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The Right Time to Change Prices?

Lesson 6 from: Value Pricing & Business Models for Creative Entrepreneurs

Tara McMullin

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Lesson Info

6. The Right Time to Change Prices?

Lesson Info

The Right Time to Change Prices?

When is the right time to raise or lower prices? How do you know when it's time to change prices? I get this question all the time, so we're gonna spend an hour talking about it. First thing to remember is that prices are never set in stone. Prices are never set in stone. We feel like we put something up on the web, we put something up in our Etsy shop, we put something up on Society6, whatever it might be and boom, that's the price it has to be. Once we set that price, it is done. It is carved into stone, and that's just not the case. There's actually something going on on the web right now called dynamic pricing, at least I'm pretty sure that's what it's called, dynamic pricing, and this is the kind of set of algorithms that change prices on the fly. They're programs that change pricing on the fly. I mentioned airline tickets earlier. The airlines is where this goes on all the time, depending on supply and demand, depending on time of day, depending on day of the week. Airlines are c...

onstantly changing prices on tickets, and you know, if you're a frequent traveler, you know the ins and outs. You know book your flight on Tuesdays or Wednesday afternoons. Oh gosh, I forget all the rules, but you know, and you know. You know when it's time to buy. But for the more casual traveler, who's not up on all the travel hacking rules, they don't know and they don't notice. And that's the other part of pricing and changing prices is that you are always the one paying the most attention to what you charge. No one else is paying nearly as much attention to the prices you are charging for what you offer than you. So you know, while there are people who may have added your necklace or added your coaching to some sort of wish list, you know, most of the time they're not going to notice if you're experimenting with pricing, if you've raised a price just to see what will happen or if you've lowered a price just to see what will happen. And so just like choice and just like the micro-business earning plateau, the theme that you're gonna continue to hear about through the next 2 1/2 days at this point, experimentation is another theme you're going to hear about from me all the time. And so while I'm gonna talk about some good rules, some good guidelines, some just good strategies for when to know if you need to raise or lower your prices, and then how to go about doing it, the bottom line with when to raise or lower your prices is that you need to experiment. You need data. You need information. Remember, the biggest problem or the biggest reason that people lack confidence with pricing is lack of information. You need more information constantly. So while I wouldn't suggest constantly raising and lowering your prices, a la the airlines, what I would recommend is that you do every so often do a little experiment. Figure things out. See how people value what it is that you do, what the work is that you create. An example of this is gosh, nearly four years ago now I wrote a little Ebook called The Art of Earning because I had learned all of these money lessons, money mindset lessons for myself that I wanted to share with other people and it's a collection of essays on changing your money mindset. But it occurred to me that I didn't know exactly what to charge for this. Part of the message of the book is charge what the work is worth, charge what the going rate is. And I knew I could actually charge quite a bit of money for this book. And at the same time, I wanted as many people to get it as absolutely possible. So I chose to experiment with a pay what you want model or pay what it's worth model. I set a suggested price, and said, "Hey, you can pay me whatever you want for this." Well, you can pay me whatever you want down to $5 for this. And I've been running that experiment ever since. Something really interesting happened about two years ago. When it started off, you know, people were paying the full range of things, but the average price was about $11. I noticed about two years ago that the average price had jumped up to about $14. Now I haven't done the math real recently, but I would imagine it's about the same thing. Most people pay $15 for that book, even though the suggested retail is and they could pay as little as $5. So that helped me immensely when I went to release The Art of Growth, which is one of the purchase bonuses for this workshop. I priced it at $15. And lo and behold, that was a great price for that package. I think it was both accessible and it said something about hey, it may be a small investment but this is an investment in your business. So I'd highly recommend experimenting and getting the data you need, the information you need to be able to make better pricing decisions. Now, that said, when do you need to change your prices? I've got four main reasons you need to change your prices, and then like I said earlier, I asked a whole bunch of other people to tell me when do you know you need to change your prices? So first, you need to change your prices when they're no longer sustainable. And I'll get into what that means in just a little bit. But you know, are these prices keeping the business up? Are they keeping you flowing? Are they keeping you paying the bills? Are your prices no longer sustainable? That's a good time to change your prices. The next one is when you need to tell a different story. We spent the whole last hour talking about the story that your prices tell, and all the different ways that story gets told. Sometimes we need to raise prices because we need to tell a different story. That could be related to our customers. It could be related to our competition. It could be related to our experience. You know, things