Why You Should Charge More (Or Nothing At All)
Some of our worst customers pay the least.
It comes down to expectations – they’ve paid us and they feel entitled to get as much of our time/resources as they possibly can.
That’s fine when we’re talking about a few thousand dollars, but when I’m 15 emails deep in a Gmail string for a product that costs $97 – I’ve got a problem.
To be honest, I’d rather provide support and give advice on things we’ve given away for free! (And we do – many requests come through our Contact Us form for help on products, tools, and services that aren’t even ours!) At least when we’re doing it for free everyone KNOWS there’s no obligation on our end – we’re honestly providing helpful advice and information because we like to do it.[callout]“When I’m 15 emails deep in a Gmail string for a product that costs $97 – I’ve got a problem.”[/callout]
Look, there are plenty of customers that have spent $1K or less with us that are awesome. Inevitably, the customers that take up a disproportionate amount of our time and provide the lowest margins are almost ALWAYS from this group.
I’m not writing this to be an ungrateful whiner. Instead, I’m hoping this will encourage you to test your pricing and challenge your assumptions about what you think might be the best approach.
I got to thinking about this after reading Tom Ewer’s post regarding his recent launch and the lack of financial success he discussed.
I should state that I think Tom’s a great writer and I keep up on Leaving Work Behind because I’m a fan, but his problem with charging more (or creating a product that’s worth more) tends to be a trap many new entrepreneurs fall into… They don’t think they have the skills or experience to create (and charge for) a premium product or service, but they need to make money and aren’t comfortable giving it away for free either. They end up offering a low-mid range product/service (out of hundreds/thousands) that makes it very hard to differentiate themselves and they’re not appealing to the right audience.
Let’s take a look at some of the strategic differences between Free and Premium pricing while digging into a few specific examples.
The Case For Free
You might be surprised to hear this (or maybe even thinking it yourself,) but we get beat up a bit for talking about giving away so much for free.
“You’re crazy to not charge for that!”
“You’re leaving money on the table!”
There’s an underlying perception issue with statements like this. They come from a place where paying customers should be your only target market and that anything else is ancillary and possibly a waste of time.
When you look at it, both James and Dan offer a ton of value for free. From the Tropical MBA podcast to Own The Racecourse – both provide valuable information and don’t necessarily require any payment as a customer. Although you could argue that both act as marketing/sales funnels for those paid products and services, both stand up on their own as providing value to the user for free.
They’re both coming from a good place and believe that paying customers are the highest market to target. In practice, however, they both have no problem sharing information, content, and products/services for free. Here are a few of the reasons for that:
1. Free customers can turn into paying customers.
Multimillion-dollar SaaS companies have been taking advantage of this for years (to varying levels of success,) but I think it’s even easier for your bootstrapping entrepreneur. We have an advantage they don’t – we can build personal relationships with our prospects and customers by doing things that don’t scale.
What do I mean? Here are a few examples:
- Jake Hower sends a personalized video to every subscriber
- Gary V. and Mark Cuban still respond personally to emails and requests
- Shopify and CD Baby adding quirky, personalized emails and delivering on outrageous requests
- Sending handwritten letters to your prospects and customers (Check out what Kiteletter can do)
Moving these potential customers down the value funnel from suspect > prospect > customer can and might make the difference between a profitable/unprofitable company when just starting out.
While this all may be true – wouldn’t it be better to take an 80/20 approach here? Shouldn’t we focus more effort and energy on those that are paying customers rather than those seeking our freebies? That brings us to our next point:
2. Unequal value leads to better distribution.
This is especially true in industries where a free offer for superior products/services is more disruptive. If you can get your free offer in front of enough eyeballs and wow them with what you’re giving away, you’re bound to have it come across the desk of (what Malcolm Gladwell calls) a “connector“. You can hack this, of course, but an organic share by one of these people is likely to move you closer to that tipping point.
