MBA1566 Should You Charge a Set Up Fee?

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Hey O. Welcome to the Hundred dollar RBA Show. Your business gets better and better every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of the $100 MBA, a complete business training and community online and in today's episode you will learn should you charge a setup fee? Many businesses, many products and services charge a one time setup fee when onboarding a customer. This could be $500, it could be $2,000. Why do businesses do this? Is it just to make more money? But more importantly, should you implement a setup fee in your business, in your product, in your service? What are the circumstances that need to be true in order for this to make it work, to actually help your customer and not only your business. We get into all these facets, all the reasons why you would have a setup fee in your business, how to present it, and also what are some of the hidden benefits your business will get by setting up this fee. So let's get into it. Let's get down to business. Many businesses have a setup fee. From CRM services like infusionsoft that have a one time setup fee, to ad agencies that help you with your Facebook ad marketing, to your local gym. We all know that when you sign up for a gym, there's the monthly or annual fee, but there's also a setup fee. Why do companies do this? Well, there are several reasons. Let's first talk about the economics. Number one, the customer is going to get something in return in that setup fee. And in order for you to deliver that, that has costs on your end. Whether the setup fee is, you know, $50 at the local gym because they need to do the paperwork and the administration and you know, set up your key card that has a cost, or if you're like infusionsoft and maybe you charge a little over a thousand dollars and they'll help you with your migration, they'll get you set up and get your email marketing going. There's a cost to setting you up. And a lot of businesses have said, hey, customers are willing to pay for it knowing that they're going to get some value. Why should they absorb the cost for that setup? And I like this mentality because it allows you to stay profitable, allows you to think, hey, I can make some money for every new customer, a one time fee to cover my costs for getting them up and running. The second reason why a setup fee is a good idea for some businesses is is it weeds out tire kickers, okay? People that are going to look to cancel sometime soon. This is why gyms and organizations do this. They have a setup fee because you're putting some skin in the game. You're saying, hey, I'm committing to this gym or this organization, here's some money on the table, plus I'm going to pay you every single month. You're going to think twice before you cancel because if you do, you're going to have to pay another set of fee to come back. And as consumers, we have loyalty for things we've invested in. It's sort of like a sunk cost fallacy where like hey, I already put this money in, I might as well keep using this product or service. So setup fees kind of make sure that people that are serious, that are interested in the long run, it will lower your churn and keep your lifetime value high. It weeds out those people that will not be good customers for you and are not committed to see this through. Number three, this backs up the second point. People are far more committed to whatever you do if they have some serious skin in the game when they're putting some money down. And it's not just like a monthly fee or annual fee, they made an investment, okay? People will take your service, your product more serious. In the example of infusionsoft. You're gonna try to your best to get the most out of this service and really take it seriously. If you're dropping a grand to get started, just to get started. And lastly, a setup fee is actually a really good service you're offering your customers. A lot of people are like, he, hey, why am I being charged for this? Oh, they're going to save me some time in getting started with the product or service. Is it really worth it? That's one mentality. But there's a whole school of people, there's a whole bunch of people around the world that love this concept because they value their time. They don't want to waste their time trying to figure it out themselves. They want guidance. They want somebody to show them how to really get started quickly and to get the benefit, to get their ROI from the purchase as soon as possible. So they're happy, they're happy to pay the fee because they know they need it. They know that this is something that is worth their money and requiring it is not something that they're so upset about. In fact, if you go back to the gym example, I remember I joined a gym a few years ago where they required every new member to pay $500 to get started. Now that's a lot of money. But the $500 included, I think about 10 personal training sessions, all the admin fee, I think a few supplements, things like that, sort of like a starter pack. And many of the gym customers just saw this as a deal. They're like, oh wow, I get 10 personal training sessions. As well as these supplements, as well as these like nice towels are giving me and a gym T shirt. They just saw this as a great bundle, a great bonus that they're gonna get for 500 bucks. And they said, I need this, I need some personal training at the start and it's going to get my butt to the gym. The accountability, they know themselves and the gym knows this and they know that they're going to really actually enjoy going to the gym with their personal trainer. And after their 10 sessions are up, guess what, they're going to purchase 10 more sessions or go on a long term contract. This is not a bad thing. You're actually serving your customers in a better way. You're actually ensuring that they have a higher level of success with your product or service. This is the goal here. The goal here is not just to sell your products or services to make sure your customers actually get a win, because if they do get a win and they'll continue to be your customer, they'll continue to pay you, and they'll tell other people and be raving fans of your service. So charging a setup fee is not just a way to make money. It's a way to cultivate a great customer. So how do you know if you should actually have a setup fee in your business? Well, take a look at what your customer has to do to be successful with your product or service. Do they need some training? Do they need some onboarding? Is there any kind of administrative tasks they're going to have to do or set up? How much time will that take them? If it's going to take them, 3, 4, 5, 10 hours, customers will be happy to pay money to save them that time. People want to just get started, right? They just want to see a result. That's why they bought your product or service. So if you can get them to that result faster with a setup fee, then it's a smart idea. One of the ways businesses introduce a setup fee in their pricing is to put it on their higher plans or packages. It's a good way to experiment to see how much to charge as well as how many people are interested in this offer, in this actual opportunity. You don't have to require it on all your packages, but on one of your higher tier packages you can do this. You're catering to people who are a little less price sensitive. I've seen a trend in terms of a setup fee having a certain price. And of course there's cost involved, how much it's going to cost you to set up this customer. But on average, I've seen that the setup fee is, is equal to one half of a year of your product or service. So if your service is $1,000 a year, then the setup fee is one time it's $500. And then of course, they will pay $1,000 for the year. This will cause them to feel like this is an investment I got to commit. And hey, when it comes to pricing like a setup fee, you want to feel a little bit uncomfortable, like you're stretching yourself a little bit. A lot of us don't want to charge what we're worth. But you should, because your customer will see the value if you convey the value of what they're getting in that setup.

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To wrap up today's lesson, a setup fee for your products or services is a great way for you to give more value to your customers. It's also a good way for you to make more money on the top, to make more revenue, to secure more cash from your customer before they commit. Long term, it allows you to say, hey, I know for sure. At least I'm getting this much from every new customer. Regardless if they save for three months, a year, five years, the setup fee kind of controls your revenue stability at the start. It also is a great filter for committed customers and allows you to deliver what your customers need so they can be successful with your product or service. Thank you so much for listening to the $100 MBA show. If you love what you hear, why don't you leave us an itunes rating and review? We'd love to hear from you. What do you love about the show? What's your favorite episode? What's your favorite takeaway? I read every single review on itunes, so go ahead and do that right now. And by leaving us a review, you enter our weekly random draw we call Free Ride Friday. Just listen in on Friday to see if you won. You'll win a lifetime membership to one of our programs. It's our way to say thank you for showing us love on itunes. Before I go, I want to leave you with this. Putting money down to purchase pretty much anything other than a low cost consumer good was the standard for a very long time. Whether you're buying a car or you're buying coaching or training or hiring a consultant, this was the standard. People are not that unfamiliar with actually paying upfront to get started. Thank you so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care.

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