Gain Price Confidence: How to Stop Undercutting and Start Profiting

John (00:08): Hello and welcome to another episode of the Duct Tape Marketing Podcast. This is John Jantsch. My guest today is Carolyn Crewe. Early on in her entrepreneurial career, she made some pricing mistakes and quickly realized that there was nowhere to go for pricing for help. She didn’t think about it then, but that was the catalyst for her pricing education. She knew that pricing was the thing she could control to boost revenue, so she took what she already knew and from her MBA and living a business experience, red Books pricing, did pricing courses at places like MIT all to fix her own pricing problems. And nearly 10 years later, we’re going to talk about it on the Doug Dave Marketing podcast. So as you guest, we’re going to talk about pricing. So Caroline, welcome to the show.

Carolyn (00:55): Thank you so much for having me. I’m really excited to be here.

John (00:58): So let’s start big picture. What are some of the biggest challenges, obstacles, businesses typically face just in this topic?

Carolyn (01:07): Yeah, for sure. I mean, there’s a whole list, but the ones, which is not the new information for you, the ones that I would say that I see over and over again, copying competitors, just blindly copying competitors, actively choosing to undercut competitors. Those are some good ones. And I think it’s a shame because you don’t know that the competitor is actually profitable, so their business could not be doing well and you are pegging your whole financial future on that. So I see that off all the time. And the other thing that I would say I see is one size fits all in terms of I’m going to offer you one quote, this is it. You like it or you lump it, which is also to your detriment because not everybody has the same willingness to pay and not everybody has the same amount of perceived value of what you can bring to the table. So giving people some options is a really great way to capture more revenue.

John (02:12): So let’s get down to the dirty little secret about this. I mean, how much of this is mindset was like, I fear that I can’t get anymore, or who knows if somebody will call me tomorrow if I don’t get this work? I mean, how big a piece of that is

Carolyn (02:27): Massive in my experience. I joke, but I sell price confidence because I’m giving people and it’s because it’s what they need. My side little mission rant here is that no one teaches founders how to price their stuff. And I lived the pain of that. So now that’s why I do this is because you should know how to price your stuff. It shouldn’t be a black box. So mindset is a huge part of it. And I think it always down to you’re designing offers that customers want and you understand the value of them. When you have those two pieces of the equation, you have the confidence to back up your price because you know what it’s worth, how to price it in a way that’s fair to you as a business owner who’s taking on all the risk, all the stress, and you’re still giving customers fair value in exchange. So mindset is a huge part of it.

John (03:29): Alright, so let’s break this up. I mean, there are businesses that sell stuff as we’ve been calling it, and then there are businesses that sell services, which is air as I usually call it. So are there different, the traditional product based pricing used to be, well, here’s what our costs are, here’s what this is, and then we want to make this much profit. Here’s the price. Is that an outdated model today?

Carolyn (03:53): I that’s cost plus pricing, which I cannot stand If you want to be profitable, that is the absolute opposite thing you should be doing because your customers do not care what your costs are. Doesn’t even register in their brains that you may be even have a cost. Customers care about what’s in it for them. The other thing is that I have yet to come across a founder in the CPG space that actually knows their cost,

John (04:23): Right? Right. There’s so much cost that gets hidden,

Carolyn (04:27): It gets hidden or forgotten about, or they didn’t approach the calculation correctly, so they don’t actually know what they’re making. But the one thing that I can guarantee you is that your costs will go up. So you will be in this never ending battle of having to raise your prices and upset customers. And it’s a shame because then you’re capping your revenue potential and your potential for profitability because customers care about the value that they get. They don’t care about how much it costs you to make it or deliver it. So in the CPG space, cost plus is a thing that I see all the time. But again, it goes back to this kind of hypothesis that nobody teaches you how to price your stuff. So it’s easy.

John (05:14): Oh, exactly. Exactly.

Carolyn (05:15): It’s easy. That’s why people do it. But it will definitely come back to bite you in the butt when you start looking at your bank account. Okay,

John (05:21): Let’s switch to service-based businesses because again, it’s hard for somebody to say, yeah, I’m going to take this little thing and stick it in the corner, so I’m going to pay for that. It is all perceived value or perceived return. I work with a lot of marketing consultants, and so the perceived value comes with, here’s where my business is going to go if we make it to X. So how do you go about pricing that? Because again, we’re not selling a widget, we’re not even selling time necessarily. What is the approach to pricing? Professional services particularly?

