Pocket Price Waterfalls: How to Find Your Actual Costs and Margins

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What are we going to do with this inflation thing that's happening? And how do we adjust our business to really find free money and deal with it so that it doesn't affect us as much as it otherwise might? So there's a lot of ways to incentivize sales. And so what the pocket price waterfall does is basically goes through and says, okay, so this is 100%. This is our standard list price, right? So standard list price is 100. And then I've got all these things that eat away at it. I've got distributor discounts and special discounts and end customers and other promotions. And this is all invoice pricing. So these things show up on the invoice that they're not as hard to find and identify as the off invoice soft costs. Right? This is where you can really get into trouble because you're probably thinking about these things, but you're probably not thinking about these as much. So what the pocket price waterfall does is it gets us thinking about all the actual costs of selling and what we net. Also, you have to be aware of what is the true margin, what is the margin that you're making on these things? So there are lots of purchase incentives that can affect margin. And so this I'm leaning more towards our digital sellers and our E learners and things like that. But are you paying affiliate performance incentives? Let's say that you have a leaderboard of affiliates on your launch and you're giving somebody a car that costs $50,000 or $100,000. Are you taking that into consideration? Or are you just thinking, oh, well, it's $100,000 against the launch, right? Is it necessary to do that? Is that a price that makes sense? Am I getting that much more benefit from it? Am I getting a multiple of benefit from it? Can you do cash discounts to drive immediate purchases? So do you enable your sales team to say you've got somebody that says, it's a $15,000 product that I'm selling, but man, if they only have 12 or 14, seven. Go ahead. Right. Do you enable any kind of discretion there? What about coupons? Are you offering coupons? Do you have coupon programs either with affiliates or just to drive sales or in promotions that you do? And are you calculating that into how much you're actually receiving. What about free training and coaching? There's a labor cost associated with that. If you offer onboarding or free training or free coaching to facilitate consumption of your thing or to help enable the sale, do you figure in the actual cost of delivering that? When you're figuring out what is my actual profit margin? What about free shipping? Are you shipping the cost of good? Are you shipping any goods to the customer? Right. What about gratuities? Right? Excuse me? Guarantees, quantity. Guarantees quality. Guarantees time. Guarantees satisfaction. Satisfaction guaranteed. How many people take you up on that? You're not putting that in your pocket. Okay, what is or do you offer discounts or rebates associated with a lack of satisfaction? Hey, you know, I know you didn't like it, but you enable your sales team or your recovery team to say, you know what, you can give them a discount of up to X percent. You can give them a renewal at 50% off. Okay? Because you're not getting that money either. If you're not doing that, you should because it can help you sell more. And are there any off invoice promotions like customer rebates or other things like that? Also payment plans, Right? What is the cost to carry? How many of you offer a payment plan of any kind of sort to any of your clients? Okay, just the people over here. You guys are sleeping. It's okay. Lunch is soon. Okay, Product bonus costs, right? Are there any physical products or soft product costs that you're giving as bonuses? What about promotions? Are you targeting specific segments? Are you offering specials to people? Are you incentivizing your salesforce? Salesforce? Do you have competitions and sales incentive awards for your sales team? Right? Most of us do. What about second tier affiliate costs? Do you offer finders fees? Do you have JV brokers that are helping you? Is that figured into the cost? What about surprise and delight cost? If you have a shock and awe box or some really cool thing that you send? We send a package that cost us 500 bucks to everybody that joins war room, Right? We barely break even, you know, but that's a joke. But it's, you know, but it's 500 bucks, right? So that does come off. It does impact margin. So are you sending things like that? Are you sending gifts on a regular basis? Right. That's gotta be figured in as well. What about tech support, training or service bundles? All of that stuff, Right? You want to use all of these incentives. It's just important to know the real cost. Okay? And it's. It kind of sucks doing this so hopefully you have an accounting type person that will do it for you and run the calculations and just show them this stuff and say, I need to know how much are we actually getting? How much of the price that we sell things for are we putting in our pocket? And how much of the margin do we actually get to put in our pocket? Okay, so you can do a pocket margin waterfall as well. This is exactly the same thing as the price pocket, only it's done with margins. What you can see in this example that's kind of interesting is that on the far left there are several customers that they're losing 15% on. They're literally going negative on sales. So the more of those people that you sell, the faster you go out of business. Okay, so don't sell to them. Sell over here and think about how can I prioritize selling over here? If you do something like this, you'll know where the profit sits. If you know where the profit sits, then you know where to focus your attention. Okay, so run the pocket price analysis and the margin analysis on product by product and also account by account. Accounts can be customers or representative customers. It could be a group of customers that you've tagged. It could be a source that customers come from, whether geo or channel. Right. But run this analysis. This is really cool. And if you've never had a data scientist, this is kind of what they get off on. Right. So you can actually, you think this is agony, but someone actually enjoys doing this. Okay, not any of us, I hope. Right. Because it's not the highest and best use of your time, but it really is helpful to know. It really is. So typically we find that there's a 1 to 5% minimum benefit that we can uncover that we are leaking. And so as you recall, 5% can be a pretty significant increase in margin in some cases, like for us, where we typically operate about 25%. So some action steps. The first thing is to set targets. Right? So set your target