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If you want to make more profit than 99% of businesses, you need to nail pricing.

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Optimizing pricing has a six times stronger increase on profitability than getting more customers

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and two times stronger increase of profitability than decreasing churn or getting people to buy more

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times. It is the strongest way for businesses to make more money. In this video, I will walk you

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through on each page that I turn a new concept that you can apply to your business that will make

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it more profitable via pricing. If you don't know who I am, my name is Alex Ramose, I own

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Acquisition.com. It's a portfolio of companies that is over $200 million a year and these videos

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are to help you show what we do to grow our portfolios so that you can make lots of money and then maybe

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someday we can invest your company. Otherwise, enjoy. I take a weekly call with school

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communities in the school group and I had like three or four guys who asked me questions that I was

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like, these are not like Alex questions. These are math questions that you can just simply solve

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by doing math. It's like, should I do this price or this price? It's like, well, what's the

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conversion of this one versus this one and then what's LTV on this one? It's just you just solve

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the math problem and I think a lot of businesses are not using math to solve their problems and with

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pricing being one of the largest levers for making money, not one of it is the largest compared to

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getting more customers, increasing how many times people buy and pricing is still a three times

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stronger lever on profit versus the other two. Let's talk about five concepts of pricing that

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will make you more money. The first one is something that I like to call the price to value

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discrepancy. If we imagine here as the value, this little first red line, this is the value that

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the person gets. This is our price assuming that our price doesn't change over time. Now, if our

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price doesn't change and the value does, when will people cancel? Here, when the price and the

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value are matched or when it's underneath. This is our sad face as business owners because we're

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like, oh my god, I thought that I was making all this money. The thing is that there's a third line

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here that is probably worth understanding and this is our cost line. Ideally, you want your cost

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to be here, your price to be here, so this is your profit. Then over here, this is your,

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something called customer surplus, which is just a fancy word of saying goodwill or the value

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that people are getting net of the price. Ideally, you have really high value, you've got a price

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that's still high relative to your cost basis as a business owner. This is the fundamental

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surprising individual. Now, one of the things that I see as a mistake is how does this occur?

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How do we go from having lots of value to not having lots of value? Well, let me explain.

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So with one-time value versus consumable value, which is I like to think about it, all right?

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So the reason that you have those big discrepancies is that usually you don't understand the value

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that you are delivering to a customer, meaning if I say, hey, let me give you this course on

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building websites, whatever, right? Then as soon as you learn how to build websites, the value

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of that course drops to zero. You already have the skill. Like the day before you needed to learn how

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to do arithmetic, arithmetic is super valuable. The day after you learn it, it has zero additional

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value. Now that doesn't detract from what the initial value was, it just no longer has value.

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And so what most business owners should do, but don't do, so this is me telling you that you

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might want to think about this, is differentiating the value that you have in your business between one

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time and consumable or recurring value, all right? So let me explain. So let's use that example

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of the websites. So my little course on website building is something that would be one-time value.

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Once you have it, that's it. There's nothing else. But what are all the things that I might have

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in my business for website building that someone is going to consume this month and next month

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and the month after? I might have a community that's associated with people who are trying to build

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pages. That's something that I'll use this month and next month. I might have accountability.

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If I have somebody who's going to help me build it, right? Accountability slash support. That's

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something that I'll use this month and next month, right? I'll have access to those things. What

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else would I use? Probably website servers to host my site, right? I'd probably use software to

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host my site. I probably, what else would I use? I might want ads help, right? That I would use on

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a monthly basis to help optimize my ads, right? And so the big thing here is that we have to look at

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services we provide and this is especially true with education people because they have lots of

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one-time value and very low recurring value is thinking am I pricing these things appropriately?

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So hear me out. I think that a superior pricing model better matches the price to value discrepancy

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that you're shooting for on a regular basis. So it would make sense for me to charge more here,

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right? My price to be higher here and then it would make sense for my price to be low or over

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here. So I continue to have this delta all the way through, right? And so the question is how do you

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accomplish something like that? Well, what you do is you have something called a start-up or one-time

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fee which is associated with the thing that has one-time value and then you have a lower consumable

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or recurring billing thing that's associated with the consumable or recurring value. And this is

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fundamentally why I think there's so much churn in the media or education or information space

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is because people don't differentiate between those things but your customer sure do.

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And so the customer says, well, you want me to pay $1,000 a month for this course but I already

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learned how to do this and you want me to keep paying for it for 12 months even though I already

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went through it. Now you might make the argument, well, it's worth $12,000 but you know what?

