Use Soft Costs to Set Final Price
It's not just those hard numbers that you have to take into account. If it was just those hard numbers, guess what, I'd price my product a lot higher than where we have it priced right now. But there's other things I wanna think about, there's a different story I wanna tell. So I'm gonna use soft costs, I'm gonna really bring that story element into play to help me set the final price. Using the hard costs tells me what I need to pay for, how that profit is gonna work out, how I'm gonna get paid, how my team's gonna get paid. But the soft cost piece allows me to make sure that I'm telling the story I wanna tell, that I'm telling the story that I figured out when I thought about my unique selling proposition. And so, I'm gonna ask myself, does that hard cost price, does it tell the right story? Is this the story I wanna tell about the product, the offer, that I'm selling? Like I said, if it was just about the hard cost, I'd probably say, oh yeah, CoCommercial should be about 300 bucks a...
month. (laughs) And that'll be great, that'll cover all of our expenses, and I won't have to work so hard. But the story I wanna tell isn't about a product where only a select few can buy it. I don't wanna tell a story about people having to get to a certain point, or having accomplished a certain thing. Yes, I want high quality members who are smart, and savvy, and who are doing the work, absolutely. But I wanna make it so that this is the thing that you have to have. It's another app, it's another service, that you're adding into the mix of things, the mix of services and apps that you run your business on. CoCommercial, I want to be part of that, that's the story I wanna tell. It's just as valuable to your business as your email marketing tool, your video broadcasting tool, whatever it is, that's where it falls when you're thinking about expenses. It's not necessarily part of that $5, you set aside every year for education or conferences or travel, it's just a monthly part of your business. That's the story I wanna tell. So, there are, luckily, are a series of things that I'm thinking about every time I think about that story. First and foremost is the value to the customer. What kind of results am I gonna get from my customer with this offer, and how can I quantify those results? This is tricky, I know it's hard. (chuckles) Your offer may not, probably doesn't, help people make more money. That's the easiest way to quantify results. You can also quantify results with time. How much time does it help people save? People value time a lot. And so if you can say, well, I help people save 30 minutes every day, or I help people save an hour every day. Or I help people get more sleep. I help people worry less, those are all things that can be quantified to a certain level. You may not be able to put a dollar amount on it, but it tips the scale in one direction or another. I'm also thinking about how big of a pain point does it solve? Generally speaking, the bigger pain point you solve, the more money you can charge for it. The faster you fix a big pain point, even more money you can charge for it. Again, not necessarily about a specific dollar amount, but it's about tipping the scale in one direction or another. How big of a change are you promising? So not just quantifying the results, or solving a pain point, but how big is that change from point A to point B? Are you changing my life? On a fundamental level? Or are you helping me do something a little more conveniently? Those are both valuable. One is probably gonna cost more than the other, though. Again, it's a range, it's a scale here. And then what future potential does this change provide for? In other words, if I solve this problem now, what pain is that going to help me avoid in the future? Or what goal is that going to help me get more easily in the future? So what future potential does this change provide for? What extra promise can I see down the line because you've helped me achieve this thing? Again, how does that tip the scale. Maybe it doesn't change a whole lotta stuff out there and so it doesn't tip the scale much. Maybe if I get past this one obstacle, sky's the limit, that's gonna tip the scale in the other direction. Then I want you to think about your business, and your business model. Does this offer prepare your customer for a more profitable offer? So you can charge less for a product that turns them into the perfect customer for a more profitable offer. You can charge less for a product that turns them into the perfect customer for a more profitable offer. You don't have something like that going on in your business, that's totally fine, but then don't artificially deflate the price of your offer. All right? A great example of this is books. We charge very little for books, because books tend to, from a business owner's perspective, qualify a lot of customers for very expensive offers. So whether you're self-publishing or publishing through a publisher, it doesn't matter that you may only be making $2 or $5 or $7 per book. You're gonna sell a lot of them, and as you sell a lot of them, you're pre-qualifying customers for much more profitable offers. There are other ways to do it, that's just one really good example. Then I'm looking at, as Jennifer asked about, positioning in the market. What other solutions exist? Look at that market analysis that you did. Where do you want your product to fall in that marketing analysis? The market doesn't dictate price to you, you dictate price based on where you want to be in the market. You decide, I wanna be on the low end. Or you decide, I wanna be on the high end. Or you decide, I wanna be somewhere in the middle. Generally don't recommend the middle. (laughs) But it can be done. Where do I wanna be? What kind of an offer do I want this to be in the market that I'm in, and where does that fall, then, in terms of price? As you're doing your market analysis, make sure that you are factoring in offers that are on the very high end of your market. If you're a business coach, don't just look for other business coaches that cost $150 an hour. There are business coaches out there that are thousands of dollars an hour. And they're worth every penny, some of them. (laughs) So make sure that you're including that in your analysis. The higher end offers that you can include, the higher the end offers, that doesn't make sense, that you include in your market analysis, the more you can be intentional about where you actually position yourself in the market. Same thing on the low end. Who's the Walmart and the Target of your market? Walmart and Target are very successful companies. Yes, they price things very low, they do it intentionally, right? That's part of their business model, it's part of the story that they're telling about price. And so you wanna make sure that you're including those offers in there too, because that can teach you something about maybe an opportunity in the market you wouldn't have otherwise seen. So what's the very low end, what's the very high end, what are some different offers in there, and where do you want to be? 'Cause it's your choice. Greg?
