MBA1589 Why Selling Low-Priced Products Can Be Harder

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Visit Dell.com deals foreign. Welcome to the Hundred Dollar MBA Show. Delivering business building truths 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 Hundred Dollar mba, a complete business training and community online. And in today's lesson you will learn why selling low priced products can be harder than selling high priced ones. Many people when they start a new business, they want to launch a new product or service. They price their product or service low. They feel like it'll be easier to sell this product if it's cheaper, if it's more affordable. This is very common, especially in the course of the economy where people are selling online courses that they've created and sell them at $99, maybe even cheaper. But experienced entrepreneurs know it's actually harder to run a profitable business with lower priced products. And I'll explain why. It's not just about making more money, it's actually more about being able to afford your customers. And I'll explain what I mean by that. In fact, in today's lesson you'll learn the smaller company you are, the more difficult it is for you to sell lower priced products, the more difficult it is for you to sustain as a business and to grow and to scale. I'll explain why as well as what are some of the steps you could take so you don't get caught in this trap so you can afford your customers and sell higher priced products without turning away your customers. Let's get into it. Let's get down to business. Many new to business like to price their first products or services low. They feel like it's just easier to ask for the sale if it's not much money. The issue here is that who are you going to ask the sale from? A lot of people forget that it costs money to acquire a customer. And when I say money, this can equal time as well. Hiring somebody to write you great content for content marketing or email marketing. Or it can mean straight up how much money it's going to cost you to advertise, to attract a customer, to attract a buyer. Let me give you an example. Let's say, for example, you're spending some money on some Facebook ads to drive some traffic to an online course you're selling for $99. Now, the way ads work is that it's a lead generation tool. You try to get somebody into your funnel, they opt in for maybe a taste of your course, a module, a free guide, and from there you try to convert them through an automation sequence through your email marketing. Now this is a one time fee. It's a $99 cost for the course. So say for example, it costs you $10 per opt in or per conversion. That means you have to spend a hundred dollars on ads to get 10 people to opt in for your freebie so they can be part of your automation sequence. And from there you are convincing them to buy your course with some email notifications with some more great content, maybe you're gonna invite them to a webinar, all that kind of stuff. Now, in order for you to just break even, right, not make any money at all. In fact, you'll probably be at a loss because you'll need somebody to run your ads and you're paying for the expenses of your email marketing and all that kind of stuff. You'd have to have a 10% conversion. 20% will put you in the profitable range. And it's not easy to convert somebody off your email list to a buyer at a 20% conversion rate. That's pretty high. Most see something between 5 and 9% at best. So at best you're not even making money. So a lot of people find it difficult to make money on low price products because they just don't have enough money to market the product to get the Customers they need. And I want to say something for lower priced products, it's actually harder to convert them because they're more price sensitive. Now let's give another example. Let's say, for example, you have a product that's $2,000. A $2,000 course, you're going to run the same ads. And let's say we are converting on our email list at 10%. Really, really ambitious. Let's say we're at 10%, just like the other one where we broke even. But just to compare apples to apples, I spent a thousand dollars on ads this time and again. $10 per conversion on my email list to opt in for my freebie. Now I have a hundred leads on my email list and if I convert at 10%, that's 10 customers. Okay? Now, while I broke even in my first example with my $2,000 product, I got $20,000 in sales because I got 10 new customers and I spent $1,000 on ads. I made a profit of 19,000. So as you can see, you can afford to get more customers when you have a higher priced product. Running ads is more affordable. You can get more return on investment. Now I use $2,000 for a reason, for price point for a product because anything lower than 2000 is considered, you know, lower priced products. Now I want to say 2000 per year, that's like the annual revenue that you'll get from a customer. That's total value of the customer. So if you have other upsells, you have other things that you're going to sell them later on. We want to put that into the equation. But the point here is that you have a whole lot more breathing room when you're priced higher. A lot of new entrepreneurs think if I price my products too high, I won't get that many customers. It's not about the number of customers, it's about how much money you make from each. The total number of dollars you take home. Right. The profitability. In fact, it makes a lot more business sense. I rather have 10 customers and earn $20,000 than to have 200 customers at a $99 point. Because I have to now service and maintain and help 200 customers instead of 10. It's a lot easier to get 10 customers. I can afford to get them with ads than to get 200. 200 is a slog. I don't need a large audience. You need a large audience to get 200. And just like I mentioned in previous episodes, lower priced products will attract high maintenance customers. Higher priced products are people that Understand what they're getting into. They know when they're parting with their money. They need to apply themselves and they have to use the product to get results. Also psychologically, when somebody buys something more expensive, they have a less likelihood, they have a lower likelihood of a buyer's remorse because they will justify the purchase. This is just human nature. Let's say somebody buys a brand new home now, they buy the house and they realize there's a couple things they need to fix. There's a faucet that's leaking in the second bathroom and a wall is chipped or whatever it is. They don't have buyer's remorse and feel like, oh man, I shouldn't have bought this house. They just say, hey, this is an investment. This is what I'm doing. I made the right choice. Buying a home is a good investment, a good thing for my family in the future, versus somebody who buys a used car that costs $3,000. They're going to really nitpick and have buyer's remorse because, oh, there's a scratch here, the radio doesn't work sometimes. I made the wrong choice here. This is just human nature. So you have less refunds, you have less issues with higher priced products because you get a different caliber of customer. Like I mentioned before, with higher priced products you can afford to have less customers, less maintenance, less overhead. Remember, even if you're on online business, the more customers you have, the more cost you have. Even with servers, your hosting, customer service, you name it. With higher priced products, it gives you a chance to have a higher profit margin. Things are not that thick. You can hire more people on your team. You can be able to relieve yourself of the stress of decision making constantly. You can, I don't know, enjoy your weekends. Remember those and it makes your business worth having when you have some wiggle room. But when you have lower priced products, it's really hard for you to have any spare cash on hand to expand to get you some help to invest in your business. Have you ever heard of the stores Caldor or Bradley's? Well, there were actually big chains in the U.S. they were stores, department stores that competed with Kmart. But they went out of business because they were in the price game, the low price game. And guess who came to town? Walmart. And Walmart actually knew this and used this to their advantage before they went into the market. They have already planned out, this is in Sam Walton's book, they planned out that we're going to take a loss. Walmart as a company is going to take a loss for 10 years, okay? They actually had enough money to invest to take a loss for 10 years. And they're going to lowball and they're going to really slash their prices and put these companies out of business. And they almost even put Kmart out of business. Now, Walmart was able to do that and be the dominant leader in this sector because of this issue. They were vulnerable because they had no margins to play with. They're already slashing prices to the lowest. It could be, barely making a profit. Let's flip it. Let's look at the benefits of being expensive. Tesla recently became the most valuable car company in the world, surpassing Toyota for the first time. Tesla is seen as a futuristic, modern luxury brand. They don't have a car that's realistically less than $40,000 US. They have enough profit margin to remain valuable. Even though Toyota creates more cars, they actually sell more cars. They create more cars, they have more models, they have more choices. But the company's valued higher because of their profitability and because they have the ability to keep more of what they make. So it's a tough choice. Sometimes you need to say, I need to raise my prices. I'm in a cheap market. I need to be a little bit more aggressive and price myself higher. Whether I'm a product or a service or something in between. You can even take some steps towards that. So if Your product is $200, make it $500 today, and then six months from now, increase it to a thousand. If you're worried about, hey, this is going to be shocking for my customers. Just make sure you add more value to your offering. Make sure you express the value. A lot of us, we're undercutting our products and services. They're incredibly valuable, but we don't show them how valuable it is. Your customers only know what you tell them. So you got to tell them how valuable your product or service is, what they're going to get, the return on investment, what they're missing out on.