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As far as they're concerned, today it's worth nothing. And so this is why I like having this

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perception of I have a one-time payment upfront that's higher and then I have a smaller payment

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that is done every month that reflects a price-divide discrepancy on these recurring consumable

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things. Now one of the things that people have a hard time with is realizing that this

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is significantly less valuable than this. And so what happens is that this might have to be $5,000

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and this might be $300 per month or $200 per month and that's okay. And so making sure that

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that price-divide discrepancy matches will allow you to have really long LTV on this side.

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And so in so doing, get way more LTV overall because people don't leave and if people don't leave,

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they keep paying, they keep paying, you keep making money. Okay, now that is the one-time value versus

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consumable valuable concept. This is the big headlong tail which I talked about in my offers book

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in more depth and I think a lot of businesses are going to start switching to it. They already are

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the way that this is done in the info space is people sell a course and then they have continuity

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or community on the back end and you sell it as one thing but they're just priced differently.

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So you pay $5,000 today but then you pay $X dollars per month over time. Okay, now if you were to

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switch to something like this, let me walk you through something that blew my mind,

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that might blow yours as well. So profit welded a really cool study on this would show the difference

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between monthly billing, quarterly billing and annual billing. Now you're like, okay, well,

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what's the point who cares? Well, you should care. Let me show you why. So if you build monthly,

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the average churn across all memberships is about 10.7% per month. It means if you have 100 people,

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you're going to have 89 at the end of the next month. All right, if you build quarterly,

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that churn drops to 5%. Okay, less than a half, literally simply by changing the billing cadence.

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Now what happens if you build annually? It drops all the way to 2%. Now you're like, okay,

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that doesn't seem like a very big difference. But let me show you how big of a difference this

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really is. So we can determine LTV by taking price and by the way, you all wanted more real business

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shit. This is real business shit. Okay, so you take price and you divide by churn and this gives

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you your back of napkin LTV. All right, meaning lifetime value, how much somebody's worth over time.

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And so that means that if my price is $100, all right, $100, and we'll use that for all three of

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these examples per month, all right. Now if it's $100 per month, here I'm billing monthly,

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here I'm billing $300 of recorder, here I'm billing $1,200 per year, all right, just to be clear.

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Now these churn rates are extrapolated back out to monthly. So if I have 10.7 percent churn,

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10.7, then it means that my LTV is somewhere in the neighborhood of like $950, somewhere there.

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Okay, now if I have 5 percent churn, my LTV is now $2,000. If I have 2 percent churn,

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my LTV is $5,000. Wow, so we went from $950 to $5,000, just by changing the cadence that we

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built. If you're listening to this and you're like, wait a second, if I made five times the money

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per customer, guess what that would do to my business, you bet it would five extra business,

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then you're like, okay, well, I'm going to do this tomorrow. Not so fast there, you know, fast

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thread. Let's talk about the other side of this. Two things real quick, one, if you like this stuff,

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the question that I was setting at the very beginning of this was from a school Q&A that I do. So

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if you're getting into business, you want to start a business, you can join the school games,

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30 percent of people make their first dollar online, very proud of that, if they finished

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the first month of the school game. So pretty cool there. If you already are a business owner and

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you like this more in-depth stuff in terms of like scaling the companies and increasing profit

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and EBITDA, we have workshops that we just started offering at acquisition.com at our headquarters

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in Vegas. And so if you want to see if you qualify for one of those, you can go to acquisition.com,

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hit scale, and hopefully we'll talk to you then. Conversion rates. And so think about it like this.

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Let's say you get a hundred clicks or at-bats or whatever to pitch this thick, right? Now before

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this used to say, hey, my thing is $12,000 and you bill a thousand bucks a month for a year.