Carolyn (05:54): Yes. No matter who I work with, for me, the foundational piece on which every pricing choice is built is the jobs to be done framework. I’m sure you have come across this. So your customer, today’s reality sucks, right? The boat your customer is in is not good. It’s not fun. They are stuck. They want to be somewhere else, and you have the amazing opportunity to swoop in and show them that you understand what it’s like to be stuck and to get them unstuck, to get them to the place where they want to go. So that to me forms the foundation because if you understand what it is they’re struggling with, how they are stuck, you can design offers, service packages that are specifically catering to that level of stuck. So that’s the first step. So you can take their job to be done, and I like to break it down.

(06:50): I call them baby jobs. So what is the first job on this journey? If you actually think about it and they’re in a rowboat trying to get to shore and they can’t figure out how to get there, what is the first thing they’re going to come up against as it relates to that job to be done? That is going to represent the first service package. It’s going to be the cheapest, it’s going to be the most low risk offer for them. But some people have deeper pockets. Some people don’t want the basics, they want more. So you have a tier that relates to a bigger job. It could be the second job they’re going to come up against, or it could be a cumulative thing where they got a taste and now they want to add something else. And then you have a third job, which is typically the whole kind of kit and caboodle for people who have deep pockets who just want to make it go away.

John (07:43): More money than times.

Carolyn (07:45): Exactly right. But you have a series of offers that are absolutely aligned with the thing that they’re struggling with, how they are stuck, and each one helps them get a little bit unstuck depending on how much they perceive the value to be and what their budget is. So that’s kind of the second step. And then we value what is their time worth? If you save them however many hours, 10 hours a month, what could they be doing with that time? What is the opportunity cost? Those sorts of things, or what is the outcome you’re going to help them get if they’re trying to increase revenue or increase profitability, whatever it is, and you can get them there, what does that look like and what’s an appropriate share of that value that you’re creating?

John (08:33): Yeah, I think one thing, obviously very important thing is you have to be able to measure that and you have to have the posture to say, I know that if you spend $10 with me, you’re getting a thousand dollars.

Carolyn (08:42): Absolutely. But there are ways to easily calculate that. It’s not perfect, but you can often, so one client I worked with recently, they thought they were bringing one package was bringing a thousand dollars in value a month to the table, and when we did the math, it ended up being $17,000 a month. Wow. So it’s the potential to leave money on the table by not understanding how to do this and how to connect these dots and huge.

John (09:12): So explain to me the universal law that the less somebody pays you, the more demanding they are.

Carolyn (09:18): Oh, absolutely. Oh my goodness. Okay. How much time do we have? I’m a big fan of qualifying customers because I want to make sure I’m going to knock it out of the park for you. And if it’s not a good fit, we should figure that out as quickly as possible.

John (09:36): I think I’ve seen over the years, until you experience this, maybe it just sounds theoretical, but $3,000 month clients will be three times more work than one $10,000 month.

Carolyn (09:49): A hundred percent,

John (09:51): Hundred percent. A lot of times I just tell people, look, double your prices. Hey, you lose a couple clients, great. But now the ones you’re working with are actually going to be the right ones. The other thing I’ve also found, particularly because what we’re really trying to solve is people underpricing, right? Yes.

Carolyn (10:07): Oh, absolutely.

John (10:08): Is that there’s actually more competition down there, isn’t it?

Carolyn (10:11): Yes. Yes. There is so much more competition because everybody is afraid. Yeah, exactly. Everybody is to tie their prices to the value that they’re bringing to the table. So again, it’s easy to be cheap. So it comes back to that question of mindset and confidence that you brought up before. If you understand the value of what you’re offering and you’re going to get them results, it’s so much easier to put a price tag that reflects that value on what you’re offering.

John (10:40): And I wonder sometimes too, and again, every industry will be different, but what signal you’re pricing is sending in terms of the perceived value. I mean, it’s like hugely, it can’t be that good or it must be awesome. I mean, obviously you have to fulfill, but talk a little bit about that kind of signal that you’re sending.