You talked a little bit about trying to stay away from that middle ground, you said you didn't recommend, like--
Yeah, so the middle ground is really hard because it doesn't tell much of a story, essentially. It doesn't say a whole lot. And so, generally it's easier to edge toward the higher end or edge toward the lower end, and create the rest of the story of your business around that. I mean, you don't necessarily need to use that as the one factor that's dictating that, but you want the whole story to be around, this is high volume, here's why that's beneficial to you, here's the story I'm telling. Or this is high end, here's why that's beneficial to you, here's the whole story I'm telling around that. Whereas in the middle, those decisions all get a lot swampier, which is a little weird. Jennifer?
Is it a differentiation issue?
Yeah, it's a differentiation issue, absolutely. So if you are gonna be somewhere in the middle, and obviously, tons of businesses fall somewhere in the middle, then you wanna be looking at what are all the other factors that I can use to differentiate this offer and my brand so that the story I am telling is as strong as possible?
But if you're doing that, there's probably justification for a higher price.
Okay. (Tara laughs)
Yes, absolutely, very good. And then finally, what do customers expect to pay? This is what we ran into with CoCommercial, for instance. When it comes to a monthly service, there are certain things that people expect to pay, and there are certain things they don't expect to pay. Sure, there are plenty of really great offers out there that are $100 a month, $500 dollars a month, a thousand dollars a month. But the vast majority of subscription services, the ones that get sold in the app store, where we are and are selling, sell somewhere between 4.99 a month, and say 15 to 19.99 a month. And so when I was thinking through what this new pricing strategy needed to look like, was asking myself, what would someone expect to pay for an app? What would someone expect to pay for software that helps them run their business? Because that's the story, now, that we're in. Being in the app store, using that as a positioning and delivery channel for our business means that our customers expect to pay something different than if I was selling this as a training offer, right? If it was a training offer, I might be able to get away, I could definitely get away with at least $100 a month. But that's not how I wanted to position it, that's not my goal, that's not the story that we wanna tell, and ultimately, it's not that highest contribution that I, as a business owner, want to make. And so we're choosing to be in this other, weird place, where not a lot of people in our market are, because that's what our customers expect to pay. And the traction that we've received from that has been absolutely amazing. It takes some trade-offs, and all of this pricing stuff is gonna be trade-offs, right? You decide to go high end, that means you're trading off of helping a certain type of person who literally can't afford it. They're not putting you off, they're not not committed enough, they literally can't afford it. You go down to the low end, on the other hand, and you don't get to work with people who only purchase things that are at the high end. You don't get to solve those problems. You don't get to run that kind of business. So there's always a trade-off here. And this is really about telling the story you want to tell and making the choices you want to make, but don't ever think that you're getting, kind of, fenced in, on a pricing conversation. There's always a different story that you could tell, there's always another differentiator that you can offer, there's always another expectation that you can tap into, it's your choice. So make sure you're allowing yourself to make a choice. Because not choosing, in this case, is really gonna sink your chances of getting ahead. Questions about pricing. Everyone knows exactly what they're gonna charge now, right? (audience chuckles) No, I know. Just like a lot of the other things that we've talked about today, as I said, this is an iterative process. You're gonna choose a price, you're gonna experiment with that price, you're gonna find out whether it told the story you wanted it to tell or not. You're gonna find out whether it covered your expenses the way you wanted them to be covered. Whether there was profit left over for you at the end of the day. Jennifer?
So, if... I'm assuming, and I know this is maybe jumping ahead into, like, the marketing component. But, when we're thinking about the story with our pricing tells, it's also the idea of understanding that people tell themselves their own stories of what they're willing to pay.
Because I know for the demographic that I work with and am part of, artists will tell you they have no money for anything, but then they'll be like, oh, did I tell you about that workshop I took?
It was like a week long, and I went to Amsterdam, and it was $1500. (audience member laughs) And they'll be like, yeah, but you don't wanna pay, yeah, so, when you were saying that it was making me really think about that component.
Right, so to take that example and run with it. If that's the kind of customer and the kind of thinking, those are the kind of expectations that they have, you look at, all right. If I wanna price my product at $1500, $2,000, my offer. And they're willing to go to Amsterdam and pay that and have this great experience, I might not be offering that exact same thing, but what can I borrow from the way that product, that offer has been developed that gets these people onboard, that have no money, to spend that kind of money on something? What can I borrow from that to tell the story that's gonna get that same customer to pay for my thing? And so as you asked in an earlier lesson, I still don't quite know what this looks like yet, that's another way that you can actually figure out what is this going to look like? I wanna charge this amount, my customers are willing to pay that amount for this thing, and this thing, so what can I borrow from them to figure out better what this is gonna look like?
