- One of the most important
and one of the most critical questions
you have to ask yourself as an entrepreneur
is how much do you charge for your product or your service.
Now, when it comes to pricing
it's such an important decision
because it affects your marketing.
Done properly, pricing could also be a marketing strategy.
So today, I'm gonna give you not one, not two, not five.
Seven pricing strategies.
So then from now on,
you know exactly how you should price
your product or your service.
You see when you are not charging enough,
so let's say, you price too low,
you're not making a profit, you're not making money.
When you price too high,
then maybe you're not getting customers,
you're not getting enough volume so you won't grow.
So there's that fine balance
to just the right type of pricing strategy
could change everything.
Pricing strategy number one, price to your competition.
That means find out what your competitors are charging
and then maybe you charge kind of the same.
Let's say, they sell this product for $100,
then you'll say, "Okay, I'll sell mine for also $100."
Now, sometimes, I also see entrepreneurs
what they do is they would take the the average prices
of the, let's say, three top competitors,
and then they would just add it together and divide it up.
That also, I've seen that before.
Price to your competition.
Now, there is some industries, in some cases,
that might be okay.
You want to be competitive, right?
Especially if you are in a what I call,
a commodity kind of a business.
That means your customers,
they are shopping for the best price.
So by having a price
that's maybe 5%, 10% higher than everybody else
within your industry that might be hurting you
because your customer's like,
"Hey, you know what, you charge $100.
"I talked to your competitor,
"your competitor only charges 90 or 95."
Now, unless you've done your proper marketing
or you know how to position yourself,
that might be a difficult objection to overcome.
So price to your competition.
Now there's a downside to this.
That means you are always reacting, right.
You're always reacting to what your competitors are doing.
They bump up their price, you bump up your price.
They lower their price, you lower your price.
You're always reacting to what your competitors are doing.
If you want to be a leader,
ideally you want to play offense.
We want to be the one that's leading.
We want to be the one that's dictating the terms,
dictating the price in the marketplace
so others follow versus you follow others.
Does that make sense?
Pricing strategy number two, price to pay the bills.
I call this the break-even strategy.
What it means is you price it enough
so that you just break even.
It covers your overhead, it covers your cost.
Well, that might be good in the beginning in some cases
that you are maybe entering a new marketplace.
You're testing things.
You're saying, "Hey, you know what,
"all I want to do is just to break even.
"I just want to test the waters.
"See how the marketplace reacts to my offer."
It's possible.
Or sometimes, you gotta use it very carefully, right.
Otherwise, you'll go bankrupt doing this.
'Cause you're not making a profit.
Is you are pricing, using the break-even strategy
to acquire a large volume of customers.
Sometimes I call that the self-liquidating offers.
Meaning this is for your low-ticket offer, on the front end.
You price it, just want to break even.
If I'm selling a book,
I don't make money from selling the book,
but it's just to break even.
That's fine, because that's what a book costs.
It's $20, right?
So you sell the book, similar price.
But you know all the profits, all the wealth
comes from the follow-up offers.
So you know all the profits,
all the wealth comes from afterwards.
The follow-up.
What you offer to the customers who have bought your book.
That's what we want to do.
Is this making sense?
Strategy number three, and that is price to time.
This is probably one of the most common pricing models.
A lot of people do this.
Lawyers, professionals, accountants use this a lot.
They charge per hour or they charge per day
or charge per week, or charge even per month.
That's kind of like a retainer model.
Price to time.
How much time am I spending on this particular task?
How much time am I spending on this project, right?
And that's how I would charge.
So they charge $20, $30, $50.
Lawyers, $100, $200, $500 per hour.
Price to time.
Now, this model is very, very common
but to me, personally,
I think this model is getting out of date.
As we are now transitioning from the job economy
to what I call skill economy,
now companies and people, they are paying for results.
They much prefer to pay for results.
And here's what I believe.
When you price to time,
the problem with that model is the relationship
that you have between you and your client,
that relationship is always, there's a conflict of interest.
What I mean by that.
Okay, let's say you charge $50 per hour for what you do.
Okay.
And you bill them $50 per hour.
