All You Need For Your Pricing Strategy

Newsletter #18

Before we begin– I have a small request to make (for something in return)! 🙏🏻

Most of you will have seen the Finance Guides I’ve been sharing on Twitter (if not, scroll down to see one example).

Given how well they have been received so far, I want to put them all (15 of them!) into an info-product.

But I want to give even more value.

So my question: what would you find interesting to have alongside all finance guides/checklists?

I’m thinking of Excel Templates, Learning Tracks, A Case Study, or my thoughts behind each one. But it can be anything.

What would you find valuable?

I’ll give 2 products away for free (at random) to the people that reply to this with a suggestion! 🌷

Anyway, moving on to the newsletter. I hope you like this one, it’s a BIG topic if you sell anything.

It got inspired by this quote that I stumbled upon:

Seems obvious, right? But the more I thought about it, the more I realised how little I read and hear about “pricing”.

We got all the bestsellers about:

• Sales: 100M Offers – Alex Hormozi

• Marketing: Purple Cow – Seth Godin

• Copywriting: Cashvertising – Drew E. Whitman

• Persuasion: Influence – Robert Cialdini

And also about:

• Operations: Traction – Gino Wickman

• Finance: Simple Numbers, Straight Talk, Big Profits! – Beverly Blair Harzog, Gregory Burges Crabtree

And you name it…

But then when you manage to attract people to your business, and you actually know how to deliver, there’s one thing missing: how much do you charge?

Some of those books, like 100M Offers, do talk about pricing. But they leave it superficial like: “charge more than you expect” or “price based on value”.

Again– wth are you supposed to do with that?

When you look at any large business, they have entire divisions that only focus on the pricing strategy. But in the SMB/Agency space, it just does not seem to come up enough.

Now, I admit there are good books on pricing:

With a title and cover like that, you can hardly ignore it.

But I bet you haven’t read this one. I certainly had never heard of it.

Why should you care about “Pricing”?

I’ll let Harvard persuade you:

(Namedropping ‘Harvard’ for Authority and Social Proof– thanks Robert Cialdini)

The image above comes from a study where they analysed the financials of 2,463 companies.

They then started adjusting some of the numbers. The results speak for themselves:

• If the average company increased prices by 1%, its operating profit would increase by 11.1%

• If variable costs decreased by 1%, operating profits increase by 7.8%

• If they would 1% more products, operating profits increase by 3.3%

• If fixed costs would decrease by 1%, operating profits increase by 2.3%

But this might not be immediately intuitive.

Why would variable costs be so much more impactful than fixed costs?

And why does price have the biggest impact?

Let’s bring in some logic and a simple example:

• 1% of 1,000,000 = 10,000

• 1% of 1,000 = 10

Meaning: taking 1% of a large number has a much bigger impact than 1% of a smaller number (duhh).

The reason I bring this up is that this result stems from that exact reason:

• Sales will (hopefully) be higher than Costs.

• Variable Costs (wages, energy, materials) are usually higher than fixed costs (rent, interest).

• Volume is less than Sales (unless the price is less than $1)

So when you get a 1% increase in price, this impacts the biggest number in your business (sales), and thus has the biggest $ impact on your profits.

Lesson: always focus on the big numbers in business.

Keep this Pricing Guide

But how do you go about thinking about your pricing strategy?

By checking out this guide hehe:

I haven’t shared this one yet, so hope you enjoy this little exclusive ;).

Now, I’ll acknowledge that not every industry has the luxury of setting its own prices.

If you are in a more commodity-like business, like Agriculture, I recommend reading this one: The Never-Ending Search For Efficiency

What can you do in practice?

Experiment!

From the Price Elasticity of Demand formula, we know that it’s all about the Change in Quantity and a Change in Price:

% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand

This is not an exact science.

But with these two factors, you can get a lot of clarity.

So take your latest financial model or statements, and break your “revenue” lines down into two extra categories: Price & Volume

A basic setup:

This model should also include all your other important line items like operating costs, other expenses, profits and your cash balance.

Now you can start playing with these numbers. What if you raise prices to $500? And what if the Sales volume would then drop to 1000?

That would give you a $20,000 boost in revenue. Which will flow straight down to your pre-tax profits.

But what if sales drop to 900? Then you’d only make $450,000, resulting in a drop in profits.

However, if you make 300 fewer sales, you might be able to lower expenses. This will then increase your margins.

Reminder: you will never be able to predict consumer behaviour.

But by playing around with the numbers you can get a feel for the potential impact. And you can start to picture what this would look like for your business.

It might even take some iterations or split-testing with customers to figure out what the right pricing strategy is.

But as the quote goes; Price too low and you are killing your profits, and Price too high and you are killing your reputation.

Best of the week

Some real value/motivation for all business owners… even though it’s focused on just the US, there are some nice points here for everyone.

And if you don’t make use of these deals yet, get on it!

Had to share this one

Has anyone even read this book? Funny tho

Reminder 2: would appreciate any feedback on what you’d like to see in the info product!

And I hope you take action on your pricing strategy!

If you want to brainstorm about it or get some help, feel free to reach out or book a call: https://calendly.com/joeydw/call

It’s a crucial part of your financial strategy.

That’s it, hope it was useful! 🌷

Until next week,

Joey de Witit