Yeah, and what I see is, you do that because you want your artwork to be better, you do this because you wanna talk about it better.
So, it's looking great, but now you wanna say great things about it.
Yeah, but ultimately, they wanna make more money, right?
All those things necessary.
All the things necessary.
Other questions, yeah?
Question, all right. So my package, the way I kinda came up with it was just looking at it session by session, but then I don't wanna offer session by session, so trying to see what is my hourly rate, and then how much time am I spending in between sessions, and then on top of that I have supplements, which can be really a lot for people to buy. So I also included a test in my package. So then there's a number, and then it's pretty high, and then there's an added number to it, because they need to order the supplements. So I'm always trying to, I feel like I'm still kind of on the low side, like I'm working too hard. So I'm trying to figure out how do you look at this in terms of hourly or not at all? Just let that go, and just think of a number that suits better if you don't look at it that way, I guess?
Yeah, so, I love this question. You're the only person in your business right now, or do you have anyone working for you?
No, just me.
So, we want to create space for you to be able to hire someone in the future if you wanna hire someone. Probably, at the least, like a customer support, personal assistant, executive assistant kind of person. So the first place I'd start is how much do you personally want to make per year? You don't have to tell me right now, but let's say it's $100,000. Personally you wanna make $100,000. That's going to account for labor and some overhead too, right? Because you're doing all of the labor involved with overhead you're doing, and all of the labor you're doing with creation, delivery, and marketing, you're doing. But that becomes a big number that you need to make sure all the numbers add up to on the hard cost side outside of profit, and then profit is gonna be above and beyond that. Okay, so that $100,000 is just coming from your labor. Now, we don't necessarily need to look at what that is on an hourly basis to start. We're just taking that as, this is how much I wanna make for the year, okay? I do think people get tricky, it's tricky when we are talking about, like, there is literally an amount of time that you're spending with a client. And so shouldn't I figure out what that hour costs? And yeah, you can. Or you can say, all right, I've got $100, that I need to account for in terms of labor, plus an addition to that, profit. So let's say $130,000 that I need to account for here. How many packages can I sell? Based on how much time I have and want to work, how many packages can I sell? How much time is it going to take to sell those packages, okay great, I can actually sell that number of packages in the year. That's really important to actually understand what your capacity is. And then simply, you take that number of packages, and you divide it into 100,000, and you get, oh, now I've got at least the base, this is what I need to pay myself from each package I sell. And then you can think about the other expenses that you have. Advertising, the technology that you use to run your business, the other overhead like electricity and internet, all of that good stuff. And then you can add that on on top as another calculation. But at least that way you know you've got your income covered by your sales goal, and I'd probably pad that a little more, too, in case you miss that sales goal. And you've got profit associated in there as well, which is also some nice padding for you, but we wanna actually account for profit, that's really important. And you've got that other overhead plus the actual physical costs of those packages involved there too. Does that help you kind of walk the line between hourly pricing and just ignoring it?
Exactly, I would like to make money.
Right. (laughs) Yeah--
It's a lot harder work in the beginning. I mean, I'm just putting in so many hours just because I'm also trying to streamline systems and all these other things that need to be set up, so.
Yeah, so where people get really tricked up with this is that they're trying to work forward. So they're trying to set an hourly rate, and then they're trying to figure out how many hours, just like you said, how many hours is it gonna take to do all of this, and then how am I going to account for all of that, and what's that going to add up to?
Whereas I suggest you start with what you want it to add up to, and then you do the math backwards. And so a lot of the calculations you could come up with similar numbers. But when you start with what you want it to add up to, you know that the math is going to work. And then you get down to the price, and then you can ask, is this price gonna work, and that's a slightly different question. (participant mumbles) But we wanna know, I want you to know that at the end of the day, if your business is working, you're actually making the money you wanna make. Which is a question not a lot of people ask, right? Which also leads to the what else problem? Because they're like, oh gosh, this is working. I'm doing the blogging, and I'm doing the podcasting, and I'm selling the thing, and I'm going through all the motions, but it's not adding up to the amount I want to be taking home at the end of the day, so what else do I need to do? If instead you start the calculation with here's what I wanna make, here's how I'm actually going to make that, then you know either it's working and you're making that much money, or something's not working. And so instead of asking what else do you need to do, you say how do I fix that one problem, or those three problems, or however many problems it might be. But you're fixing problems instead of saying what else do I have to do? Which is a much better approach. Reverse engineer everything. (laughs) That is my philosophy on life, is reverse engineer everything. If you don't know what the next step is, don't ask what the next step is, ask what the 100th step is and work backwards from there. Ask where you wanna end up and work backwards from there.