And this is gonna take you 10 hours.
And you bill them $500.
Okay, that's one thing.
But let's say you could get this done in eight hours.
Now, be honest.
Are you gonna bill them eight or 10 hours?
Even if you could get it done in eight hours,
or you're gonna get it done within eight hours.
Because the relationship is,
the longer it takes for you to finish something,
the more money you make.
Versus from the client's perspective,
I want to get this done as efficiently, as fast as possible.
But yet, I'm paying for time.
So how does this work?
This is always, this is a conflict of interest.
You want to make as much money as possible.
They want you to get it done for as little time as possible.
So price to time,
and there's a time and place for this,
but I don't believe in that so much anymore
because the whole model of back in the industrial age,
clock in and clock out.
No.
I don't believe in that.
Here's what I believe in.
No fee is too high for success
and almost any fee is too high for failure.
When your clients are paying you,
they're paying for results.
When can we get this done?
And shouldn't they be rewarded if they can get it done
in five hours instead of eight hours?
If you can get it done faster, better, more efficiently,
why shouldn't they be rewarded?
Why would I have to pay more
for you to drag the projects longer?
It makes no sense.
But it is a very common model
and still a lot of people use it.
If you want to use it that way, that's fine, too.
Price to time.
Pricing strategy number four, price to cost plus.
Now this is very common in,
let's say in the construction business.
So, on the surface, very logical.
So this is gonna cost how much to get this project done?
Let's say this project's gonna cost a million dollars?
That's the cost, right?
And then you'll just add a 10, 15% mark up on that.
Let's say I'm selling this item, it's $10,000.
I'm just gonna add my mark up, my 15%, right.
That's fine, that's one way to do it.
Now you see this, again, very common in interior design
and construction and a lot of different industries.
Now what's the problem with this model?
It's very a common model.
But same thing with the price to time model,
it's something that has been around a long time,
it's logical but, again,
they are getting paid based on spending more money.
So if I'm a contractor, let's say,
and I know this project with materials and everything
is gonna cost a million dollars.
And I'm gonna earn my mark up on them, my 15%.
150K.
Now if there are ways that I could save money,
if I can use materials that are better
but actually cost less
and I get the whole thing done, maybe $800,000.
Now most contractors, not saying all,
but most contractors will think,
"Well, do I really want to get it done for $800K
"because now I make less money
"doing the same amount of work?
"Or is it in my kind of self interest, best interest
"to spend as much money as possible?"
From the client's perspective on the other hand,
the more money that you spend,
the more expensive the materials,
the more expensive the labor, the more money that you make.
From the client's perspective, it's the opposite.
How do you get the best product,
how do you get the best outcome
for the least amount of money?
Again, it's conflict of interest.
But very, very common, price to cost plus.
Now, let's say if I am building a building,
I'm building an office.
I can tell you that's not the model I would strive for.
I would do something that's very completely different.
Example, I would negotiate with the contractor,
this is what Dan Lok would do,
I would have a very clear budget and I would say,
"Here's the budget, right, let's say a million dollars, ok"
But here's what I would do.
Out of this million dollars,
chances are you're gonna maybe 150K.
I'm more than happy to pay 150K.
But if you could save me money,
the two things I look for,
if you can get it done for $800K,
you're smart, I'm gonna give you a bonus.
I'm not gonna pay you $150,
I'm gonna pay you another $20,000, $30,000.
Whatever it might be, depends on whatever the project is.
Second thing, KPI would have is,
if you can get it done on time or even early,
I'm gonna pay you another bonus
for the result that you produce.
So now then we're on the same page.
Right, you follow what I'm saying?
Now we're on the same page.
So you and I, we're thinking about the same thing.
We're focused on the same thing.
Have the same goal.
To get it done, get the project done on time or early.
You get compensated for that.
To get it done below the budget and save money,
you're getting compensated for that.
You see how that works?
So the contractor that takes on this deal
knows I am results focused.
We're on the same page.
He doesn't need to find ways to cut corners,
or try to mark up stuff, or materials and all that.
No.
It's in his best interest to work on my behalf
to lower the cost, to get a great product done
but at a lower cost, timely fashion.