pocket prices. How much of what you actually sell, your list price, do you want to go into your pocket? Right. Do it by customer, do it by size, do it by type, do it by segment, play with all that data, or get your data scientist or somebody that you hire to do that so that you actually know the second thing. Here's something that happens a lot when we offer a lot of discounts, but we don't have an organized waterfall to know what they are. We will let people stack them and they will find ways to do it. They will absolutely find the coupon that you put out one time that was 70% off at the worst possible time when you're in the middle of a launch or something like that. What the hell? Where is this coming from? Because they found it and they shared it with everybody. Don't let that happen. So in your terms of service, don't allow discount stacking beyond a certain point. Figure out what your minimum acceptable margin is and then don't allow discounts to stack past that. That's a really, really important thing. Okay. Reprice or eliminate the things that are below your target. So if you're not getting the margin that you want, reprice them. And if you're, if you are getting the margin you want, then that's great. Can you test price increases? Of course. But definitely don't go below your minimum acceptable. That's really important. Prioritize selling more high pocket price, high pocket margin accounts. So you prioritize those accounts and then don't forget to account for all the off invoice things like shipping, like tooling, like tech support. All of the things that are the cost to serve. You want to account for those. Okay. The second thing is adjusting your product and customer mix. What are some things that you can do with that? Well, focus your acquisition, budget and efforts, obviously, but not all of us do it. We're guilty of this because the team does its thing. They get into the whirlwind of doing whatever they're doing and they're not focused on this. Focus on the highest margin products and customers. Who knows who their highest margin products and customers is? Right. Who knows? Just a few of you. Right. So you want to run that analysis because it's going to change your life when you know that these are the people that you want. And by the way, these people suck. They are sucking us dry. We're losing money on these people. Let's fire them. Right. Let's not use them anymore. Eliminate or restructure the low margin products and customers and then prioritize your high product. Excuse me, high profit, low cost offers. What are the offers offer by offer that are yielding the sales of the highest profit and highest dollar performing, lowest cost product sales. 3. Rethink your value ladder. How many of you have actually thought out your value ladder and charted it? Nobody really. Okay. A few people, they're like, I'm tired of raising my hand. Okay. Right If I do it this way, yes or yes. Right. Okay. Rethink your value ladder. Start higher. This is something we learned from Russ Rufino who spoke. We've learned it from a whole lot of people. Kris Krohn does this. They start at multi thousand dollar products. I think Russ least expensive is just under 10,000. And by the way, he said in extensive testing 10k is the big barrier that when he went over 10k sales fell by so much that it made sense to go back. Okay. We're testing prices all the time. Start higher and then you can always downsell. So on your value ladder, can you start your offer at $2,000 instead of 500 even though you're willing to sell it for 500? And then can you take things off of the $2,000 offer so that it can become a $500 offer without upsetting the people who are paying $2,000 for it? You can. There's a lot of ways to do that. And we'll talk about it. Okay. Create or add low cost, high margin products and services. Right. What are some of those one on one coaching. One on one coaching or product setup or specialized onboarding. Right. It's I say low cost because you're looking at a high ticket thing. Right. This is something that can be very low cost. It can even be automated. Right. You can provide automation. You can provide done for you, you can provide. Done with you. You can provide download insurance. I hate it, but it does actually work. I don't personally, I wouldn't offer it because it just annoys me every time I see it. Extended coaching and extended membership. Now why do I say that extended coaching and extended membership are low cost? Because you already have these people in place. If you already have coaches in place that you're paying to add people to a group coaching session costs you no dollars unless you're paying on a per person basis. Right. If you've got software, you're only talking about minimal bandwidth costs to add somebody to give them an extension. But that can be a really big perceived value for people. What about extended warranties? Can you give somebody extended warranties on your products that you're selling or can you offer third party extended warranties which have ridiculous margins and a lot of people like it actually makes them feel comfortable. The opposite of download insurance for me. Right. It's like yeah, if I drop my iPhone and it breaks into a million pieces, I don't want to really spend the money. $40,000 to get another one. Right. Group coaching. Group coaching is so inexpensive. You just add people to the group live event tickets for events that you've already got scheduled. Right. There's a zero cost really to that. I mean it's very Very inconsequential. Okay, longer access to things, upgrades. This is something Kris Krohn does a great job of. It's a $2,000 product and you get it for life. But if they can't afford the 2,000 for 1,000, they can get it for six months. But if they can't afford the thousand for six months for, for 500, they get it for three months. Right. So he's starting higher up the value chain and then chunking back by removing simply time in most cases. There's a few bonuses too. What about masterminds and user groups that you already have? What about software as a service enhancements? What about upgrades and updates or tech support or training packages? All of those are basically low cost because if you've already got them, it's not. The marginal incremental cost of providing this to somebody is very low and the perceived value and what they're willing to pay is very high. Okay, number four, create profit optimized offers. So one thing that I would recommend that you do just throughout this is take your best performing sales letters and go through and look at all of the things that you're offering and figure out what your actual out of pocket cost associated with each of those things is, including the bonuses, and then subtract that cost from the sales price. That's going to help you do