Make More Profit than 99% of People

If you want to make more profit than 99% of businesses, you need to nail pricing. Optimizing pricing has a six times stronger increase on profitability than getting more customers and two times stronger increase of profitability than decreasing churn or getting people to buy more times. And it is the strongest way for businesses to make more money. And so in this video, I will walk you through, on each page that I turn, a new concept that you can apply to your business that, that will make it more profitable via pricing. If you don't know who I am, my name is Alex ramosi. I own acquisition.com, it's a portfolio of companies that's over $200 million a year. And these videos are to help you show what we do to grow our portfolio so that you can make lots of money. And then maybe someday we can invest in your company. Otherwise, enjoy. I take a weekly call with school communities in the school group, and I had like three or four guys who asked me questions that I was like, these are not like Alex questions. These are math questions that you can just simply solve by doing math. And so it's like, should I do this price or this price? It's like, well, what's the conversion rate of this one versus this one? And then what's LTV on this one? Right. It's just you just solve the math problem. And I think a lot of businesses are not using math to solve their problems. And with pricing being one of the largest levers for making money, not one of it is the largest. Compared to getting more customers, increasing how many times people buy, and pricing, pricing is still a three times stronger lever on profit versus the other two. So let's talk about five concepts of pricing that will make you more money. All right, so the first one is something that I like to call the price to value discrepancy. All right? And so if we imagine here as the value, this little first red line, this is the value that the person gets. This is our price, assuming that our price doesn't change over time. Now, if our price doesn't change and the value does, when will people cancel here? When the price and the value are matched or when it's underneath? And this is our sad face as business owners because we're like, oh, my God, I thought that I was making all this money. And so the thing is that there's a third line here that is probably worth understanding. And this is our cost line. So ideally, you want your cost to be here, your price to be here. So this is your Profit. And then over here, this is your something called customer surplus, which is just a fancy word of saying goodwill or the value that people are getting net of the price, right? So ideally you have really high value. You've got a price that's still high relative to your cost basis as a business owner. And so this is the fundamentals of pricing in a visual. Now one of the things that I see as a mistake is how does this occur? How do we go from having lots of value to not having lots of value? Well, let me explain. So with one time value versus consumable value, which I like to think about it. All right, so the reason that you have those big discrepancies is that usually you don't understand the value that you are delivering to a customer. Meaning if I say, hey, let me give you this course on building websites, whatever, right? Then as soon as you learn how to build websites, the value of that course drops to zero. You already have the skill. Like the day before you needed to learn how to do arithmetic. Arithmetic is super valuable. The day after you learn it, it has zero additional value. Now that doesn't detract from what the initial value was. It just no longer has value. And so what most business owners should do but don't do. So this is me telling you that you might want to think about. This is differentiating the value that you have in your business between one time and consumable or recurring value. All right, so let me explain. So let's say I. Let's use that example, the websites. So my little course right on website building is something that would be one time value. Once you have it, that's it. There's nothing else. But what are all the things that I might have in my business for website building that someone is going to consume this month and next month and the month after? I might have a community that's associated of people who are trying to build pages. That's something that I'll use this month and next month. I might have accountability if I have somebody who's going to help me build it. Accountability support. That's something that I'll use this month and next month. I'll have access to those things. What else would I use? Probably website servers to host my site. I'd probably use software to host my site. I probably. What else would I use? I might want ads help, right? That I would use on a monthly basis to help optimize my ads, right? And so the big thing here is that we have to look at the services we provide and this is especially true with education people because they have lots of one time value and very low recurring value is thinking, am I pricing these things appropriately? So hear me out. I think that a superior pricing model better matches the price to value discrepancy that you're shooting for on a regular basis. So it would make sense for me to charge more here, right? My price to be higher here, and then it would make sense for my price to be lower over here. So I continue to have this delta all the way through, right? And so the question is, how do you accomplish something like that? Well, what you do is you have something called a startup or a one time fee which is associated with the