Carolyn (10:59): Absolutely. So this ties in with positioning. So if you are telling me, and I have founders that I work with all the time, who they will tell me they’ll swear that theirs is the best, mine is the best option out. There’s the best on the market. And then when we look at their pricing versus any of the competitors or sometimes even the alternatives, they are cheaper. And I’m like, what’s up with that? And they’re like, well, we want to get clients. We want to steal market share from our competitors. And I’m like, yes, but nobody thinks you’re the best if you’re the cheapest. So this absolutely, customers also don’t read. So they look at pricing, as you said, as a signal of how good it is. So higher prices are absolutely often associated with higher value, higher trust, and that’s what the luxury industry is Banking on.

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John (12:51): So how much is this a function of marketing? What I mean by that is that person that does actually have the best but can’t seem to be able to charge what they think it’s worth because they don’t have the demand.

Carolyn (13:03): So two things come to mind. One is they’re not effectively communicating the value that they’re bringing to the table. The other thing that comes to mind is maybe they haven’t niched down enough. So I see a lot of people that are in a very competitive space and they don’t know what their secret sauce is. They don’t know how they’re bringing something different, unique and special to the table that’s different from competitors that customers actually care about. And because they don’t, again, have that confidence, they don’t know how to position themselves and things kind of go off the rails.

John (13:43): So how do you fix the C word in pricing commodity. I hear that all the time, right? You hear that all the time. I mean, there’s so many industries like, oh no, we’re just the commodity. People buy the cheapest.

Carolyn (13:55): I would not be in that business if I was going to be super harsh about it, but I think it always boils down to you are going to have an easier time if you pick a niche talking about marketing, if you are the go-to agency for plumbers, your messaging is so much easier because you only have to say that one thing that you know is keeping plumbers up at night and you will own that market and you’re going to be able to demand higher prices because you are going to be the guy to go to. So when people get into the commodity game, I feel like differentiation is going to be the thing that’s going to make it or break it for you. And I think that also ties in with your positioning. And if you can figure out some way to be unique and special in the eyes of customers, that’s really for your competitors to replicate, that’s where you get that competitive advantage and that’s where you’re going to be able to justify a higher price point. People aren’t going to want the cheapest, they’re going to want the best, but you have to be able to communicate that stuff in terms that they understand and it hits them hard.

John (15:12): So a lot of times pricing or price sensitivity is really a risk equation. Like somebody’s saying, I don’t know if I can afford that because I don’t know if I’ll get the result. I mean, it’s kind of a risk. So where do things like that are related to pricing? Like guarantees fit into the pricing matrix?

Carolyn (15:31): So a couple things come to mind. So one is a guarantee of sorts goes in a higher end service package. That’s an opportunity. Huge perceived value, huge perceived value if you can tie some sort of certainty, some sort of insurance. So maybe there’s an opportunity there to have a higher priced tier that gives customers some peace of mind. The other thing that comes to mind is depends on what you’re selling. And it depends on your customers, but maybe there’s an opportunity to have a hybrid pricing model where there’s some sort of flat fee, but a percentage of wins to take some of the risk away. You still get paid, you still covering your costs to exist, but if they feel the customer feels like they’re gambling on you, if you are willing to put some skin in the game too, that could be a way to use pricing as a differentiator and to make you more money.

John (16:33): And I was going to go right there next, especially in the consulting world, value-based pricing has been around for a while. Some people argue that it’s harder to deliver because maybe the are things out of your control. In a business, we do marketing for a business, but then their sales folks screw up every lead we send them kind of thing. But talk a little more about that idea of if there are elements we can control, maybe we fix the foundation, say in phase one, and then phase two becomes, okay, now for every one of these elements, revenue growth is attached to them or some measurements attached to them, and we get more when you make more. I mean, is that a model that you think is an easy one to roll out? Is that a model that is, has perceived greater value for the buyer?