kind of like a very quick thumbnail, one of those pocket price waterfalls. That's a good way to do that. Well then think about, well, what can we do differently? How could we recreate this offer? Could we bundle, could we take high perceived low cost items and bundle that with the other things that we've got so that we can get a higher AOV and a better margin? Or could we unbundle? Right. So my attorney friend, Grant Teeple has a client and all she does is she goes into companies that have bundled products and unbundles them, products that have product suites. She goes in, she acquires the company and then she just unbundles the products and sells them for significantly more to a, to a market that wants to not have the bundled products because they're just not serving that market anymore. She also buys companies that have unbundled products and bundles them. Right. She goes both ways on bundling and unbundling. But that's something for you to think about and test. Do you have key products that would be good to get people in that they'll buy more of if you unbundle them? What about thinking about sensitivity? So maybe your customers are price sensitive and You've done a test and you say, okay, I can't raise prices by 5%, it negatively impacts sales. I'm at the 99, 99 mark and if I go to 102, it's just not going to work. I've tested it. Right. Well, what about quality? Is there a quality component that maybe you could replace parts so that there's a different quality and you reposition yourself? You're not the high quality provider, but you are the functional provider. People are willing to accept quality reduction for lower prices. That's important to test. The one that I love is quantity sensitivity because tests have shown that most customers are the least quantity sensitive. So when you buy that bag of potato chips that has 90% air and seven chips at the bottom, right. Over time the height of those chips in that bag has declined because and the price has stayed the same. So they've been able to maintain the same price, but either maintain margins or increase margins by reducing the quantity. And nobody really cares because you can't see through the bag in the first place. Now I think those guys are shady and disrespectful for doing that. I don't think that's cool. But can you, maybe you're selling a supplement and you give 28 days or 26 days instead of 30, right? But that reduces the shipping cost and it reduces the ingredient cost, right? Maybe, maybe you can use a smaller container. So think about things like that. Whatever you're offering, is there an opportunity to be quantity sensitive, to address price sensitive, quality sensitive and quantity sensitive things in your customers create new value propositions. So a few things, example wise, right? 100 calorie snack packs, they cost more than the full product because you're paying us more to stop you from sitting in the closet and eating a whole bag of these. Okay, Right. What about Coke? That cold Coca Cola that's at the checkout costs multiples more than the six pack of cans on a per ounce basis than the six pack of cans that's just in the aisle, probably facing you on an end cap as you're picking up the cold one. Right. What about 30 day express sprints? What we found is that people like sprints more than they like courses. But a Sprint is just a course with a facilitator. So maybe you offer Instead of the 90 day course, maybe you offer a premium priced 30 day sprint. It's actually less for more. But personally I would pay for that because I would rather get this done in 30 days than 90. Right? So that's Something to think about too. What about custom products and services? Can you charge more for those and provide longer lead times for anything that you're doing custom? The answer is yes. Almost everybody has proved it in the current market. So rather than that, people that are price sensitive will then not take the custom thing and go to the stock. And people who want custom are willing to wait. So you kind of eat your cake and have it too. And what about repositioning the value so that you're recreating overvalued and fatigued offers in a way that will actually make them profitable? And, and then you're thinking about identifying the offers that people are absolutely not price sensitive to and you're raising them because at any given time we all have products and services that are undervalued and overvalued, right? We're charging too little for something and we're charging too much for something. So thinking about adjusting those things on a regular basis. Other things you can do, sell multiples, offer multiples of things that you sell. It increases aov, reduces effective customer acquisition costs. What about adding no cost or low cost digital bonuses? They typically cost us nothing. What about the sunk cost bonus? The event that you've already scheduled, the mastermind that you've already got, the coaching group that you've already got, an existing membership that you've already got? All of those can increase AOV and margin. And then the last but not least is acquiring your value chain. So can you capture more product, more profit margin by acquiring up and down your manufacturing or your creation and distribution chain? So even if you're not in the business of selling products, there are still expenses like outsourced providers. Does it make sense for you to acquire media? Does it make sense for you to acquire agencies so that you can reduce your customer acquisition cost? Because now you own that margin, right? Does it make sense to acquire distributors and wholesalers or your affiliates or your retailers? These are ways to dramatically increase the profit margin that you've got without having to change any pricing at all. So if you know what your minimum profit margin that you want is and you find it slipping away, this is a good place to look as well. Okay, so we talked about optimizing your pricing strategies. That's the first thing I would like for you to look at. Then we talked about adjusting the mix of your products and your customers, rethinking the value ladder. Can I start higher? Can I add things that don't exist, that are selling significantly more profitable? Can I create profit? Optimized offers so that maybe there's something in my offer right now when I go through my sales letter that I know costs a ton and we all hate it and it doesn't really matter to the customer. When we create irresistible offers, we really throw in too much stuff. It might actually help you sell better if you test it to take some of that stuff out and lower your cost. Particularly if it's a really costly thing. Right. They might just not care. And then acquiring across the value chain is that helpful. Okay. Awesome.

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