change all the time. Sometimes we just choose to tell a different story. You know, early on in my business, I was working primarily with the craft and maker audience. And I made a choice to make a change to a more service provider clientele because that's what I was more familiar with. That was more of-- I had more experience in that market and I was more interested in that market, frankly, at the time. So I made a change in that story and my prices needed to change to reflect that change in story. Another reason you may need to change prices is because they're out of alignment with your other prices. So you may need to change prices because a price on a current product is out of alignment with prices on other products. Having a viable product spread, having a product spread that makes sense, and a pricing spread that makes sense is important and a lot of times, you know, that's one of the first things I should-- I look at, I should say, when I start working with someone, is what are all the different prices for the things that you offer? Do they make sense to me intuitively? Do they make sense to me experience-wise? What's the story that the whole spread is telling? And does it make sense? And then finally, you need to change your prices when they're not connected to the value of what you're offering. When what you're offering just doesn't make sense with what you're charging. You know, you may be paying the bills. You may be telling the story you want to tell. It may fit into your pricing scheme the way you have it. But if it's not connected to the real value of what you're offering, you need to change the price. 'Cause probably it's not telling the right story actually. But whatever. So make sure that your prices are connected to the value of what you're offering. So maybe think right now about the products and services that you have out for sale right now, the things people can see. Are those prices sustainable? Do they need to tell a different story? Are they in alignment with the-- You know, are all the prices in alignment? Do they make sense, do they work together? And are they connected to the true value of what that product or service offers? Let's break this down a little bit more. So, the question is sustainability. Are you prices sustainable? Do they cover your regular overhead? Overhead are all those expenses that just happen. They are your office rent, which includes your home office, remember? That's part of having a home office is running a home office, and there's electricity and there's water and other utilities, your internet cost. So even if you have a home office you have office expenses, right? When was the last time you added that stuff up? When was the last time you thought about what the real overhead of your business is? Other overhead might be what it takes to sustain your web office, so like your website. I just had to up my web hosting package dramatically, and I've just added another 100, $150 a month in web hosting expenses that I didn't have before. That means I need to rethink what my overhead is a little bit. That's a pretty, you know, for an online, minimal type of business, that's a big added expense every month, and I need to make sure that the prices that I have are covering that overhead. So just think about all of those just to be in business expenses that you have. Your prices must cover your regular overhead. Here's another thing they must include to be sustainable. They have to have profit built in, and that profit needs to be what can be saved for future expenses and investments. Here's what profit isn't. It's not your labor. It's not your labor. Megan Auman, who made my amazing leggings, is really good at explaining this. Profit is not what you take home. Profit's not what is left over. Profit is what goes for future expenses and investments. It gets held onto because it's worth something to your future, all right? So are your prices sustainable in terms of profit? Now let's talk about the labor. Do your prices pay your living wage? Earlier we talked about the way you want to live your life, how many hours a week you want to work. What's that ideal life look like for you? Do your prices currently pay your living wage? Here's another one that's a little crazy. Do your prices include room for labor other than your own? Do your prices include room for labor that's other than your own? So do they take that into account? Do they take into account the labor that your VA puts in on a weekly basis? Do they take into account the production assistant that you have, or the-- You know, maybe you get pieces cast or you get them micro-manufactured at a factory down the road. Is that extra labor taken into account in your prices? That goes a really, really long way to sustainability. A lot of times I hear from people, "Tara, I really just don't have enough time for this, for that or the other thing." And you have to ask the question, okay, well, what in your business could be done by somebody else? Could you outsource production? Could you outsource social media? Could you do this, could you do that? And they say, "Well, no, I just, I don't have the money for that." Which is why, very early on, or from the beginning, you need to build in room for labor other than your own. You need to be able to deliver your service or sell your product for a price that pays you, pays profit, and could pay somebody else. It doesn't need to be a one to one. It doesn't need to be for every dollar I make somebody else needs to make a dollar. It doesn't have to be that, although it could. But you do want to factor in that extra expense of labor because you aren't going to be able to build freedom into your business, which is something we've heard from just about everybody. We want to work less. We want to be able to escape more. Escape in a positive way, not in a negative way. We want to be able to be out and about. Well, that requires labor that's not yours, and so you have to build it into your pricing from the beginning. Another thing that makes pricing