Carolyn (17:20): I think if your buyer has deep pockets, or maybe not even deep pockets, but has money but are risk averse, maybe it’s because they don’t know you yet, the trust isn’t there. Maybe it’s because they simply don’t have the money to invest in it, but they’re willing to take a chance. I think that kind of hybrid model could work for some business owners, but you have to be confident in your ability to deliver. But pricing is one of those things that gives you, it’s one of the biggest levers you can pull as a business owner to increase profitability. This has been proven over and over again. So how do you create value and how do you communicate that value? But it always comes back to what is the customer’s job to be done? And if you know that there’s a big risk that they feel like they’re taking, there are ways to find this middle ground to test out the waters, to build that trust, to show that you can get results. That I think would help a lot of business owners make the sale, but without compromising their profitability.

John (18:30): And I think there’s also a great, the value or potential value of that value-based pricing is that it also sends a signal that we don’t win unless we all win. Correct. Right. So that has value. I’m sure you’ve worked with people over the years that you’re like, your pricing model’s all screwed up. It needs to be here. And they’re like, okay, great, we’re going to do it. But now they’re going back to their clients saying, guess what? We’re raising your prices. How do you effectively mitigate the risk or the brand damage or whatever you want to call it? Nobody wants the prices. They’re like, no, you’re not going to give us anymore. Why are we going to pay you more? Even though there are realities for why you should raise money?

Carolyn (19:08): I think the challenge for every business owner is how can they continue to add value? So that is kind of the fundamental thing when we talk about value-based pricing. So again, of course everybody’s costs go up, but if we think about the idea that your customers, they maybe know there’s a cost, but they don’t actually care what your costs are. They care about what is in it for me.

John (19:35): That’s right.

Carolyn (19:36): So how can you add perceived value in a way that is going to resonate with them? I think that is the linchpin in the operation that is going to help you avoid those risks. Yeah.

John (19:51): So are you suggesting that let’s say you have a monthly recurring type of product or service and you’re now going back saying, Hey, it’s going up 25%. Do I need to add or at least make them feel that I’ve added 25% more value? A

Carolyn (20:06): Thousand percent. So you absolutely have to do something to add value, but the thing is, if you understand how they are stuck and how you are getting them unstuck, the way you add perceive value doesn’t have to cost you a lot, right? So because I did a technology pricing technology workshop this morning, it’s top of mind. If people have a phone number to call when things are broken, you might have double. That is magic, right? But that’s it. But people are willing to pay. It doesn’t cost the business tons of money to have a phone number to have someone answer the phone, but the perceived value for the clients can be absolutely massive. So I think you absolutely have to add value in some way. The other thing that I typically do is if there’s going to be a big price increase that we test it out with new people coming to the business, sure, asking for a quote, then I would suggest a rollout policy where you may be grandfather and existing clients for a certain period, but they are made aware that pricing changes are going to happen. It’s going to be this in six months. For now, we’re keeping it steady to ensure there isn’t a mutiny, but this is coming down the pipeline. This is why. And it gives them time to process because nobody likes change, and it gives them information to help understand we’ve added value in this way, our costs have gone up. We’re doing this. Your life is going to be better because we’ve added this extra capacity or whatever it is.

John (21:48): I was just going to say, because the kneejerk reaction is like, oh, my price is going up. But you give ‘em that time, they’re like, they still may be mad, but in six months when they haven’t done anything about it, now it’s their fault.

Carolyn (22:00): But that’s the thing is the people who get mad enough to leave probably shouldn’t have been your customer to begin with. So it’s a filtering system and then that leaves you with more capacity to take on new customers who absolutely are willing to pay that new price. Yeah.

John (22:18): Awesome. Well, Caroline, I appreciate you stopping by taking a few moments to stop by the Duct Tape Marketing Podcast. Is there some place you might invite people to connect with you or find out more about your work?

Carolyn (22:27): For sure. LinkedIn is a lovely place. I spend a lot of time there these days, so you can search for me there. The other place where if you want to learn more, you can find me is my website, which is called Best Kind Consulting. I’m from Newfoundland originally, and in Newfoundland there’s an expression where if something is the best kind, like this restaurant’s the best kind, John. He’s the best kind of guy. You got to get to know him. So best kind consulting, you can find me there.

John (22:54): Awesome. And that’s ca instead

Carolyn (22:56): Of that’s Yes. I am in Canada. The exotic Canadian. Yes.

John (23:01): Awesome. Well, again, I appreciate you stopping by and hopefully we’ll run into you one of these days out there on the road.

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