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Okay, fine. Now the thing is maybe you close 20 percent of people on this. Okay, fine. Now let's say

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you have another hundred where you get on the phone and you say, for these guys, it's $5,000

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per year and it's up front. Now the question is, what percent- maybe you still sell 20 percent? I

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don't know. This is a testable proposition. But this is where it gets really interesting. Is that

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for everybody who knows that you say, hey, this is $12,000, this is a thousand a month for 12 months,

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we all know that this person cancels a month for. You know what I'm saying. So they cancel a month

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for five, which means the people are worth $4,000 to $5,000. Right? Now if you bill $5,000 and you

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bill it annually and you say, hey, you have to pay this up front, maybe you have the same closure

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because the price point is so much, the perception of the price is so much lower. But here's where this

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gets really interesting. Is that if we look at this 12 months later and we say, hey, what percentage

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of these people are going to renew, guess what the percentage is? Way higher. And that brings me

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to my next point, which I will reiterate back on this one, which is let's think about what the

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mechanism is that drives down this churn going from monthly to quarterly to annual. So let me tell

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you what it is, or at least my best thought of it. Is that churn, churn is directly correlated

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with frequency of billing. Okay, so here we are. If I bill you every day, the likelihood that you

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churn is going to be significantly higher than if I bill you every month. And I believe that that

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comes down to what I consider the look back window. So think about it like this. If I have a month,

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right, or a period between billing one and billing two, it doesn't really matter what this period of

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time is. On this point, I'm going to look back with my eyeballs and say, how much value did I get

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between this billing and this billing? Now, if I'm billing monthly, then let's say I'm an SEO

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agency and I make someone 10X their money on month one. Great. Month two happens. Let's say I make

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them one X. Guess what they're going to do? They're not going to think, oh, well, I 10X my money

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on month one. This guy's already paid for himself for almost the whole year. No, they're going to think,

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well, I got a good return last month and I got a crap return this month and so I'm going to cancel.

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It's about what have you done for me lately. It's about what have you done in the look back window

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between billing cycles? The reason that this frequency piece that I was mentioning earlier

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is so important is it extends the look back period. If I paid $5,000 a year to be a part of an

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association and then it comes up to bill a year later, then I might think to myself, huh,

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I look back over a year and say, did I make more than $5,000? Now, that 10X month is going to be

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included in the one X month and the next month that was a three X and the next month that's a one X,

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the next month that's a 15X. All of those months are going to be included and I'm going to be like,

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wow, this is a bang and deal, right? And so for that reason, extending the look back when

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new gives you a higher likelihood that people are going to renew and we already see that. It's five

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times more likely that people renew on a new basis. Now, you can make also the argument that someone

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can pay a fee upfront can also afford to do it. So they're not just scrimping by to try and

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barely afford whatever the service is. And so there's probably a number of reasons that annual

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does better than monthly or quarterly. But for me as a consumer, I think to myself,

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I think about what's this look back window and I want it to be as long as seemingly possible

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for someone to logically say, this makes sense for me. Okay, so from there, I have made a number of

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conclusions for myself that I'd like for you to consider, oops, that you can consider for your

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business. All right, which is the difference, this is kind of countering and marketing culture,

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which is originally you want to say you want to sell it for as much as you possibly can, which I

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used to preach and I don't believe that as much anymore. And I actually would much rather

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pitch something that I know they're going to continue to pay for, right? And so I spent the first

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part of my career trying to obsess about what gets people to stick, how to get people to pay

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again and again and again. And where I have switched to in my careers, I just look for things that

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people already don't cancel from. And then I just try and sell those. And so if I could do it all

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over again, I would only focus exclusively on things that people already don't cancel. So if you

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look at alarm systems and insurance and payment processing and banking and other things like that,

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you're going to find things that people in general don't cancel or switch from cable, right? Like,

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people don't switch from these things. Cell phone service, like these are things that people

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don't really switch very often. On the flip side, gym memberships is something that people cancel

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all the time. And that's a structural thing. People don't want to work out, but people do need

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insurance. People do need to watch television. People do need to use their phones even more. And so

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I would take all of my emphasis and say, why don't I just get into the right boat that I already know

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has really long LTV. And so that's something that I've just learned in time now. Now the other

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piece is I would strongly emphasize the point that I was making earlier about looking at quarter

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annual and monthly is that I would rather take less money on an annual billing and convert it

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the same percentage. So it's like if it's 12k for a year versus 5k paid up front for a year,

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I'd rather have the 5 because I know that my annual renewal rate will be much higher. So let's

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finish out this little equation here. So here, if this $5,000 is what I'm asking for someone to

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pay for a year, and we have this look back a year later, believe it or not, remember we have 2%.

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A lot of times this means you're going to keep 80% or more of the customers.

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And so all of a sudden, wait a second, remember we had 2% monthly churn, but this is a 5k thing.

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Well, that means that this price point would be 5,000 divided by 12. Can we do that math for me?

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That's 600 bucks a month, 500 for 600 bucks a month, 500 bucks a month, 465, 416, okay.