sustainable is that it respects supply and demand. And that means that you're not getting so much demand that in supplying that demand you go out of business. All right? And this is a very common problem. You get in a magazine, you get on a hit website. You get on the Today Show. Suddenly your supply, or I'm sorry, your demand goes through the roof and you haven't built a business that allows you to scale to supply to that demand. All right? That doesn't just go for physical goods businesses, either. It absolutely goes for services businesses. In this case, if you don't have the time to put into your business, you can't supply the demand. Do you want to be a business that's booked six months or a year out in advance? Maybe you do. I think most of us don't. I think that's an accessibility thing that we want to be able to offer. We want to be able to serve people when they want to be served. So do your prices mean that just the right people are getting through so that you're filling your calendar a month in advance, two months in advance, and not six months or a year? All right? So that's sustainability. Cover your regular overhead, include profit for investment and expenses, pay your living wage, afford to pay somebody else and respect supply and demand. Any questions? No? All right, let's talk about telling a different story. You need to tell a different story if you're attracting the wrong kind of customer. So early, I believe it was Christina mentioned that she was attracting a kind of customer who said, "Oh, no, no, I can't afford that." Well, you're attracting the wrong kind of customer. It's time to attract a new customer, and changing your price can be a great way to attract a new kind of customer. I also said when you price one kind of customer out, you inevitably price new customers in to your market, and changing your price can help you do that. And remember, I'm gonna talk about all of this stuff in terms of raising prices. All of this also goes in terms of lowering prices as well. You know, most of the time, the vast majority of the time, I need to tell people to raise prices. So that tends to be where I talk about things from. But every so often, there's somebody who's like, "Yeah, you know what, we could lower this price." You could sell more, you could do this, you could do that. It would work out better, so do keep that in mind. You need to tell a different story if you're misrepresenting your experience, craftsmanship, or level of service. And in this case again, I'm talking about raising prices. I'm not suggesting that anyone is misrepresenting their experience in that they misrepresent it too high. Again, the vast majority of people don't really take into account their full level of experience. You know, I talk a lot about the fact that I don't have a business degree. I don't have formal business training period. My background is in religious studies, and that has been some experience that I've had a hard time owning over the years, but absolutely it makes me better at what I do. In fact, it very directly relates a lot of the things that I'm teaching you today, tomorrow, the next day. And so I want to be able to represent that experience. I want to be able to own that experience, and pricing is one of the ways I can own that experience. Again, I mentioned that if, you know, if I see an abnormally low price, my first instinct is well, what's wrong with it? So if your craftsmanship is top-notch, but your pricing, along the lines of people whose craftsmanship is not top-notch, that's a problem. It tells the wrong story. You need to tell a different story if you've been putting your product in the wrong market. If it's in the wrong conversation, if people are talking about it in a way that doesn't make sense to you, that isn't where you want to be. Again, it doesn't have to be positive or negative. You can just want to make a change. So who are your competitors in the market that you're in? Who are the other brands? What are the other brands that people mention in the same breath as yours? If they're not who you want to be mentioned alongside with you may need to change your prices to get into a different market, 'cause you need to tell a different story. And then finally, you need to tell a different story if your prices are mismatched with your customers' values. Ooh, I'm missing an apostrophe there. Mismatched with your customers' values. There was a time in Philadelphia a couple years ago when I went into a brand new coffee shop. I ordered what I always order, the soy latte. And the price was, I want to say it was $4, $4.50, something like that. It was a good dollar or so less than I was used to paying for a very similar drink, and I was in a much hipper spot than I would normally buy coffee, at the time. And on top of all of this, so one I was a little like, "Really? That's all you want from me?" On top of all that, they also had a minimum transaction fee for credit cards, and all I ever carry with me almost is plastic, right? Normally my drink would have met that minimum charge, okay? So normally my drink would have been over $5, and in this case it was under $5, and so I was like, "Um, um, um." And I had to buy all this other stuff so I could use my card and, sorry, rambling story, but the point is my values are such that I expect a soy latte to be a certain price, and that certain price is over $5. So that was really jarring to me, and when you jar your customers with your prices, you leave them with a bad taste in their mouth, and so that's an opportunity to tell a different story. That's an opportunity for that coffee shop to charge me $5.25, $5.50 for that drink, and to get rid of the silly transaction minimum for credit cards. Yes? Okay, that's telling a different story. Next question is are your prices out of alignment? Remember prices are relative. We expect to pay different things. We expect different prices for different things. Duh, but it's kind of natural to us, when we just go to the mall and go shopping or when we go downtown and