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Like I mentioned at the top of the episode that it's actually harder for you as a small business to sell lower priced products than a big company. A big company like Google, for example, has 10 tons of cash and they can afford to take a loss and they can afford to spend more than they should on marketing so they can gain a customer that's going to spend $5 a month on a Gmail address. I'm talking about business email of course, versus like Basecamp's company. Hey, they charge $99 a year so that's almost double of what they charge at Google for your own URL and all that kind of stuff. And hey's not even your own, you know, custom URL, it's hey.com and I'm sure when they release a business email, it's going to be even more expensive. But they give their unique spin to email. They offer things that Google does not. They understand they can't compete at that price point, so why try? The bigger you are, the lower your prices can be. You can afford to have lower priced products just like the example I gave with Walmart. The smaller you are, the more expensive you should be, the more you should be making. If you go back to the car manufacturers, some of the smallest car companies are the exotic car market, whether it's McLaren or Ferrari. As a company, in terms of employees and factories and things like that, they're not that big compared to the Hondas and Toyotas of the world. But they're profitable because when they make a car, they sell it for a pretty penny. Thank you so much for listening to the 100 Olympia show. If you love what you hear, hit subscribe right now so you don't miss a B by hitting subscribe. You get our next episode automatically right on your device. So you never miss the latest lesson from the $100 BA show. Before I go, I want to leave you with this. I also want to mention when you pay more, you value the product more, you value the experience more. Think of a fancy restaurant you want. Maybe you went on an anniversary or a special birthday and you spent more than the normal meal that you would normally spend when you go to eat out. Maybe it was double. Maybe the check was, you know, $500 for you and your party after the meal it was like okay, that was a lot of money but man that was really good. That was tasty. That dessert was amazing. You're reminiscing. You really value it versus maybe a hundred dollar check at your go to you know, meal or go to restaurant and you've gone there five times and you really don't remember much about it and usually just get up and go afterwards. When you value something you talk about it, you recommend it to other people. There's a lot of advantages to being expensive. Thank you so much for listening and I'll check you in tomorrow's episode Q and A Wednesday. I'll see you then. Take care. Of.

We've all been there. You hold on to a coupon but forget about it and suddenly it's expired.

Expired in 2012. Dang it.

Fortunately, by switching to Geico, you could save about 900 on car insurance without ever touching a coupon.

It feels good to save big. It feels good to Geico.