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So 416, all right, and then we multiply this guy by 50 because it's 2% churn,

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right, which means that you have, what is that? That's going to be 20,000 something.

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All right, don't worry, it's 2% churn, there you go. So this is 2%, which is equal this times 50.

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Same thing, equals 20,800. All right, the reason this is so important, the reason this is so

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important is that look at the difference between this 20,000 and this 4, 5,000 that we have here.

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Now, this means that a year from now, you're going to have 80 out of the 100 people still paying

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you and then they renew again. And guess what? If you keep selling at this rate, that means that you

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get all of last year's sales to stack on top of this year's sales. And guess what happens in the

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third year? You have last year's, the year before is and this year's that stack on top of each other.

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And so this is what creates a compounding business. And the vast majority, vast vast majority

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of small businesses do not understand this. And the reason that they stay poor is because they

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think that the only way that they can grow their business is to increase the number of customers

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that they're selling every month. And that simply is a very terrible way to live. Because the

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moment your acquisition channel, your YouTube channel gets shut down, your Facebook account gets

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shut down. You've got some sort of deliverability issue on your domains. If you're doing outreach,

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right, there's always something that can happen. And unless you have customers that plan on continuing

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to pay you over and over again, it means your business dies immediately. That's not a very valuable

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business. It's also one that's hard to sleep with at night. And so the idea is you want to find

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stuff that people don't stop buying. You want to sell the crap out of it. You want to sell it at

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a price point that you know they're going to continue to pay. You want to extend the look back

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window as much as you possibly can. So it increases the likelihood that they're going to convert.

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And you also have a bidirectional relationship between the price and the conversion rate. And so

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maybe you do get more people to buy a thousand dollars down than you do at five grand upfront.

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But on the flip side, five thousand dollars is less than twelve thousand dollars for the year.

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And so you're going to have two forces that are going to be working against each other.

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Now for me personally, I would rather have the much higher quality customer that's going to be in

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the most optimized billing cycle. And if I do think about this with my thinking hat, maybe I either do

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the big headlong tail, which is if I know my thing isn't tremendously valuable, then I might say

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my one time upfront that offsets my cost to acquire customers. And then I have a very small

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monthly billing after that that has a big price to value discrepancy based on the consumable value

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of my service or thing. Or I know that my value is high. And it is high on a recurring basis,

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but it's volatile, meaning some months it's big, some months it's not big. This is particularly true

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of things like ads or organic. Like if you have something that goes viral one month, it's going

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to make a lot of money for them. If it doesn't go viral the next month, and it doesn't, now some of

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these things you can't control. And so by having an extended look back window, it increases the

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likelihood that something good happens during that time period. It increases the likelihood that

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it will bill again in the future. And so the TLDR for you, number one, separate out one time

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versus consumable value. And then if you can do that, you can switch to the big headlong tail

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pricing model, which is one time upfront and then small recurring. The alternative is that you can

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consider increasing the look back window, right, between when people see value and when they get

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value, there's our little eyeball looking back, a lot of money. And so what we can do is trying to

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switch to annual to the best degree possible. And billing based on what you think someone is going

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to continue to pay for, what they're going to pay for on their worst month, rather than what you

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get as much as you can get them to say yes to today. And this is something that I've switched to

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over time. The third thing is making sure that you're in the right boat. And when I say that, what I

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mean is instead of trying to obsess about getting people to buy more times, go to stuff that people

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already don't cancel. And you'll be amazed at how much easier it is to do business and how those

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things stack on top of one another. By the way, if you're wondering why my eyes look back and forth

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between things, it's because I have three things I'm looking at. One is I have a bunch of notes

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because I do prepare these for you guys because I don't want to just like be off the cuff and just

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rambling. Second is that I do these with Instagram lives. And so those are on a separate camera

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than the YouTube camera. And I try to look at the YouTube camera, but I also have a hard time not

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looking at the audience that's on Instagram live. And so if you see my is darting back and forth,

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that's why. So now we'll transition to questions from the audience. The question is one is how do I

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know how to raise my price because of things like inflation? And how do I just raise my price in

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general if I've been in business for a period of time? All right. So those are two separate questions

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I'll answer each of them individually. So from an inflation perspective, every continuity contract,

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I would include a clause that says that you can match the CPI or the canino's consumer price index

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that allows you to map up the price with inflation. That's up to you. Now having that clause doesn't

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mean necessarily mean that you have to always do it every month or every year, but it means every

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two or three years you can just update your pricing accordingly. People don't like pricing changes.

