Mistakes Entrepreneurs Make Setting Prices

0:00 Hey welcome back. So today I want to talk about one of the biggest mistakes that I see entrepreneurs making and that is pricing. As an entrepreneur you are so concerned about cash and cash flow that you assume that everybody else in the world is and so when you want to sell your product and you want to get into a new market you say oh I'm gonna discount it I'm gonna I'm gonna charge less and that's gonna make people want to buy. It's a huge mistake. It's a mistake for two reasons that I'll explain in a minute. You see when you're

0:30 When you make a buying decision, there is a price that you are charged and there is

0:34 value that you perceive that you get.

0:36 If the value is higher than the price you charge, you think it's a deal and you buy

0:40 it.

0:41 If the value is less than the price, you walk away.

0:44 So your goal is to get the value to be higher than the price.

0:48 You only have two variables.

0:50 Provide more value, charge less price.

0:52 Most entrepreneurs focus on charging a lower price when they really should be focused on

0:57 providing a higher value to their customer.

1:00 You see, if you provide a higher value to your customer,

1:03 you're much more likely to get them to stay

1:06 and be your customer for life.

1:08 So the mistake is this.

1:09 When you lower the price,

1:11 you also lower the perceived value.

1:15 Think about it.

1:16 If you see the same garment in a fancy high-end store

1:20 or in a discount store, and the price is different,

1:23 cheaper in the discount store,

1:24 more expensive in the high-end store,

1:25 even though they're the same garment,

1:27 You'll assume the more expensive one is better.

1:29 Perceived value.

1:31 So let me tell you a real story.

1:33 When we were starting SharePayroll, we went to market with a lower price than the competitors,

1:38 ADP and paychecks at the time.

1:41 We incrementally raised our prices.

1:44 And I was so scared that first time we raised our prices.

1:46 We raised our prices 20%.

1:48 I did a bunch of mental math.

1:49 I figured out how many customers I could afford to lose at that and still have the same amount of cash flow.

1:53 So it turned out that of our base of about 1,000 customers, when we raised it 20%, we

1:59 lost two customers, 0.2%.

2:03 But we increased our revenue by 20%.

2:05 We then subsequently raised our prices, raised our prices, raised our prices.

2:09 It was magic.

2:10 And all of that incremental price change goes directly to the bottom line because we didn't

2:14 increase cost at all.

2:15 And then we got to the point where our price and ADP and Paychex price were exactly the

2:20 same.

2:21 And when we made that last price increase and they were exactly the same, I had a line of sales reps out my door and I was scared.

2:29 Turned out they all came to me with a story that was almost exactly the same.

2:34 Troy, I don't know what you did, but it just got easier to sell our product.

2:38 Easier?

2:39 Yeah, the conversation went from, why are you worse than ADP and Paychex?

2:44 What am I giving up by buying you?

2:46 To, oh, you're the same as ADP and Paychex, but I get to do it on the internet?

2:50 it? That's way better. I'll buy. Perceived value. We didn't change the product. We just changed the

2:56 price. So when you're thinking about positioning your product, think about the relationship of

3:00 price and value and think about how you can increase the perceived value and hopefully

3:05 increase the price as one way to do it. Thanks.