go shopping, and we expect earrings to be priced differently than necklaces. We expect shirts to be priced differently than pants. We expect a cut and color to be priced differently than just a bang trim. But when it's our own pricing, we often lose sight of how prices work together, about how prices tell a story about the other prices that we have. And so you gotta make sure that your prices are relative to each other in a way that's telling the right story, that makes sense. So do a quick gut check with me. Do the different prices for different products and services in your own businesses make sense? Does the product spread that you have make sense? So for instance, in my own business, I have a kind of mastermind level program where I work with people almost one on one, but also in a group of 15 entrepreneurs. So they get one on one interaction with me every single week. I answer their questions, I'm available to them, and they get the benefit of working in a community and making those connections. That program costs $2800 for four months. I have another program that there's, honestly, it's pretty similar content. It's good stuff, there's great exercises, and people get to interact with me, but they don't get one on one support. They don't get access to my inbox. They don't get, you know, all these things. That's $39 a month. There are people who have a very, very strong value for that high end thing. They want that support so bad, and rightly so, and there are lots of people who have values for DIY. I want to figure this out myself. I just want to know that you're there to answer a question every so often, or that you've got the right tool for me. And so that product spread helps people make a choice. It makes sense that I've got this way up here and I've got this way down there. It makes sense. Do your prices make sense? And here's the other thing. Do your prices help your customers actually make a buying decision about what's appropriate to them? You know, I just mentioned I've got some clients who really, really want that one on one, hand holding support. They want to feel like they're making big changes in their business and I am there for them. And then there are other people who really prefer to go it on their own. The difference in price helps guide people to the decision, the buying decision that's right for them. You can do the same thing in your business. Let's say it's a jewelry business. I always come back to jewelry 'cause there's so many of you fabulous jewelry designers out there. You can have the same product in four different materials. At the bottom, there is a, just a super affordable, super accessible version of a product, and that's great for people who just want the style. They just, they've got a whole chest full of earrings, or a whole closet full of clothes, whatever. These are people who are constantly switching different things out. And then you've got people who have values for really high end, really great materials. Those are the people who are going to gravitate toward that high end stuff. And if you give people a nice enough spread, you can pull that all off, because those high end pieces are going to attract those right people and help them make a decision and those low end pieces are going to help other people make the right decision for them. Make sense? Cool, last one, let's talk about value. So does your price help represent the way your customer uses a product or service? Do your prices represent the way your customer uses a product or service? In other words, what's her relationship to this product? Is it an everyday piece? Is it an only special occasion piece? Is it only when my world is collapsing that I call you? Or are we checking in on a daily basis? Or on a weekly basis? How do your prices help your customers understand how she's going to use this product? Do your prices help make sense with what result she's getting from it? So in other words, what does it mean to her? What does it mean to her? What changes does she experience, or what changes does he experience because he's using this product? Or because he's learned something, or because it helps him see himself in a different way or it changes his behavior? Those are all results, so you know, results are very relative to price. I want to make my prices such that I can back up the fact that I'm going to teach you how to design your own website. So a website costs, let's say $5,000. Is it worth you to pay $ to learn how to do a website? Sure. Would you buy a $30 product that taught you how to build a website? Probably not, because it doesn't make sense. When there's that big a spread, it just doesn't make sense. It doesn't make sense with the value your client is going to get. So it's a harder sale. And is it relative to other ways of achieving that result? So that same example, or you can think about that same example. Is a $30 book or a $30 program relative to getting someone to do a website for you for $5,000? No. It may be a great book. It may do everything it says. It may really actually teach you how to build a $5,000 website. But people don't believe it. And they're going to assign less value to it, which means they're probably going to get a lesser result. So pricing can help us relate what the story of the value is of what we're offering. And if you're experiencing it all where customers come to you and they say, "Well, I didn't know I was gonna be able to do this and this and this and this when I bought this product. I'm so glad, what a surprise." That's a good indicator that you need to make a change here. That's a good indicator that you need to talk about your product differently, and that you need to price your product differently. People shouldn't be surprised at the value that your prices, that your products are delivering to you. It should be expected. It should feel good. They should feel savvy, they should feel victorious on this buying decision, but you don't want them to be surprised. Okay?

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