Wowing anyone with a something-for-nothing approach is more likely to get you shared and talked about, but getting in front of these connectors exponentially improves your chances at widespread distribution.
It’s easy to share examples on a larger stage, but let me give you a few that we’ve run across on a lower level and in our space.
- Drew Sanocki @ DrewSanocki.com – This guy has real business chops, but who would have known about it if he hadn’t shared what he knew? Instead, he put together an awesome post on how to build an online retail business to $1MM in 18 months and published the Small Online Business M&A Report.
- Justin @ Centurica.com – He recently shared the 2014 Website Buyers Report that’s being read and distributed amongst industry insiders. It’s an amazing resource that took him quite a bit of time to put together. This one piece of content is opening doors and allowing him to make connections across an industry that’s typically highly competitive and distrustful.
A cynic might point out that they’re putting all the time into creating this valuable free content just to get you into a sales funnel that will ultimately sell you something. While that’s likely, if the content is valuable/helpful as a standalone it doesn’t matter and is likely to have an impact. There’s profit in the less transparent, “Give ’em 70% of what they need to know and charge for the rest” approach, but you tend to lose the distribution you’d get from the connectors.
3. High-value free products or services leads to improved (actual and perceived) value of your premium products/services.
By giving away content, products, or services for free – you’re automatically improving the perception surrounding those that you charge for. While that may sound like a marketing gimmick, I’d also argue that most entrepreneurs will then feel COMPELLED to then create premium products and services that ARE of higher value.
There’s no way you want to put your best foot forward on the free product and then donk around with the premium stuff, right? Unless you’re running a pump-and-dump, you’re going to want your premium products/services to absolutely crush your free offers in terms of value delivered.
Entrepreneurs can use the pressure of expectation they put on themselves by delivering kick-ass stuff for free. Then they have to up their game with premium products and continue to move themselves (and their products/services) up the value chain.
The Case For Premium
1. Be careful (and mindful) with where you’re hanging out and who with.
Let’s look at two different scenarios. In both let’s assume they’re squeaking out a living at $3K/month as paid traffic consultants with a few different customers.
A) A guy/gal who spends most of their time, effort, and energy in places like the Warrior Forum that cater primarily to the Internet Marketing crowd
B) A guy/gal who spends most of their time, effort, and energy in paid eCommerce masterminds and forums talking to real eCommerce business owners
Who do you think is more likely to de-value their time? Who is in a better position to charge a premium for their services?
It’s tempting to look at your competition on a particular platform and think that’s your ONLY competition. You can get sucked into believing the only way to “deliver value” is through affiliate-based info-products that lead to up-sell backend offers, down-sell offers, etc. While you’re trying to squeak out a living there, your REAL competitors are engaging and building meaningful relationships with legit eCommerce business owners. These guys will pay a premium for a service, based on a TON measurable value and ROI.
2. Prospects not paying? Take a wider view and switch markets.
Tom’s (limiting) belief that he doesn’t want to be like “those guys” is worth exploring.
- Does he only think jerks charge a premium? – Sounds like an opportunity! Compete at that price level and DON’T be a jerk!
- Does he only think suckers pay more than some dollar amount he’s arbitrarily established in his head? – He should try talking to the premium buyers…how can he better meet their needs and surpass their expectations?
- Is he comparing his success to that of the top guys in his space and thinking there’s no way he could charge more than them? – He’s likely underestimating his value. He could pick up a few of their products to compare.
Qualaroo is an excellent example of adjusting your target upmarket.
Qualaroo was originally created for small online businesses to get better insights regarding their site visitors and to help turn them into customers. KISSinsights offered a free and a paid option (with a low price point) hoping to attract clients. They weren’t crushing it with their approach and ended up selling it to Sean Ellis.
Sean saw an opportunity here. He ended up dumping the free offer and significantly raising the pricing. Instead of targeting small businesses, they realized they could focus on $1MM per annum and VC-backed clients – those who wouldn’t have a problem paying a much higher fee. Additionally, he changed the payments to an up-front quarterly/annual payment, significantly boosting cashflow.
