3 Steps That Will Double Your Profits in 8 Weeks Ep 444



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.

Summary Notes

Understanding Pricing and Profit Dynamics

  • Pricing strategies can significantly impact both unit sales and overall profitability.
  • Higher prices may lead to fewer sales but can result in increased profit margins.
  • It's essential to analyze the relationship between price, sales volume, and profit to make informed business decisions.

"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.

Documenting Business Growth

  • Documenting the journey of building a business can provide valuable insights and inspiration for others.
  • High-profile entrepreneurs like Bezos, Musk, and Buffett are examples of successful business journeys that could have provided learning opportunities if documented.

"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.

Profit Increase through Strategic Change

  • A single strategic change can have a profound impact on a company's profitability.
  • A case study is presented where doubling the profits of a portfolio company was achieved in less than eight weeks through one significant change.

"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.

Applying Business Strategies

  • The speaker outlines a structured approach to applying business strategies, including hypothetical examples and communication with teams.
  • The process involves understanding the change, applying it to a specific business model, and effectively communicating it both internally and externally.

"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.

Hypothetical Business Scenario

  • A hypothetical business example is used to illustrate the impact of different strategies on business growth.
  • The scenario involves a business with a fixed number of customers, revenue, and costs, and presents three different ways to double the business through a genie's wish.

"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.

Analyzing Business Growth Options

  • The speaker presents three options for doubling the business: increasing customer numbers, increasing prices, or increasing customer retention.
  • The impact of each option on revenue, profit, and customer lifetime value (LTV) is analyzed.

"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.

The Power of Customer Retention

  • Doubling customer retention time can lead to increased LTV and more sustainable profit growth.
  • Customer acquisition costs are lower when focusing on retention, leading to higher bottom-line profitability.

"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.

Price Increase as a Profit Multiplier

  • Increasing prices can significantly boost profit without changing the product or service.
  • Higher prices can enhance perceived value and align with brand expectations, potentially leading to increased sales.

"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.

Market Positioning and Pricing Strategy

  • Market research is crucial to determine the acceptable price range for products or services.
  • A strategic price increase, based on market positioning and brand alignment, can lead to both higher profits and sales volume.

"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.

Pricing Strategies and Profit Maximization

  • Understanding supply and demand dynamics is crucial in pricing strategies.
  • Raising prices can lead to increased profits even if demand decreases.
  • The relationship between price and demand is not always directly proportional.
  • Doubling the price does not necessarily mean halving the sales.
  • The optimal pricing point can significantly increase a business's profitability.
  • Emotional factors often impact pricing decisions; fear can prevent price increases.
  • Positioning and the perceived value of a product can influence its price.

"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.

Leveraging Price as a Profit Lever

  • Pricing is a powerful lever for increasing profits.
  • Businesses often test various aspects of their operations but neglect to test pricing.
  • Properly testing and adjusting prices can lead to substantial profit growth.
  • Positioning and how a product is charged can have a significant impact on pricing.

"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.

Veblen Goods and Pricing Perception

  • Veblen goods are unique in that demand increases as price increases.
  • Higher prices can lead to higher perceived value, which can attract more buyers.
  • Proper pricing of Veblen goods can exponentially increase profits without increasing costs.

"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.

Implementing Price Changes

  • When raising prices, consider grandfathering in existing customers to maintain goodwill.
  • Marketing upcoming price changes can create urgency and clear sales pipelines.
  • Expect a temporary dip in sales following a price increase and allow for adjustment time.
  • Use pricing surveys to gauge customer willingness to pay and identify price points.

"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.

Conducting a Van Westendorp Pricing Survey

  • The Van Westendorp Pricing Survey helps determine acceptable price ranges for products or services.
  • Four key questions assess customer perceptions of price points.
  • Analyzing survey data provides insights into customer willingness to pay.
  • Additional questions can segment data by customer demographics or industry.
  • Identifying the most and least valued aspects of a product helps refine pricing strategies.

"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.

