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!”
Some of the people saying this are doing quite well financially too – guys like James Schramko and Dan Andrews have brought this up to us multiple times.
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.
“Why You Should Charge More (Or Nothing At All)” – Tweet This!
When you’re just starting out or testing a product, getting feedback from actual customers is even more important. I wouldn’t beat yourself up too much about that when starting off. Over time, though, you’ll have to cut that out if you want to scale! 🙂 You can still provide a feedback system/loop that lets customers get their voice heard that doesn’t require as much of your time. Allowing them to fill out a Google Form and aggregating that data, for example, keeps it useful for you and allows them to voice their opinions and give feedback.
If you’re selling out too quickly, you can either add more product or raise your prices. (You could keep everything the same, of course…but that doesn’t bring in more cash and/or fix your issue!) If you’re worried about charging more and alienating – add more value. Give them more for the higher price point. You’ll be moving up the value chain and finding new clients at the new price point, but still enticing the old customers with the added value. Just make sure you’re getting feedback on the value to add from actual customers so you’re not left guessing…
Glad it was helpful, man!
Thanks for the tips Justin. I appreciate your willingness to go above and beyond in all the ways that you share your business knowledge and experience.
I just noticed your new adwords retargeting campaign. Sweet! I feel like you guys are following me around now :).
I’ll be working on one of my sites, looking at the adsense unit to see if it’s lined up properly and get a big ass banner that says:
Could your website sell for 20x?
Quick tip for you – make sure you design 300×600 banners as well. Not many people do and they really stand out. I mostly see 160×600 banners in the 300×600 ad space on my sites because adwords doesn’t have enough 300×600 inventory to show to me.
BOOM! Sweet, man!
I don’t think we created the 300×600 banner but asking our guys to create one now. 🙂
Cool Justin. I’m seeing a few on-site changes I like too – like when I click on a sold site on your marketplace I get an email opt-in popup. Good stuff, do you have someone working on conversion optimization right now?
Damn – you’re on it, man!
Yeah, Vincent has been working on it, but we’ve just hired a guy to really dig into CRO. We’re still making a few changes ourselves, but he’s got a roadmap to help us improve over the next few months.
We’ll do what we can with some marketplace changes and site changes for now, but we’re planning a full-on redesign again in a few months.
Nice. I love this. Premium pricing can be such a brilliant positioning tool.
Hey Jake – I meant to link to some of your content where you talk about those custom videos, but I couldn’t find anything when searching. Do you have content about that I can share?
Think this is most relevant -> http://www.fuzedapp.com/blog/build-stronger-engagement-with-your-subscribers-using-this-simple-strategy/
BOOM – added! Thanks, man.
This was probably the most insightful post @ EF blog. Awesome stuff!
Once I decided to inject data in my copy, on my blog and in my follow-up emails, my price increase didn’t seem high to clients. In fact, the deal still looks irresistible. I won’t give details on what I’m selling, I’m just telling: the right proof (case studies with actual student results) attracts more ideal clients. You just have to make the process smooth and delightful – as you say Justin.
Despite many others, you
have a responsibility: win them to your business, not lure and deceive.
Thanks, John – glad you liked it!
Delightful is the key – the customers you want will pay more for a better experience. And I’m NOT talking a ton of development or back-end work. You have to put yourself in your customer’s shoes to get this, I think.
We’ve been getting feedback on the buying/selling process and have just laid out some changes we’ll be implementing in the coming weeks. Good stuff!
This is a good read. Isn’t it ironic that some of the worst, most demanding customers we get are the ones who pay us the least? In my experience helping my brother manage a team of web developers and graphic designers here in Davao, these difficult customers are the ones zapping away our time and energy, and yet they’re the ones giving us pennies. I believe in premium pricing for premium products. You get what you pay for.
The challenge I see is that many players in the industry are willing to dive too low in terms of pricing (along with quality — especially in graphic design) and I’m afraid that’s eventually bringing the industry down to the gutter. However, with regard to your take on not charging anything on some services, I’m not really against that. I believe it’s a great way to expand your business network and establish good business relationships with future paying clients. Perhaps you can use it to leverage your other products and services.