thing that has one time value. And then you have a lower consumable or recurring billing thing that's associated with the consumable recurring value. And this is fundamentally why I think there's so much churn in the media or education or information space is because people don't differentiate between those things. But your customers sure do. And so the customer says, well, you want me to pay $1,000 a month for this course, but I already learned how to do this and you want me to keep paying for it for 12 months even though I already went through it. And now you might make the argument, well, it's worth $12,000, but you know what, as far as they're concerned today it's worth nothing. And so this is why I like having this perception of I have a one time payment upfront that's higher and then I have a smaller payment that is done every month that reflects a price to value discrepancy on these recurring consumable things. Now one of the things that people have a hard time with is realizing that this is significantly less valuable than this. And so what happens is that this might have to be $5,000 and this might be $300 per month or $200 per month, and that's okay. And so making sure that that price to value discrepancy matches will allow you to have really long LTV on this side. And so in so doing get way more LTV overall because people don't leave. And if people don't leave, they keep paying. If they keep paying, you keep making money. Okay? Now that is the one time value versus consumable valuable concept. This is the big headlong tail which I talk about in my offers book in more depth. And I think a lot of businesses are going to start switching to it. They already are. The way that this is done in the info space is People sell a course and then they have continuity or community on the back end, and you sell it as one thing, but they're just priced differently. So you pay $5,000 today, but then you pay X dollars per month over time. Okay? Now if you were to switch to something like this. Let me walk you through something that blew my mind, that might blow yours as well. So Profitwell did a really cool study on this which showed the difference between monthly billing, quarterly billing, and annual billing. Now you're like, okay, well what's the point? Who cares? Well, you should care. Let me show you why. So if you bill monthly, the average churn across all memberships is about 10.7% per month. That means if you have 100 people, you're going to have 89 at the end of the next month. All right? If you bill quarterly, that churn drops to 5%. Okay, less than half, literally, simply by changing the billing cadence. Now what happens if you bill annually? It drops all the way to 2%. Now you're like, okay, that doesn't seem like a very big difference, but let me show you how big of a difference this really is. So we, we can determine LTV by taking price. And by the way, y' all wanted more real business shit. This is real business shit. Okay, so you take price and you divide by churn. And this gives you your back of napkin ltv, all right? Meaning lifetime value, how much somebody's worth over time. And so that means that if my price is $100. All right, $100. And we'll use that for all three of these examples per month, right? Now, if it's $100 per month, here I'm billing monthly. Here I'm billing $300 every quarter, here I'm billing $1,200 per year. Alright, just to be clear, now these churn rates are extrapolated back out to monthly. So if I have 10.7% churn. 10.7, then it means that my LTV is somewhere in the neighborhood of like 950 bucks somewhere in there. Okay? Now, if I have 5% churn, my, my LTV is now $2,000. If I have 2% churn, my LTV is $5,000. Wow. So we went from nine hundred and fifty to five thousand just by changing the cadence that we built. If you're listening to this and you're like, wait a second, if I made five times the money per customer, guess what that would do to my business? You bet it would. 5x your business. Then you're like, okay, well, I'm going to do this tomorrow. Not so fast there, you know, fast. Fred, let's talk about the other side of this. Two things real quick. One, if you like this stuff, the question that I was citing at the very beginning of this was from a school Q and A that I do. So if you're getting into business, you want to start a business, you can join the school games. 30% of people make their first dollar online. Very proud of that if they finish the first month of the school game. So pretty cool there. If you already are a business owner and you like this more in depth stuff in terms of like scaling the companies and increasing profit and EBITDA, we have workshops that we just started offering@acquisition.com at our headquarters in Vegas. And so if you want to see if you qualify for one of those, you can go to acquisition.com, hit scale, and hopefully we'll talk to you then. Conversion rates. And so think of it like this. Let's say you get 100 clicks or at bats or whatever to pitch this thing right? Now. Before this used to say, hey, my thing is $12,000. And you bill, you know, 1,000 bucks a month for a year. Okay, fine. Now the thing is, maybe you close 20% of people on this. Okay, fine. Now let's say you have another hundred where you get on the phone and you say, for these guys, it's $5,000 per year and it's up front. Now the question is, what percent? Maybe you still sell 20%, I don't know. So this is a testable proposition. But this is where it gets really interesting, is that for everybody who knows that, you say, hey, this is $12,000, it's $1,000 a month for 12 months. We all know that this person cancels at month four, you know