial for making informed pricing decisions.
"What if it was super expensive? What if it were way too cheap? What if it were a stretch? And then what if it were a bargain?" These questions, part of the Van Westendorp survey, are designed to identify price points that customers consider too high, too low, acceptable, and attractive, helping to find the optimal price for a product or service.
"We got to communicate to the team. Got to communicate to the sales team, security to the marketing team, talk about how this pricing change that we've determined is the right change." This quote emphasizes the need for clear internal communication with various departments to ensure that everyone understands and supports the pricing change.
"The moral high ground is unimpeachable. You can't counter it." This quote explains that taking the moral high ground by focusing on fulfilling promises and integrity is an effective strategy in negotiations, as it is difficult to argue against.
"Now, once you have that, you have to let it shake out. You have to let it settle." This quote advises patience after implementing a new pricing strategy, suggesting that it takes time for the market to adapt and for the true impact on sales and profits to become clear.
"If this was interesting, you go to acquisition.com, and I think the third video is on pricing." This quote provides a call to action for listeners interested in learning more about pricing, directing them to a specific video resource that can aid in their business pricing strategies.