Charging a premium price can mean the difference between effectively making minimum wage and living a rich life. After increasing my price, my profit jumped from $90,000 to $1.5 million!
Originally posted on Inc.com
That eye-opening moment …
That moment when you add up all of the hours you’ve worked over the life of your business, and you come to a scary realization:
You could’ve made more money working at McDonald’s or in a basic office job!
If you’re an entrepreneur, you’ve probably had this realization at least once. (Maybe you’re even experiencing it right now.)
This is the dark side of entrepreneurship that few people actually talk about.
Despite what you read in the media about entrepreneurs living lives of passion, purpose, and prosperity, the opposite is true more often than not.
There’s a simple way out of this Walking Dead cycle. It’s so obvious that I’m surprised it’s not talked about more …
Increase your price.
The Simple Change That Almost All Entrepreneurs Should Immediately Make
Undercharging is one of the main reasons that entrepreneurs end up in the Walking Dead vicious cycle. Yet a surprisingly large share of entrepreneurs undercharge (27 percent to 57 percent, depending on the source you use).
I started off my career failing because I was undercharging. I remember the exact moment when I realized I would have actually made more money per hour if I had just stayed at my bartending J-O-B that I hated. From my trial and error over time, I figured out a way to 100x my price. As a result, my profit jumped from $90,000 to $1.5 million.
It is hard to overstate how big that jump is. It’s the difference between saving a few thousand per year and living a middle-class lifestyle, and living a rich lifestyle, never having to worry about money, and saving more in one year than most people save in a lifetime. It means being able to hire a world-class team and working fewer hours; I only work 20 hours per week.
Here are six real–and surprising–reasons, from my business experience and academic research, that you should raise your price today.
Reason No. 1: It Allows You to Buy Traffic and Scale Your Business More Easily
We live in an amazing time. You can precisely target the people who are the best fit for your product or service and send them a message in the form of an advertisement.
Buying traffic is amazing, because it’s so easy to scale. Once you have a funnel that works, when you want to grow your business, you just have to buy more ads.
Would you rather get a steady, scalable stream of qualified leads like clockwork using the same ad over and over?
Or would you prefer to keep beating on doors every day just to get new leads?
I pay $40 to $50 for every potential client that books an appointment with us.
I gladly pay this, because my programs range from $5,000 to $25,000, and one out of every 12 leads turns into a sale.
Reason No. 2: A Small Increase in Price Often Leads to a Larger Increase in Profit
Let me illustrate this through a simple hypothetical example. In this case, doubling the price multiplies the profit by 11 …
The same principle applies across companies of all sizes. For the average S&P 500 company (one of the 500 largest U.S. companies), McKinsey estimates that a 1 percent increase in price would increase profits by 8 percent.
Reason No. 3: Charging 10x Doesn’t Require a Significant Change to Your Business
To justify a 10x price increase, you don’t need to invest 10x in your product.
Small, strategic tweaks can create exponential growth.
As I explain in Use This Strategy to Get 5 High Paying Customers in Just One Week, you just need to tweak these three things correctly:
- Update your service’s value proposition to potential customers.
- Streamline your product to deliver on that value proposition.
- Target the most profitable customers in the sales funnel.
Reason No. 4: It Attracts the Right Clients
In many ways, your price determines whom you attract. If you raise your prices (especially 10x), you will attract people who value their time so much that they are willing to pay a premium price to have their problem solved.
Lower prices often attract a do-it-yourself market who pride themselves on minimizing their costs even if it means sacrificing their time.
A more profitable customer can mean the difference between a $20,000 business and a $2 million one.
Reason No. 5: It Gives You a Margin for Error
It’s impossible for us to predict all of the things that will happen. Unexpected problems occur. Markets change. Employees don’t work out. The only thing that is sure is that something will probably go wrong.
The result is that things always take longer than you think they will.
When you have a razor-thin profit margin and a project takes too long, you lose money on each customer.
This is the sad reality that many entrepreneurs find themselves in.
They’re working themselves to the bone to lose money. That’s when you start wondering if you should’ve taken a job at McDonald’s.
Why go through all of that agony?
Having premium pricing allows you to still be very profitable even when unexpected things happen.
Reason No. 6: People Will Value the Product and Brand More Highly
We tend to evaluate higher-priced products as better quality. This is otherwise known as the price-quality heuristic, a mental shortcut we use to assess a product.
Even the taste of food can be enhanced when you change the price. A study of 140 restaurant buffet diners showed that people who paid $8 rated the buffet as being 11 percent better than those who paid just $4. That’s double the price, and they liked the food even more!
When you don’t make the profit you want, what do you do?
Most entrepreneurs take the hard way …
They raise capital.
They work harder.
They get more customers.
In my experience, for nine out of 10 service-based businesses, these are all the wrong approaches, because they don’t solve the fundamental problem.
The core problem is often not charging enough!
The beautiful thing is that this also happens to be the easiest solution.
For my step-by-step process on how I raised my price 100x, read Use This Strategy to Get 5 High Paying Customers in Just One Week.