what I'm saying? So they cancel at month four or five, which means the people are worth 4,000 to $5,000 right? Now if you bill $5,000 and you bill it annually and you say, hey, you have to pay this up front, maybe you have the same close rate because the price point is so much, the perception of the price is so much lower. But here's where this gets really interesting, is that if we look at this 12 months later and we say, hey, what percentage of these people are going to renew? Guess what? The percentage is way higher. And that brings me to my next point, which I will reiterate back on this one, which is, let's think about what the mechanism is that drives down this churn Going from monthly to quarterly to annual. So let me tell you what it is, or at least my best thought of it, is that churn. Churn is directly correlated with frequency of billing. Okay, so hear me out. If I bill you every day, the likelihood that you churn is going to be significantly higher than if I bill you every month. And I believe that that comes down to what I consider the look back window. So think about it like this. If I have a month, right, or a period between billing one and billing two, it doesn't really matter what this period of time is. On this point, I'm going to look back with my eyeballs and say, how much value did I get between this billing and this billing? Now, if I'm billing monthly, then let's say I'm an SEO agency and I make someone 10x their money on month one. Great. Month two happens. Let's say I make them 1x, guess what they're going to do? They're not going to think, oh well, I 10x my money on month one. This guy's already paid for himself for almost the whole year. No, they're going to think, well, I got a good return last month and I got a crap return this month and so I'm going to cancel. It's about what have you done for me lately? It's about what have you done in the look back window between billing cycles? The reason that this frequency piece that I was mentioning earlier so important is it extends the look back period. And so If I paid $5,000 a year to be a part of an association and then it comes up to bill a year later, then I might think to myself, huh, I look back over a year and say, did I make more than $5,000? Now that 10x month is going to be included in the 1x month and the next month that was a 3x and the next month that's a 1x, the next month it's a 15x. All of those months are going to be included and I'm going to be like, wow, this is a banging deal. Right? And so for that reason, extending the look back window gives you a higher likelihood that people are going to renew. And we already see that it's five times more likely that people renew on an annual basis. Now you can make also the argument somebody can pay a fee up front can also afford to do it, so they're not just scrimping by to try and barely afford whatever the service is. And so it's probably a number of reasons that annual does better than monthly or quarterly. But for me as a consumer, I think to myself, I think about what's this look back window? And I want it to be as long as humanly possible for someone to logically say this makes sense for me. Okay? So from there I have made a number of conclusions for myself that I'd like for you to consider. Oops. That you can consider for your business. All right, which is the difference. This is kind of counter Internet marketing culture, which is originally you want to say you want to sell it for as much as you possibly can, which I used to preach and I don't believe that as much anymore. And I actually would much rather pitch something that I know they're going to continue to pay for. Right? And so I spent the first part of my career trying to obsess about what gets people to stick, how to get people to pay again and again and again. And where I have switched to in my career is I just look for things that people already don't cancel from and then I just try and sell those. And so if I could do it all over again, I would only focus exclusively on things that people already don't cancel. So if you look at alarm systems and insurance and payment processing and banking and other things like that, you're going to find things that people in general don't cancel or switch from. Cable, right? Like people don't switch from these things. Cell phone service, like these are things that people don't really switch to very often. On the flip side, gym memberships is something that people cancel all the time. And that's a structural thing people don't want to work out. But people do need insurance, People do need to watch television. People do need to use their phones even more. And so I would take all of my emphasis and say, why don't I just get into the right boat? That I already know has really long ltv. And so that's something that I've just learned in time now. Now the other piece is I would strongly emphasize the point that I was making earlier about looking at quarter, annual and monthly is that I would rather take less money on an annual billing and convert at the same percentage. So it's like if it's 12k for a year versus 5k paid up front for a year, I'd rather have the five because I know that my annual renewal rate will be much higher. So let's finish out this little equation here. So here, if this $5,000 is what I'm asking for someone to pay for a year and we have this look back a year later. Believe it or not. Remember, we have 2%. A lot of times this means you're going to keep 80% or more of the customers. And so all of a sudden, wait a second. Remember, we had 2% monthly churn, but this is a 5K thing. Well, that means that this price point would be 5,000 divided by 12. Can anyone do that math for me? That's 600 bucks a month. 