price raises and snakes shedding skin

Summary

raising prices is one of the most uncomfortable things you’ll do as an owner. I’ve done a lot of them. I’m still nervous every time. here’s how I think about when, why, and how.

1. three reasons to raise prices. one, you undervalued from the start. two, your costs changed and the math no longer works at a healthy margin. three, you have too much volume and you don’t want to scale headcount, so price filters demand.

2. the snake shedding its skin. you’ll see a drop in conversions for a window. you may see a temporary revenue dip. some current customers will leave. that’s the skin coming off. on the other side is a healthier business at a better margin. expect the discomfort, don’t panic in the middle of it.

3. don’t let the 5% who leave speak for the 95% who stay plus the new customers at the new price. founders fixate on the people who walked. those people were never going to be your best customers anyway.

4. grandfathering. on continuity programs, lock existing members at their old price. it helps retention a little, but the real retention lever is always the product being amazing. price is the cherry, not the cake.

5. the stair-step-down. some businesses surprise long-tenured customers with a lower price each year because the cost to serve drops as they get easier to support. churn craters. has to fit your model. interesting if it does.

6. don’t race to the top. if you’re undervaluing, raise. if you’re charging what you’re worth and it’s profitable, wait. entrepreneurship is long. you have time.

if raising prices when you’re undercharging is too uncomfortable, try harder.

Transcript

why raise prices

The most impactful business is the business that genuinely improves another human, a better human business. And to grow a business like this, you have to continually improve yourself. This podcast is a documentation of that thesis, scaling businesses and also personal growth. My goal is for you to shortcut this journey.

So if you’re ready to try hard, subscribe. If you like what you’re hearing, please share and enjoy. Welcome to the Better Human Business Podcast. I’m Jerred Moon, and today I’m going to be talking about raising your prices of whatever your product or service is, and then also some other considerations you want to think of if you have existing members, recurring services, continuity programs, things like that.

So the first thing is, why would you raise your prices? Why do a price raise? And is it important? I’ll give you an example. Garage Gym Athlete has been charging $25 per month for its service since the day it launched until today, and we’ve never done a price raise. But in other companies, I’ve done price raises.

In more individualized fitness coaching, I’ve done price raises. In PT Biz, we’ve done price raises. I’ve done price raises in a lot of different areas. For one-on-one consulting, I’ve done price raises. So why would I leave, if I’m okay with price raises, it’s not something I’m scared to do, why leave Garage Gym Athlete the same?

Ultimately, you have to know what your product or service does, what market it is geared and catered towards, and honestly, what’s fair. The market will only pay so much for any given product or service. So let’s dive in a little bit more. So why raise your prices? The first thing that could happen if you’re new to entrepreneurship is you might just realize that you made a mistake, that you were undercharging.

Either you were undervaluing your services and you’re like, I would just be happy if someone came to see me or bought my product. I don’t care if they pay me $10. Like, I would just love to have a paying customer. And that’s where a lot of entrepreneurs start. You just completely undervalue yourself.

You don’t charge enough. And I get it, and you might have to start there. I don’t even, like, necessarily fault that because I feel like it takes reps and confidence. And then once you, hey, I’m really good at what I do. I have a great product or service. I should charge more. Then you can do that.

the snake shedding its skin

That’s normally the first reason and what I see being most common is that you just undervalue yourself, undercharge. But the other thing could be that you actually made a legitimate mistake. And this can happen later in business to where you are keeping your prices around the same, but maybe you hired some additional staff.

You included some additional services. You started to incur more costs, and you never did the math to find out if this product or service by itself as a standalone is still profitable. And if it is profitable, at what profit margin? So sometimes that can happen to business owners, happened to me, where you’re like, ah, crap, this is still profitable, but it’s not the profit margin we would want to have and maintain a healthy company.

And so you have to raise that price. So it could be a mistake. It could be undervaluing. And then another reason you might want to do a price raise, and this would be a situation in which a problem that would be really good to have is if you have too much volume and you can’t scale. And so this would be like an individual, for instance, if I was taking on individual coaching clients for fitness and performance and things like that, and say I didn’t want to scale.

I didn’t want to hand that out. I want to do it. I want to coach the people. I’m not looking to have seven coaches underneath me, all that stuff I’m talking about. I don’t want to scale. Then I would just keep increasing my prices until more people started saying no, but the right people were saying yes, if that makes sense.

So if I was like taking individual clients at $50 a month and everyone’s like, hell yeah, I’m going to do that. I get an individual coach for $50 a month and I’m like, okay, it’s $500 a month. Then half those people don’t want to do it anymore. And then if we go up to $1,000 a month, then you’re going to have to look at that.

So if you’re doing $1,000 a month, then maybe more people quit. So you just keep increasing your prices because you’re getting too much volume essentially. So that would be the other, really the last one I think you do price raises. So either economics, too much volume, you’re not looking to scale or you undervalue, you’re undercharged, something like that.

So then you’d want to think about raising your prices. But then when we have people do a price raise or we do a price raise, there’s always this super uncomfortable period where you’re like, is everything going to break? Is the business going to stop working because I’m charging more money for my product or service?

grandfathering existing members

And you will go through a period most likely, especially if there’s sales people involved because it’s a new price, a new price point. And even if not, there’s still going to be some bumps in the road. You have to know that’s normal. Anybody doing a price raise, I want you to know that it’s normal.