I’ll look forward to your future posts.
Glad you liked it, Shelly.
It’s really odd how that’s true, isn’t it? And it seems to be true across industries. I know charging a premium is a bit relative – but I think it comes down to delivering a premium product with all that comes with it. That tends to bring along the better (more discerning?) customers.
We’ll be doing a redesign of the site in the next few months!
Justin, this is the SHIT !!! I learned so much from you and great guys like James, Chris, and Dan.
I actually had to close my “affordable” link building service after 2 months because of this pricing mistake. I made pennies while spending lots of time on customer support and team building. It just wasn’t worth it!
This article clears up everything!
It’s too bad the link building service didn’t work out – did you consider raising your prices? You could also change the product a bit and change your target market, possibly?
One of the problem marketers run into when they create software products is support/development. The long-term development and support costs can get costly…especially true on one-off purchases. Look at Market Samurai, for example!
I decided to postpone that project to focus on the upcoming membership but when I launch again I’ll target customers with higher budget.
Great article. I think many of us all get intimidated in the beginning to charge what we are worth. They see how on forums people are selling items for $20 and still getting flack for being too expensive. We shouldn’t get intimidated or let a customer price us down. We all know how much time and effort goes into a product or service. Selling yourself too cheap comes out to less than minimum wage. Isn’t that the reason we all got tired of regular 9-5 jobs…. to make more money. Cant do that selling ourselves short. Thanks for the reminder.
I think it definitely helps to get outside of your sphere or current comfort zone when you’re looking at the market, for sure. If you’re going to model someone, try to model those that are in a premium position, top of their game, etc. It seems easier to model those that are only one step ahead of you in IM, but you can end up putting out more crap into the world that nobody needs/wants.
Good one, Justin. My biggest takeaway: always be ready to pivot and challenge your assumptions when it comes to pricing. Also – you have to start somewhere. I’d encourage others not to over-research your audience. See what people actually respond to.
Evernote’s story is a good one to follow up with, supporting the case of a free model: http://growthhackers.com/companies/evernote/
The best way to find out what your audience is looking for – ask them! And then have them prove it by paying you…
I love the Evernote example. I was hesitant to promote the Freemium model as a winner because there are plenty of SaaS examples where it DIDN’T work out. But, if you nail it, it can be wildly successful, for sure.
Truly excellent post, Justin. It’s amazing how many people spend their time and energy chasing after nickels– instead of of building authority and good will– by insisting on charging for things that could potentially have much more of an impact if given away free. And yet, they completely shy away from pushing the upper end with a premium offering. So they just wind up languishing in the mushy middle.
By the way, the point you make early on about almost all of your most irritating and entitled customers coming from the low end is absolutely true. It’s counter-intuitive, but I’ve found this to be true in my own businesses, and every time I bring it up with other entrepreneurs, they inevitably agree!
Glad you enjoyed the post. I wrote this out of experience and after talking with quite a few of my successful entrepreneurial peers/mentors.
I should add (in the comments to not take away from the post!) that this is something I struggle with too. Sometimes I worry about the value we’re delivering, the price point, etc. Ultimately, this is a driving factor for me – I want to BE better and make our SHIT better. 🙂
Totally agree about the customer aspect. Most customers that don’t pay us much are just fine…but the customers that are difficult almost always didn’t pay much. Funny, eh?
I think being better and making better shit is where it all has to start. There are always people/businesses out there who are under-charging for a superior product or service, and they just need to have the courage to raise their prices. But unfortunately, there are also a lot of people who are always angling to charge more (*cough* lotta IMers *cough*) without doing the hard work of improving and innovating.
It’s like taking up the quest for celebrity, without being committed to mastery. You may get lucky (or you just may be really, really good at promotion) and achieve the one without the other. But for most, the best bet is to BE better and then to charge accordingly, or alternately, to be DIFFERENT (which really is a way of being “better” for a certain group) and to find the ideal audience/customers for your unique offering.