600 bucks a month. 500 bucks a month. 465. 416. Okay, so 416. All right, and then we multiply this guy by 50 because it's 2% churn. Right? Which means that you've. What is that? That's going to be 20,000 something. All right, don't worry, it's 2% churn. There we go. So this is 2%, which is equal this times 50. Same thing equals 20,800. All right? The reason this is so important, the reason this is so important is that look at the difference between this 20,000 and this 4 or 5,000 that we have here now. This means that a year from now, you're going to have 80 out of the hundred people still paying you. And then they renew again. And guess what? If you keep selling at this rate, that means that you get all of last year's sales to stack on top of this year's sales. And guess what happens in the third year? You have last year's, the year before's, and this year's that stack on top of each other. And so this is what creates a compounding business. And the vast majority, vast, vast majority of small businesses do not understand this. And the reason that they stay poor is because they think that the only way that they can grow their business is to increase the number of customers that they're selling every month. And that simply is a very terrible way to live. Because the moment your acquisition channel, your YouTube channel gets shut down, your Facebook ad account gets shut down, you've got some sort of deliverability issue on your domains. If you're doing outreach, right, there's always something that can happen. And unless you have customers that plan on continuing to pay you over and over again, it means your business dies immediately. That's not a very valuable business. It's also one that's hard to sleep with at night. And so the idea is you want to find stuff that people don't stop buying. You want to sell the crap out of it. You want to sell it at a price point that you know they're going to Continue to pay. You want to extend the look back window as much as you possibly can so it increases the likelihood that they're going to convert. And you also have a bidirectional relationship between the price and the conversion rate. And so maybe you do get more people to buy at $1,000 down than you do at 5 grand up front. But on the flip side, $5,000 is less than $12,000 for the year. And so you're gonna have two forces that are gonna be working against each other. Now for me personally, I would rather have the much higher quality customer that's gonna be in the most optimized billing cycle. And if I do think about this with my thinking hat, maybe I either do the big headlong tail, which is if I know my thing isn't tremendously valuable, then I might say my one time upfront that offsets my cost to acquire customers and then I have a very small monthly billing after that that has a big price to value discrepancy based on the consumable value of my service or thing or I know that my value is high and it is high on a recurring basis, but it's volatile, meaning some months it's big, some months it's not big. This is particularly true of things like ads organic. Like if you have something that goes viral one month it's going to make a lot of money for them. If it doesn't go viral the next month and, and it doesn't now some of these things you can't control. And so by having an extended look back window, it increases the likelihood that something good happens during that time period. It increases the likelihood that they will bill again in the future. And so the TLDR for you, number one, separate out one time versus consumable value. And then if you can do that, you can switch to the big head long tail pricing model which is one time up front and, and then small recurring. The alternative is that you can consider increasing the look back window right between when people see value and when they get value. There's our little eyeball looking back money. And so what we can do is trying to switch to annual to the best degree possible and billing based on what you think someone is going to continue to pay for what they're going to pay for on their worst month rather than what you can as much as you can get them to say yes to today. And this is something that I've switched to over time. The third thing is making sure that you're in the right boat. And when I say that what I mean is, instead of trying to obsess about getting people to buy more times, go to stuff that people already don't cancel. And you'll be amazed at how much easier it is to do business and how those things stack on top of one another. By the way, if you're wondering why my eyes look back and forth between things, it's because I have three things I'm looking at. One is I have a bunch of notes because I do prepare these for you guys, because I don't want to just, like, be off the cuff and just rambling. Second is that I do these with Instagram Lives. And so those are on a separate camera than the YouTube camera. And I try to look at the YouTube camera, but I also have a hard time not looking at the audience that's on Stagram Live. And so if you see my eyes darting back and forth, that's why. So now we'll transition to questions from the audience. The question is, one is, how do I know how to raise my price because of things like inflation? And how do I just raise my price in general if I've been in business for a period of time? All right, so those are two separate questions. I'll answer each of them individually. So from an inflation perspective, every continuity contract, I would include a clause that says that you can match the CPI or the Consumer