Could Tom Ewer have pulled off that pricing and payment structure by focusing on bloggers? Could we have done it focusing on bootstrapped entrepreneurs?
Hell no to both.
Sean realized this was a valuable tool to a different market than it was originally intended for. His wider vision allowed him to see a different target market. One that was willing and ready to pay a premium for a product they had to give away previously.
3. Don’t buy into everything you hear – test those assumptions.[callout]“Had we not tested the market, we would have lost out on more than 50% of our profits.”[/callout]
You’ll find some wild claims made online. Many of those come from clueless, (well-meaning?) folks who make assumptions based on anecdotal evidence or parrot what they’ve heard from others.
We accept this in most instances, but when we start making assumptions in our own businesses based on those claims we can get ourselves in trouble.
In our case, it was readily assumed that websites were valued at 10-12 times their monthly revenue. While this would have been a multiple that made sense for us, we instead decided to test whether that assumption was correct. We listed sites at auction with $1 and no reserve to see what the market would bear. We realized after a few auctions we were getting anywhere from 18 – 24 times their monthly revenue – double the price commonly stated.
Had we not tested the market, we would have lost out on more than 50% of our profits.
4. Charge a premium by utilizing your unfair advantage and delivering a better experience.
I’ll pay a premium for a premium experience. I might not get to do it as often as I’d like, but I’ll spend a few nights at a baller resort in Phuket, take our friends out on a private boat for some island hopping around Davao, etc.
There are plenty of other people that think this way, too. If you can find a way to use your unfair advantage to capitalize on that crowd, you’re going to find yourself scaling a healthy profit stream.
Even with the recent increase in Flippa’s prices, we still charge more than they do. It’s not a trick – our sellers prefer us. Here’s a quick look why:
More Money In Their Pocket – They could spend quite a bit of time trying to figure out how to get top dollar on Flippa and still end up with 14-16X. They realize that our buyers are willing to pay a bit more to not have to wade through all of the unverified/unqualified sites listed.
Less Hassle – We sort and sift buyers and offers and walk both the seller and buyer through the transfer process. This saves quite a bit of time and effort – important for those that value their time at a premium.
Trust – We put care and experience into the integrity of the sites we list, the sellers we work with, and the buyers we accept.
Our unfair advantage is that we live this stuff. We’re on the ground…getting on calls with sellers, asking buyers what we can do to better meet their needs, etc. It’s hard for a larger organization to be as nimble or personable.
Here are a few ways you can use your unfair advantage to charge a premium in your industry:
Inject personality into your business – This is especially helpful if you’re in an industry where this isn’t common. People want to buy from other people they know, like, and trust. Give them an alternative, where they can do exactly that, and they’ll spend their money with you and not a nameless/faceless organization.
Take a data-driven approach – Only the top SEO companies provide real, quantifiable results and case studies. Hundreds of wannabes copy their shit. If you want to stand out in the SEO industry, take the time to do the long, hard work to differentiate yourself from the herd.
Turn the sales process into a delightful experience – I despise the restaurant industry, but we have friends here in Davao that are crushing it. They’re able to charge twice the price of their competitors because they have fire dancers, running themes, and over-deliver on experience.
Wrapping It Up
A strong case can be made for both Free and Premium pricing, but we still see so many getting stuck in-between the two.
Free can work because of the disruptive nature, especially in markets where you can stand out.
Premium can work when you’ve tested through target markets, challenged assumptions, and deliver on an amazing experience.
When you’ve priced yourself in the low-mid range, you’re competing with a ton of others who have either undervalued themselves or are too scared (or myopic in their views) to step outside themselves and see the bigger picture.
What are your thoughts on pricing? What have you found with your own customers? We’d love to continue the conversation with you in the comments below.
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