You might have a drop in conversions. You might even have a temporary drop in revenue. But ultimately long-term after you shake that off, it’s like a snake shedding its skin. It has to go through this process to get the skin off. But after the skin is off, it’s a new version of itself and you can leave the old one behind and you don’t have to think about it anymore.

But that process of shedding the skin is very uncomfortable and you will get some drop off. So you’ll have current customers, if you’re raising the price on current customers, you’re not like grandfathering them in or anything, and I’ll talk more about that in a second. Then you might get some people who are like, I’m not coming back.

I’m not doing it anymore if you’re raising the price on me. And that’s okay to a certain degree. You don’t want to see massive drop off. You raise your prices so much, you lose 50% of your customer base overnight. That’s fine. But if 50% of your customers are like, I’m not going to do that, it’s too expensive.

Don’t let those 5% speak for the 95% that are still happy to pay the higher prices plus all the new customers that you’re going to get at this new or higher price point. So don’t focus too much on the negative when you go through a price raise and do know that there are going to be bumps in the road as you raise prices.

Now a couple of other things, if you do have a continuity program, monthly membership model, anything like that, other things to think about. If you’re raising your prices, and here are things that we’ve done, typically like to grandfather people in to whatever they signed up for originally. I do this to keep people round, but then also letting them know that prices have increased.

They know that they’ve been grandfathered in, so if they leave and come back, it’s going to be more expensive. It’s more of like a retention tool. It’s not an amazing retention tool, so don’t think that you’re a genius if you did that. It’s just a little bit of a retention tool. Your product or service still has to be absolutely amazing for people to keep coming back.

the stair-step-down approach

That’s always going to be priority number one. Someone saying, oh, I’ll stick around because I’m paying a little bit less than what I would be, that’s not going to keep someone around. It’s going to be like, hey, this product or service is amazing, and if I leave and come back, it will be more expensive.

That has to be the thought process, not, ah, do I want to leave because it will be more expensive later? People don’t care that much. They would rather cancel the expense if your product or service is not amazing. Another thing that you could do, I’ve seen other companies do this. I have not done this one, but I think it’s an interesting strategy, is surprising people with a stair-step-down approach the longer they’ve been a member.

I read a book about this where they had, it was a membership model for triathletes where your first year was the most expensive because of their coaching involved and everything, but it became a little bit less work each year, subsequent years, for the actual staff. Because the staff wasn’t having to work as much to maintain these athletes, they actually reduced their prices.

They would reduce their price each year, but it wasn’t a sales tool. It wasn’t something you pitched at the beginning, like, hey, stick around for a year, and then we’ll charge less next year. It was more a surprise at the next year. They would let them know we’re reducing our prices for you specifically, and they didn’t necessarily let them know it’s because it’s costing us less to fulfill and all those other things.

You’d have to really make sure this works with your business model, but it’s something I’ve always been fascinated in and thought I should try because they had some amazing numbers behind it. Their churn, the number of people who quit, was astronomically less than what the industry standards were, and that was the one strategy that they implemented on top of having an amazing service, an amazing product.

You always have to have that in place, but I always like the stair-steps-down approach, and then the grandfather approach. Now, you don’t have to grandfather people in if you’re doing a price raise. It’s just something I recommend if you have people on the monthly recurring or something like that. If you’re selling one-off things here and there, like a program or a visit or something like that, then I typically would just increase the price on everybody because it’s one-off.

In that case, I wouldn’t be like, oh, you’ve always been a customer, so I’ll keep selling you my widget at $5 instead of $10 because you’ve been a customer before. That’s not how I would do that. It’s more if somebody is already locked into a plan, I would keep them there, keep my product or service the same, and try and keep them around for as long as possible.

don’t rush it

That’s basically all the stuff I want to cover on price raises, considerations, things to think about pricing-wise that can keep people around beyond just keeping your product or service amazing, so things to implement. I know price raises are very scary. I’ve done a lot of them. I’m always a little bit scared when we do them.

No matter how many times I’ve done them, there’s always a little bit of hesitation and, oh, crap, did I make the right decision? But ultimately, it ends up being better for the company, especially after you do the math. But I will say, don’t just raise prices to raise prices. If you feel like you are charging what you’re worth, the company is profitable, everyone’s happy, maybe just wait, okay?

Because if you’re a newer entrepreneur, you’ve only been doing this a couple years, there’s plenty of time left to raise your prices. You know what I’m saying? You don’t have to find out where the threshold for the market is because there will be a threshold for your product or service, no matter how good you are, because if you become too expensive, you’ll price yourself out and they will just shop for someone else.

So never think that you’re God or you’re invincible or that you are just the most amazing ever and people will never leave. That’s never true. People will always leave if it gets too expensive. Doesn’t matter how amazing you are, they’re going to start shopping around if you get too expensive. So if you are newer, you’ve only been doing this for a couple years, don’t race to the top and see, hey, how far can I take this before people start dropping off?

Charge what you’re worth, make sure it works in your company, and then wait. Wait a year, wait two years, wait three years, then start bumping those things up. Life is long, entrepreneurship is long, we can do these things over longer time periods, you don’t have to do this all right away, but if you’re undervaluing yourself, you’re undercharging and you’re having to do twice as much work to get the same amount of money, it’s probably time to raise your prices and it’s uncomfortable, but you need to do it anyway.

If it’s too uncomfortable to raise your prices when you’re undercharging, maybe you should just try a little bit harder.