Pricing Strategy

  • Pricing is a science that can optimize for the right customers, price, and profit.
  • Determine the maximal profit point by multiplying the number of customers by the number of people willing to pay a certain price and subtracting the cost of fulfilling.
  • Establish the lowest bargain price perspective by multiplying the number of customers by the number of people willing to buy at the lowest price, then multiply by the gross margin.
  • Triangulate to find the price point for maximum market share and maximum profit.
  • Align pricing strategy with business growth strategy, considering if the product is a loss leader for market share or a high-value asset for long-term profit.
  • A pricing survey can eliminate guesswork in pricing and help make informed decisions to grow the business effectively.

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.

Business Growth and Pricing

  • Choose a pricing point that aligns with the company's growth strategy, whether that's rapid market share expansion or steady profit growth for long-term value.
  • Adjust the product suite and pricing to triple profits for businesses within twelve months.
  • The approach to pricing should be strategic and in line with the company's overall objectives.

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.

Entrepreneurial Support and Community

  • The speaker does not run ads or sell products through the podcast and asks for support in spreading the word to help more entrepreneurs.
  • Encourages listeners to rate, review, and share the podcast to potentially change the lives of other entrepreneurs.

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.

Market Analysis and Pricing Decisions

  • Analyze competitors, especially those who are larger and likely have conducted pricing surveys, to inform pricing decisions.
  • Adjust pricing based on market indicators and competitor analysis.
  • The psychological aspect of pricing is crucial; both the founder and the team must be convinced of the new price point's value.

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.

Team Buy-In for Pricing Changes

  • The founder and team must be convinced of the value of the product at the new price point.
  • Use exercises to help the team understand and justify the value at increased prices.
  • Ensure the sales team is aligned with pricing changes, as it affects their income and motivation.

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.

Communicating Price Increases to Customers

  • Differentiate communication strategies for current customers versus new customers regarding price increases.
  • Grandfathering current customers can be a strategy, but may limit future pricing flexibility.
  • For new customers, communicate the improvements and investments made in the product or service to justify the price increase.

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.

Communicating Price Changes to Customers

  • Addressing price changes is challenging and requires a serious approach.
  • A personalized letter with a hand-signed signature demonstrates commitment and seriousness.
  • The letter should highlight improvements made and future quality enhancements.
  • Offer a personal touch by expressing willingness to help customers if the price change affects their essential living costs.
  • Engage with customers who reach out about the impact, clarifying the necessity of the price for business sustainability.
  • Emphasize the long-term vision of the business and the implications of not investing in it.

"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.

Price Evaluation Using Van Westendorp's Price Sensitivity Meter

  • Conduct a survey to understand customer demographics and their reasons for purchasing.
  • Utilize Van Westendorp's Price Sensitivity Meter to gauge customers' pricing perceptions.
  • Ask customers about the perceived value of different components of the service or product.
  • Use customer feedback to refine marketing strategies and eliminate non-valuable costly features.
  • Internal communication with the team is crucial before announcing changes to customers.
  • Highlight the moral high ground by focusing on fulfilling promises and maintaining integrity.

"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.

Strategic Internal Communication

  • Prioritize transparent communication with the team about pricing changes.
  • Explain the reasons and benefits behind the new pricing strategy to secure team support.
  • Highlight the importance of fulfilling promises as a moral and strategic business stance.

"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.

Moral High Ground in Negotiation

  • Use the moral high ground as a strong argument during negotiations.
  • Reiterate the commitment to fulfilling promises and providing better service as justification for price changes.
  • Make it clear that the price adjustment is necessary to maintain the integrity and honesty of the business.

"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.

Implementing New Pricing

  • Communicate the new pricing to existing customers, detailing the reasons and future plans.
  • Prepare for an initial decrease in sales volume due to price changes.
  • Allow time for the market to adjust to the new pricing.
  • Use sales data and profit margins to evaluate the success of the new pricing strategy.

"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.

Resource for Further Learning

  • Direct listeners to a specific resource for more information on pricing strategies.
  • Emphasize that the resource is freely available without any obligations.

"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.

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