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And so I would do it less frequently rather than more frequently. So that's number one in terms

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of inflation. In terms of thinking about one to raise prices in general, I encourage everyone to

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continue to raise prices until your conversion rate times price equal less money. Meaning if I can

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sell now again, this doesn't take into account a hard cost. All right. So I'm just going to assume

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that the cost of our thing is zero. Let's say it's a digital media thing just for sake of simplicity.

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So if I can sell, if I get on the phone with 100 people and I can sell 10 people at $10,000,

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I have a 10% conversion rate which means I make $100,000 from 100 calls. That's a thousand bucks

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of call. Now if I can all of a sudden get to 30% close rate with a $5,000 thing, then it means that

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I make $150,000 on those 100 calls. And so then I would make $1,500 per call. And so I try and level out

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the cost per or revenue per phone call or conversation so that I can understand what's the total amount

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of money that I'm making. So it's not necessarily about raising prices or lowering prices. It's about

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what is the total absolute amount of gross profit you can maximize. And so this is a math problem,

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not a Alex, which should I price it at problem. And I will tell you exactly what we do with every

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company, which is we just fucking test the price. And so we get on the phone and I will say this,

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it's way easier to go low to higher than high to low. All right. And so if you sell at a price that's

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more expensive over time, that works out okay. If you go the other direction, it can kind of suck.

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And so I think going up because think about it, you're like, yeah, well, that's what I was selling

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at last month. We have more demand now. We're better at our stuff. Like it makes sense. Like if you

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bought an Apple stock at 10 and now it's 20, like you're going to be upset, like in time, prices change.

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Now the flip side is when prices come down, if you are in that position, then the reason behind it

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would be useful to tell the other people, but usually you're going to have to downgrade those

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people if they're still in your business. Because if you did figure out some technological thing,

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which would be probably your big reason why it's like, hey, we figured out how to make this more

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efficient so we can lower the price, we pass the savings on to you. Then you have to pass the

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savings on to them. Otherwise, if you sold someone last month at 20K in this month at 10K, very tough

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if it's for the same thing. And so that's why I like starting low and then raising it. And then

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usually at the very end, I'm going to have to do tiny little adjustment of like, okay, I realized

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that I went over the hump of maximizing my profit. And so then I backstep and then I refund these

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people the difference where I give them a bonus. In practice, most businesses will have a monthly

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and an either or quarterly or annual. It's usually not one of the other and you'll probably know

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your avatar. If prepaying 12 months at a time is too arduous for them, then it might be better to

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just have quarterly billing as the primary way. And I would say that as I'm explaining this right

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now, you might be able to just get away with pure quarterly billing and not have monthly or annual,

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like you just do quarterly. And that might be a kind of a nice blend for a lot of people as like

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the middle ground. But it's very typical to have monthly at this rate annual at 16% less because

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it's, you know, by 10 get too free. And by doing that though, if you get people onto that annual,

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remember, you're giving them a 16% discount, but the likely that those people recur and the LTV

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on those people still might be 10 to five times higher than these people. So you take a 5x increase

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in LTV and then apply the 16% discount to the fact that it's a lower price and then you'll get

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probably something closer to a, you know, a 4.5x. So it's still worth having that quote discount

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for the annual rate. If you want to incentivize people to go to the annual, first off, you have the

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discount. So that's, you know, thing one. And I like to associate as many benefits as humanly

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possible immediately for making the decision. And so I want bad things I take away. So discounts

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would be a pricing thing that I, a bad thing I take away. And then I also want to add good things.

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So it's like, if I had a, called a, called a customer appreciation thing or I had, I had

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specific times or sessions that only VIP customers. So basically consider it like you give

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him name it something. So it's like you have your standard and your VIP. Even if it's the same

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pricing, you'll get way more people to take it because they want the status associated. And then

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VIP get these other three benefits. It's like they don't have to wait in line. They can get the

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session times they want or we have a special Saturday session or Sunday session that's only for VIP.