That's what I would do.
But again, you know,
that's one pricing model that's out there.
That's pretty common.
Pricing strategy number five,
and that is price to the package.
Now I like this one.
I use this one a lot.
It means that you are creating an offer.
You're creating a package.
And simply, let's say the package,
the total value is worth $10,000.
And you're only charging your customers $1,000 or $2,000.
They're only paying a fraction of what the entire value,
the package is worth.
I like this a lot.
First of all, it makes the offer irresistible.
Number two, if you want to increase price,
all I need to do is
how could I increase the value that I deliver?
And I like to use a general rule of thumb
and I'm giving that to you.
I call that the one to 10.
Meaning for, let's say for an educational product,
for $1,000 I charge,
I want to deliver at least $10,000 worth of value.
If I want to charge $2,000,
I want to deliver at least $20,000 worth of value.
Now although some of those products,
some of the bonuses it could be digital products, right?
That is instant access.
It actually doesn't cost me a lot to deliver that value
which is great 'cause it's scalable.
But at the same time the value is there.
The value, it's real value, this is how much it would cost
if they buy it from different sources.
So that's very powerful.
So price to the package.
Just think about how you can apply this in your business.
Versus just selling the widget, the product,
the whatever that you're selling,
how can you package in a way that is attractive?
Let me give you another example.
Let's say you are selling website development.
Instead of saying, "Hey, you know what,
"I'm gonna charge you $100 an hour to design your website."
You see how that's like, "well, how long it's gonna take?
"Well, it's gonna take me, you know, 100 hours."
"Okay, great, I'm gonna pay you 100 hours."
Versus package.
So, this website development package we are going to design
let's say a 10 page website for you.
And we're gonna also set up a blog for you.
And we're gonna create also 20 landing pages for you.
We are gonna create 30 email follow-ups for you
so that you can convert those leads into sales, right.
I convert leads.
So you see how it's a package?
Now the whole thing if you buy this, and you buy this
and you buy this, you buy this and you buy this,
all separately, it's gonna be $50,000.
I'm just making this up, $50,000.
But if you buy the whole thing from us right now,
as a sign up, as a client today,
it's gonna be $20,000.
Now why you giving them that?
So you may be thinking,
"Well Dan aren't I giving them a discount?"
You're not giving a discount.
You price the package.
You know this is the package you put together
and you offer a more complete solution.
So it's more attractive.
'Cause you're thinking on the client's behalf.
You're thinking ahead.
Say, "Hey, you know what?
"We could build a website,
"but won't you be needing some landing pages down the road?
"Won't you be needing some emails down the road?
"Won't you be needing all these things?"
"Oh, I never thought of that."
So, why don't we put together a package
with price according to that?
I like this model a lot.
Pricing strategy number six,
and that is price to positioning.
What kind of positions you have in the marketplace?
If you're the leading authority in your marketplace,
you can charge a lot more money.
Now most people do a lot of sales but they don't understand
how to do positioning.
How do you position yourself as the go-to person,
the go-to brand for whatever it is that you do?
Right?
So let me give you an example.
Let's say when you understand
the power of supply and demand.
So if you go to Clarity right now,
you see on the Clarity site,
my hourly rate is $10,000 US per hour.
10K.
Now why would someone pay me 10K?
To consult with them on an hourly basis?
That's a lot of money.
Supply and demand.
When you understand basic economics,
if you have a lot of demand,
a lot of demand and you have very little supply,
and supply in this case is my time,
we only have 24 hours a day.
You can now charge a lot more money.
Because there's a finite amount of supply.
You know there's a lot of premium products
out there in the marketplace,
very often a lot of demand, limited supply.
So ask yourself how you could use this to your advantage.
How could you create a lot more demand for what you do,
what you offer, what you sell?
And then what you want to do
is you want to restrict the supply.
Just like the diamond industry.
Do you know there's actually
a ton of diamonds that's out there?
But the diamond industry is smart enough,
they know if they flood the market with so much supply,
then the value of diamond would go down dramatically.
So they restrict the supply and they drive up the demand.
