Every business owner or manager wants to increase margins.
To do so, you really need to do one of two things:
Although I’m a huge finance nerd when it comes to budgeting and maintaining lower costs, this post is going to be about the latter – increasing how much you charge for your products or services.
When I first started Flight Media, I landed my first ongoing, month-to-month contract for $79/mo.
I managed an NYC actor’s Twitter for a few hours per month and averaged about $20/hr.
Flash-forward years later and Flight Media is charging 50X+ more per contract on a 12-month retainer.
It’s more work, but the margins are much larger and the revenue is greater!
In this post, I’m going to share the same methodology we followed to increase our rates 50X and margins by over 25%.
It’s a simple question, but often hard to answer.
The first website we ever designed, I charged $2,000 for it.
But nearly a year later, I sold a $25,000 custom website design that has since had over $20,000 in additions.
Now, our average website ranges $8,000-$10,000.
So, what happened? How did we increase our pricing by 4X or 5X without being Rumpelstiltskin?
Easy. We learned the difference between cost-based pricing and value-based pricing.
The easiest algorithm for calculating your pricing for a product/service is usually pretty simple:
Cost of Goods/Services + % of Desired Markup = Price
This type of pricing is called “cost-based pricing” and it’s the most common form of pricing.
But what if the thing you’re selling was priced at $10,000, yet it could generate your customer $1 million more in revenue per year?
Do you think a prospect would still buy if it was $20,000 or even $75,000?
Of course. Because the return on investment is still pretty steep.
Personally, we used to price our services based on this methodology.
We figured out how many hours each task took, then added our markup on our employee’s wages to get to the desired billable hourly cost.
Now, we use value-based pricing, which focuses on the outcome rather than the amount of time it takes to do something.
I remember listening to Jim Rohn talk about value one day while I was driving and something clicked in my head.
If you were earning a company a billion dollars, would it be a lot for them to pay you 52 million dollars? Of course not. You’re earning them a BILLION DOLLARS.
Since then, we’ve shifted our pricing to be based on the outcome we can generate a client.
Once you understand the difference between these two types of pricing, it’s important to begin shifting your mindset from COST-based to VALUE-based.
Then… follow these two simple rules.
If you know you have a crap product or low-grade service, then you must improve that first.
(Some people know they’re selling low-grade stuff and are ok with it, so if this sounds like you, then you probably won’t be able to increase your rates anyway.)
If you do consulting or some type of training, but know that you aren’t the best in your area/industry, then take two days and write out an in-depth plan on how to improve it.
How can you better set up your classes or workshops? What kind of materials can you bring to impress students? What kind of follow-up with students would keep people raving about you?
Strive to be #1, not #817.
TRUTH: If you don’t believe completely in the quality and value that you deliver, you’ll never be able to increase your rates and your salespeople won’t be confident selling.
Flight Media experienced this challenge in our third year of business.
We were extremely good at selling new business, but not very good at retaining business.
New clients came on every month, but a close amount dropped out the back-end. simultaneously.
So for six months, we focused heavily on improving the quality of our services and even created a “Value Management” guide for our team.
Because when it comes down to it, if your clients don’t see value in what you do, they will leave.
What are you doing to improve your quality and the value you deliver to your customers? Once you believe in it, then it’s time for rule #2.
Les Brown said it best:
Most people say I’m conceited. I tell them no, I’m just confident.
Confidence in your products/services and confidence in yourself can be the difference between $5,000 and $20,000.
A sale or a flop.
For example, when I was 23 years old and deep in the grind at Flight Media, I had a company reach out to me and ask me to deliver a speech at their leadership conference in Dallas, TX to 2,000+ people.
At the time, I had delivered only a handful of speeches, and not for much money and the crowds were much smaller.
Excited about the opportunity, I called my mentor immediately to tell him about the opportunity.
“Awesome!” he said. “How much are you going to charge them?”
“Um… I think I’ll charge them $5,000 for the day.” I replied.
(Even though that sounded like a lot to me at the time.)
Sighing, my mentor told me, “If you don’t charge them $20,000 and have them cover your travel, hotel, and incidentals (food), I’m going to fly all the way up to Ohio and kick your ass.”
The next day, I was on the phone with the VP of Communications for this company and when she asked what my speaking fee would be, I told her $20,000 plus travel, hotel and incidentals as confidently as I could.
“Sounds good! Send us over the contract and we’ll get it through legal immediately.” she said.
Within two weeks, the contract was signed and I received the first payment of $10,000 for the speech.
That day, I learned some very important lessons about confidence:
When you’re taking someone through your sales process, how confident are you in the product or services you’re selling?
More importantly, how confident are you in your ability to discuss those numbers with your prospects?
Raising your rates will, by default, raise your margins.
(So long as you don’t go increasing your expenses proportionately to do so.)
You need to believe in the quality of your products/services and the value they provide.
Once you understand that, you must be confident in selling them at that price tag.
If your sales guys are sitting there, saying, “There’s no way I’d pay that much for our products/services!” then they’ll never be able to sell them.
Because, whether you think you’re charging too much or too little, you’re right.
How confident are you in selling your services or products based on value?