SSK #9: Should you charge lower prices and work with more clients or higher prices and work with fewer clients?
Read time: 4 minutes.
A costly mistake
A lot of online entrepreneurs get their pricing wrong. They tend to under-charge and over-deliver.
While there’s nothing wrong with over-delivery as that’s what’s going to keep your customers close to you AND give you ability to sell them more; under-charging is a big business and mindset problem.
Speaking of satisfying existing customers…Keeping existing customers is a way better strategy than finding new ones. The data shows it’s 5 to 25 (!) times more expensive to acquire a new customer than retaining an existing one. 5 to 25! So before you turn your eyes towards getting a new customer, make sure you’re serving your current one up to your fullest potential.
The problem with under-charging for your services is that it doesn’t leave you much room to grow quickly. And when you don’t grow quickly you spend too much time and effort and eventually burn out. On top of that, you will resent your low-paying customers. Your head will be full of thoughts:
- “They don’t know how much value they’re getting from me”
- “How can they treat me like this after all we’ve done for them”
- “The audacity to ask for more with all they already get from us for the price”
Those are not good thoughts to have when working with clients. Instead, when charging “what you’re worth” you can:
- Invest in hiring team members
- Invest in marketing
- Spend extra time delivering results for clients or polishing work for them because they paid you enough
- Get a bigger salary
Higher prices ARE the recipe for success and quick growth.
You might be thinking “well, Mike, what about companies like Costco? They charge low prices and do amazingly well.
There are ways to make your low-priced product work and give you the financial freedom, but you first need to set your business up for success to be able to lower your prices and go after masses (read more below).
But first the "Tesla pricing strategy”
Tesla did something brilliant. I call it the Tesla Pricing Strategy. When they launched their first vehicle back in 2008, they did not sell a car that’s for the masses. They launched an expensive sports car. I don’t want to go into the details of why they did that (it has to do with the industry lifecycle, stage of technology, adoption levels etc). But I want to focus on the pricing strategy.
The big price tag allowed them to make more money selling fewer cars. And it allowed them to take that money and invest in R&D and improving their product that they can then sell to…more people. A better technology + bigger scale meant they can lower the price of their next product. Rinse and repeat, and here we are, a few years later with their lowest-priced car, designed for the masses.
They were able to grow so fast BECAUSE they had the money to invest in the growth. Had they started with a low-priced product that growth would be much much slower.
Working with clients that pay you more will allow you do the same:
- Grow faster
- Build an audience
- Build a product for masses and sell it at a higher scale
The Costco case
Let’s look at a different pricing scenario, represented by Costco. Costco is known for super cheap, bulk products and razor-thin margins. So how are they able to make money and grow and build such a big brand?
First of all, they sell a lot of product (in bulk). But the merchandising cost is…90%! They barely make any money on it, you’d think. So how are they able to grow? Yup, you guessed it, memberships. The better the prices, the more members it will attract. The more members the more memberships sold and the easier it is to forecast their earnings and growth. They make money on a mass scale subscription! That’s why it’s so important for them to keep their customers happy and renew their memberships every year. Because…remember, it’s easier and 5-25 cheaper to sell to your existing customer than to acquire a new one, right?
Costco is able to offer low prices because they have the scale (economies of scale) and because they charge the membership fee.
So the next time you are thinking about pricing and charging low to “get more clients” think again. In most cases - especially when you’re starting out - it is a way better decision to price your services higher and grow faster.
So more insights from me on this topic HERE
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