Price Index, that allows you to map up the price with inflation. That's up to you. Now, having that clause doesn't necessarily mean that you have to always do it every month or every year, but it means every two or three years, you can just update your pricing accordingly. People don't like pricing changes, and so I would do it less frequently rather than more frequently. So that's number one in terms of inflation. In terms of thinking about when to raise prices in general, I encourage everyone to continue to raise prices until your conversion rate times price equal less money, Meaning if I can sell. Now, again, this doesn't take into account hard costs. All right, so I'm just going to assume that the cost of our thing is zero. Let's say it's a digital media thing, just for sake of simplicity. So if I can sell, if I get on the phone with 100 people and I can sell 10 people at $10,000, I have a 10% conversion rate, which means I make $100,000 from 100 calls. That's 1,000 bucks a call. Now, if I can all of a sudden get to 30% close rate with a $5,000 thing, then it means that I make $150,000 on those 100 calls. And so then I would make 1,500 bucks per call. And so I try and level out the cost per revenue per phone call or conversation so that I can understand what's the total amount of money that I'm making. So it's not necessarily about raising prices or lowering prices. It's about what is the total absolute amount of gross profit you can maximize. And so this is a math problem, not a Alex, what should I price it at Problem. And I will tell you exactly what we do with every company, which is we just fucking test the price. And so we get on the phone and I will say this. It's way easier to go low to high to then high to low. If you sell at a price that's more expensive over time, that works out okay. If you go the other direction, it can kind of suck. And so I think going up, because think about it, you're like, yeah, well that's what I was selling it last month. We have more demand now. We're better at our stuff. Like, it makes sense. Like if you bought an Apple stock at 10 and now it's 20, like you're gonna be upset. Like in time, prices change. Now the flip side is when prices come down, if you are in that position, then the reason behind it would be useful to tell the other people. But usually you're gonna have to downgrade those people if they're still in your business. Because if you did figure out some technological thing, which would be probably your big reason why of like, hey, we figured out how to make this more efficient so we can lower the price, we pass the savings on to you, then you have to pass the savings on to them. Otherwise, if you sold someone last month at 20k and this month at 10k, very tough if it's for the same thing. And so that's why I like starting low and then raising it. And then usually at the very end, I'm gonna have to do tiny little adjustment of like, okay, I realized I went over the hump of maximizing my profit. And so then I backstep and then I refund these people the difference or I give them a bonus. In practice, most businesses will have a monthly and an either or, quarterly or annual. It's usually not one or the other. And you'll probably know your avatar. If prepaying 12 months at a time is too arduous for them, then it might be better to just have quarterly billing as the primary way. And I would Say that as I'm explaining this right now, you might be able to just get away with pure quarterly billing and not have monthly or annual like you just do quarterly. And that might be a nice blend for a lot of people as like the middle ground. But it's very typical to have monthly at this rate annual at 16% less because it's buy 10, get two free. And by doing that though, if you get people onto that annual, remember you're giving them a 16% discount. But the likely that those people recurrent and the LTV on those people still might be five times higher than these people. So you take a 5x increase in LTV and then apply the 16% discount to the fact that it's a lower price and then you'll get probably something closer to 4 1/2 x. So it's still worth having that quote discount for the annual rate. If you want to incentivize people to go to the annual, first off you have the discount. So that's thing one. And I like to associate as many benefits as humanly possible immediately for making the decision. And so I want to bad things I take away. So discounts would be a pricing thing that I a bad thing I take away. And then I also want to add good things. So it's like if I had a call to call it a customer appreciation thing or I had specific times or sessions that only VIP customers. So basically consider it like you even name it something. So it's like you have your standard and your vip. Even if it's the same pricing, you'll get way more people to take it because they want the status associated. And then VIP get these other three benefits like they don't have to wait in line, they can get the session times they want. Or we have a special Saturday session or Sunday session that's only for VIP and they get towel service, whatever. You just think about anything that's vip. Two or three things that ideally give them status in the community for being a vip, which you have now associated with the annual billing which has the highest stick rate. So not only are you providing more value to these people, they pay a little bit less and they get the status and, and that's okay because they pay four and a half times more over a lifetime. And so this is how you stack as much as you can in the annual so that you can just make a lot more money. And the other really