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And they get, you know, towel service, whatever. You just think about anything that's VIP two or

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three things that ideally give them status in the community for being a VIP which you have now

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associated with the annual billing, which has the highest stick rate. So not only you providing

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more value to these people, they pay a little bit less and they get the status. And that's okay

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because they pay four and a half times more over lifetime. And so this is how you stack as much as

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you can in the annual so that you can just make a lot more money. And the other really big benefit

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that I didn't hit on at all in the video that I should have is that annual, if you do increase the

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conversion percentage there in a real way, you're front loading a year of revenue, meaning your

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ability to offset the cost to acquire customer skyrockets because you get so much more cash collected

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up front. So you can get really aggressive in the acquisition even if you have a small, like let's

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see you convert half as many into the annual billing. It's like, okay, well, I get half as many,

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but I get 10 times the upfront cash. I still get five X upfront cash as I did before into monthly.

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And so if that's the case, then I'm still crushing it. The question is, is it better to

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bill upfront versus bill monthly and get the contract? Because then with that in theory, the contract

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plus the lower rate would convert a higher percentage. People on it do it extend the LTV. So I'm

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going to give a two-part answer to this. Number one is the contract that you lock someone in on

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is only worth the quality of the signature on the contract, meaning the person or the prospect

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who buys it is their creditworthiness that matters. Now, for example, in Europe, contracts matter

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a lot more and people actually adhere to that. Like there's not a really big churn rate on people

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saying that they don't make, they don't stick with their commitments. In the US, it's just a different

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culture in terms of how credit and contracts work, like people get out of and cancel contracts or

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cancel their credit cards all the time. And this is because Visa and MasterCard and those companies

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have become a very pro-consumer, basically, cover for people to not stick with their commitments,

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because they will always side with the consumer on chargebacks and refunds. And so it allows people

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to make purchases without consequences. And so I, like the people wear contracts matter,

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is like enterprise customers. If you have a massive company that you're doing business with

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contracts matter, if you're dealing with like consumers, contracts don't mean anything. And if

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you look at the biggest companies that deal with consumers, the vast majority of them don't even

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bother doing contracts because what ends up happening is that, Pete, let me say it this way,

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it will decrease sales to such a larger extent that just billing month to month and then

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focusing on improving the quality of the thing you have. Because at the end of the day, if the contract

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doesn't matter either way, all it does is decrease sales because people factor it into their purchase,

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but they don't factor it into their cancellation. And so it's like you increase friction on the front

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end, but you don't decrease friction on the back end. Now, in general, will someone who signs a contract

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stay longer than someone who is month to month? Yes. But the question is, what's the trade-off

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on conversion and is it worth it versus taking all that effort and putting it into how do I improve

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the quality of the product? How do I improve the quality of the prospect as well in terms of

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targeting and messaging? But the big one is, is there a way that I can just pick something that

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people already don't cancel? The question was, is there a way to extend the lookback period beyond

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the billing cycle? Meaning, can you accumulate saving, you know, time-saving if you had a software

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or money made if you had an agency or anything to that degree or, you know, pounds lost if you

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did weight loss, whatever, you know, marriage is saved, you know, fights avoided if you're in

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marriage counseling, whatever. I think that the best thought process that I would have around

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this is, yes, I would try and report that data on a cumulative basis as much as humanely possible

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because then it allows me to at least try, try and price or at least display my value relative

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to price on a longer time horizon like, hey, you know, we have brought you 35,000, you know,

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clicks to your website over the last six months. Now, it doesn't, like, it might look like this

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in terms of the volatility, it might be up and down. But if you look back cumulatively,

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relative to what you paid, it's still a, you know, a great deal. And so I think that is where

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customer success and having some, you know, tech and how you're reporting and how you have this

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conversation with the customer is super important in terms of framing. So I think there's

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are huge benefits to trying to show the cumulative increase. But just being really real, most people

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don't care that much. I think it might lift you a few points. But the big big is that it's still

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going to think, well, you know, you build me last month and this month I only got one accident.

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It's not worth it. For example, if you look at Instacart, they say we saved you this many hours of

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going, shopping and driving or whatever. And so it is over the duration of the time that you've

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had Instacart, they will show you what your savings are, not what I saved you this month.

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Hey, if you like this more mathematical approach of business, by the way, this is how I actually do

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business. That's not the YouTube version. And the reason that these videos will always get

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fewer views is because it's actually for business owners. That being said, one of my favorite videos

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that I've ever made is seven equations that will make you money. It is four business owners

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that want to make money. You have to know these equations. I do them in every business that I

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invest in. Watch it, memorize it. You should know these. You should know them like the back of your

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hand. It shouldn't just memorize them. You should understand them because that's how you will

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ultimately make a lot more money in your business by looking at it like an investor and investing

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accordingly.