In some cases, they manufacture the demand.
So then diamonds are way more valuable.
But keep in mind, that's priced to positioning.
That's all that is.
It's price to positioning.
Pricing strategy number seven, price to value.
This is my go-to.
This is my favorite
because that's how I like to buy things as well.
That's how I like to pay for things as well.
Price to value.
If I'm paying for results,
I would be more than happy to pay a premium for results.
I don't care about time, I don't care about effort,
I care about results.
So if it's a project and I pay certain amount of money,
the project gets done, I'm more than happy.
But price to value,
it means that there's no ceiling to your income.
So let me give an example.
Let's say you run a consulting firm.
You do business consulting.
Instead of charging the clients for,
"I'm gonna charge you X amount of dollars per hour."
Not very compelling, not very enticing
because the client's success
or failure's got nothing to do with you.
If they actually get more results,
they generate more revenue,
they pay the same amount of money.
If they get no results, you still get paid.
Well that's not good.
That means your client's taking on all the risk
and you are getting all the rewards.
Or, you can price it in such a way, price to value.
Let's say your client is doing a million dollars a year
in revenue right now, that's the base.
You'll come in and say, "You know what, I can help you.
"I am the world's best consultant on this particular topic.
"I can help you get more sales,
"get more customers, get more revenue.
"But whatever you're doing right now, the one million,
"we're not gonna touch that, that's the base.
"But let's say in the next three years,
"that through working with me.
"Now I'm gonna put some systems in place.
"I could help you go from one million
"to five million dollars in the next three years.
"We're gonna increase your revenue by 500%,
"that's our goal, and that's your goal.
"From here to here.
"The one million we don't count, but the four million
"that I've been able to help you gain in the marketplace,
"without me you wouldn't have had that kind of growth.
"Out of four million if I could help you do that,
"would you be comfortable of paying me
"a small percentage of that?"
It could be, I don't know, 5%, 10%, whatever the number is.
Only on the increase, the four million.
See, now that's price to value.
Now what if you could only help this client
to get to three million?
You get paid a little bit less,
you get compensated a little bit less.
Or you help them get to 10 million.
You hit it out of the park, right.
It's a home run.
Great, you get paid more.
See now, your interest and your client's interest,
it's aligned.
And also that means that there's no ceiling to income.
It also means your client knows
you're not gonna nickel and dime.
You're not gonna nickel and dime him.
Meaning, "Oh, yeah, we did this much
"and I'm gonna charge you,
"I'm gonna invoice you for another three hours of work."
That's bullshit.
We only care about results.
If you could go from one million to five million
doing this much work, the client doesn't care.
You want to go from here to here, you do this much work,
the client doesn't care, either.
So now you're working smart.
Now you're not getting paid based on time,
you're getting paid by what you bring,
what value you bring to their time.
And maybe, instead of spending this much time,
you only need to spend a couple hours a week on the project.
As long as you get the results.
Or you can simply make an introduction,
"Hey, you know what, your business doing a million,
"I have another client here,
"that I know would be a perfect fit.
"Why don't you guys form a strategic alliance
"and do some business in between?"
And you make the introduction.
And from there you bring in
a couple extra million of revenue to their business.
How much is that worth to this client?
A lot.
Has nothing to do with how much time you put into it.
Has to do with this.
That's priced to value.
You see how it changes the way you look at things?
It changes the way that you deliver value.
It also changes how fast you want to deliver value.
You want to deliver value as much and as fast as possible.
This is my favorite model.
Price to value.
Now depends on what you sell.
Comment below, let me know what pricing model
you are using right now.
What pricing strategy you are using right now.
Now, there's no black and white.
Sometimes within my business, my time,
Clarity, $10,000 per hour.
That's priced to time.
That's fine.
Price to positioning, price to value.
Maybe you do a hybrid model,
a combination of these models, these strategies.
Or maybe front end you do price to, to break even.
But then, or price to your competitors.
But then on the backend you have some other models,
maybe a price to value.
That's perfectly fine as well.
But what I'm saying is, you want to spend some time on this.
This shouldn't be done so, just like, half-ass.
This should be done very strategically.