big benefit that I didn't hit on at all in the video that I should have is that annual if you do increase the conversion percentage there. In a real way, you're front loading a year of revenue, meaning your ability to offset the cost to acquire a customer skyrockets because you get so much more cash collected up front. So you can get really aggressive in the acquisition. Even if you have a small, like let's say you convert half as many into the annual billing, it's like, okay, well I get half as many, but I get 10 times the upfront cash. So I still get 5x upfront cash as I did before into monthly. And so if that's the case, then I'm still crushing it. The question is, is it better to bill up front versus bill monthly and get the contract? Because then with that in theory the contract plus the lower rate would convert a higher percentage of people and it would extend the ltv. So I'm going to give a two part answer to this. Number one is the contract that you lock someone in on is only worth the quality of the signature on the contract, meaning the person or the prospect who buys it is their credit worthiness that matters. Now for example, in Europe, contracts matter a lot more and people actually adhere to them. Like it's, there's not a really big, you know, churn rate on people saying that they don't make, they don't stick with their commitments. In the US it's just a different culture in terms of how credit and contracts work. Like people get out of and cancel contracts or ghost or cancel their credit cards all the time. And this is because Visa and MasterCard and those companies have become a very pro consumer, basically cover for people to not stick with their commitments because they will always side with the consumer on chargebacks and refunds. And so it allows people to make purchases without consequences. And so I like the people where contracts matter is like enterprise customers. If you have a massive company that you're doing business with, contracts matter. If you're dealing with consumers, contracts don't mean anything. And if you look at the biggest companies that deal with consumers, the vast majority of them don't even bother doing contracts because what ends up happening is that, let me say it this way, it will decrease sales to such a larger extent than just billing month to month and then focusing on improving the quality of the thing you have. Because at the end of the day, if the contract doesn't matter either way, all it does is decrease sales because people factor it in to their purchase, but they don't factor it into their cancellation. And so it's like you increase friction on the front end but you don't decrease friction on the back end. Now, in general, will someone who signs a contract stay longer than someone who is month to month? Yes. But the question is, what's the trade off on conversion and is it worth it versus taking all that effort and putting it into how do I improve the, the quality of the product, how to improve the quality of the prospect as well in terms of targeting and messaging. But the big one is, is there a way that I can just pick something that people already don't cancel? The question was, is there a way to extend the look back period beyond the billing cycle? Meaning can you accumulate saving, you know, time saving if you had a software or money made, if you had an agency or anything to that degree, or you know, pounds lost if you don't, weight loss, whatever. Marriage is saved, fights avoided, if you're in marriage counseling, whatever. I think that the best thought process that I would have around this is yes, I would try and report that data on a cumulative basis as much as humanly possible. Because then it allows me to at least try and price or at least display my value relative to price on a longer time horizon. Like, hey, we have brought you 35,000 clicks to your website over the last six months. Now, it doesn't like it might look like this in terms of the volatility, it might be up and down. But if you look back cumulatively relative to what you paid, it's still a great deal. And so I think that is where customer success and having some tech and how you're reporting and how you have this conversation with the customer is super important in terms of framing. So I think those are huge benefits to, to trying to show the cumulative increase but just being really real. Most people don't care that much. So I think it might lift you a few points. But the big big is they're still gonna think, well, you know, you billed me last month and this month I only got one X and it's not worth it. For example, if you look at Instacart, they say we saved you this many hours of going shopping and driving or whatever. And so it is over the duration of the time that you've had Instacart, they will show you what your savings are, not what I saved you this month. Hey, if you like this more mathematical approach to business, by the way, this is how I actually do business. That's not the YouTube version. And the reason that these videos will always get fewer views is because it's actually for business owners. That being said, one of My favorite videos that I've ever made is seven equations that will make you money. It is for business owners that want to make money. You have to know these equations. I do them in every business that I invest in. Like, watch it. Like, you should know these. You should know them like the back of your hand. You shouldn't just, like, memorize them. Like, you should understand them, because that's how you will ultimately make a lot more money in your business, by looking at it like an investor and investing accordingly.