Your Pricing is WRONG (even Sam Altman Made This Mistake)

0:00even Sam Alman got it wrong the CEO of open AI valued at $80 billion just admitted they're losing money on their $200 a month chat GPT Pro Plan if one of the most sophisticated tech companies in the world can underprice their product chances are you can too and it's probably costing you more than you think in the next 9 minutes I'll show you how charging too little is the silent killer of great businesses and how you can fix it if you're not charging enough and if you get your pricing right you can actually have an unfair advantage over your competition hey Rob Walling here I've been talking for years about how

0:35pricing is the biggest lever in SAS and during several of our early microc comps this is 13 14 years ago Patrick McKenzie who you may know as patio 11 got on stage looked at a room of Founders and said two words that at one point became his calling card charge more we started talking about this back in 2011 and today 14 years later the advice is still valid even at the highest levels of tech as we see with AI in a minute I'll get to why charge more is great advice but first let's talk about a few of the reasons Founders undercharge to begin with you might title this section the

1:08psychology of undercharging it's easy to understand why Founders fall into this trap I've seen four core fears keep Founders from charging what the product is worth the first is that nobody will buy my product if I charge more and in reality usually we're undercharging and that you can have an equivalent or a competitor that is often charging much more but you still don't have the confidence to increase your prices fear number two is my product isn't good enough and in fact usually it is usually this is something in the back of your mind it's something like impostor syndrome where you say I'm not good enough when is everyone going to figure

1:45out that I don't actually know what I'm doing and I'm an impostor I might almost call this product impostor syndrome where you say when is everyone going to figure out my product isn't good enough when in reality in almost all cases it is and across the 22 12 B2B SAS Investments that I've made the vast majority of them at one point were underpriced and the vast majority of them when they raised prices things went in the right direction things went up and to the right now you can raise your prices too much and I'll talk a little bit about that later but for the most part specially bootstrapped and mostly

2:19bootstrapped Founders that I see they're undercharging the third fear is my competitors charge less and realistically if you are a commodity and someone can swap out your product for or another one then it is hard to charge more if it's a one for one comparison a gallon of gas versus another gallon of gas or this Orange versus this orange and they are basically the same thing then why should you have pricing power why should you be able to charge more so the key with looking at competitors and saying well they charge less than I do is to have a product that's differentiated you either want features

2:52or positioning or a focus or a brand you want some type of moat that keeps you from being a commodity I actually talk a lot about this in the SAS Playbook about how not to be viewed as exactly the same as other products on the market because then it's just a race to the bottom and the fourth fear is if I raise my prices I might wreck my business and you know what you might but the odds are really low I've seen hundreds if not thousands at this point of SAS companies rais their prices and there's been a handful of times that I've seen folks have to

3:23roll them back but I believe it's only once that I've ever seen someone actually break their business by raising their prices and in fact it wasn't because they raised their prices it was because they raised them they got new information several other competitors dropped their prices and they didn't drop their prices quickly enough they didn't follow suit they didn't take the data that the market and their competitors and their customers were giving them and they failed to react so while raising their prices was you could say a cause of this really the cause was them not reacting quickly enough now let's talk about why you should charge

3:55more realistically pricing is the biggest lever in SAS it's the the one thing that if you get wrong can create a terrible business and if you get right can cause you to have a business that's 2 three 4 five times more valuable and more successful than if you don't nail your pricing the first order effect of raising prices is that you get more Mr or ARR and it's that you start to grow faster I have given a talk on pricing in the past and I used a couple screenshots of tiny seed companies that started their batch year with us in May and then raised their price prices in May or June

4:30due to our urging and frankly Our advice of we think you're underpriced in this market and these graphs show the mrr growth start to increase pretty significantly and the business being really a completely different business than if they hadn't raised the prices there are also a couple second order effects one of them is churn so for more than a decade I've been saying that lower paying customers churn faster and there's an anonymous Tiny Seed company that segmented their churn and segment a was paying them $29 a month and segment B was paying them $99 a month and up and if you look at the net revenue turn

5:04between the two groups it's staggering the net revenue turn of the low paying customers was over 11% the net revenue turn of the high paying customers was net negative 4% so think about trying to grow a company with 11% turn which means your business is on fire versus minus 4% it's not even in the same ballpark that single metric can be the difference between A4 million doll a year business and a business doing a million or 1.25 million it's incredible now I have a story about a Tiny Seed company called gather that when they joined Tiny Seed were charging $39 a month for their cheapest plan 39 and 79 were their two

5:39plans and their business was not viable they couldn't do sales calls at the scale they needed and grow the business and so pretty quickly we encouraged them to raise their prices and they were you know rightfully so they were concerned that they would not get any more customers so they went from 39 to 99 and 79 to 159 and there was no difference in conversion and these days they've gone up even further their lowest plan is still 99 but their mid plan is $1.99 and of course they have a custom pricing plan but these changes alone took them I don't remember if it was 6 months or

6:09eight months as they raised their pricing and it did change the business churn went down they lost some solo customers and some I'll say more price sensitive customers but it really helped accelerate their growth all right so let's say you believe me and you want to raise your prices how should you do it first I'm going to start with a couple quick tips the first one is you can effectively raise your prices by decreasing the value or the thresholds on your value metric on a specific plan so if right now you give 3,000 contacts or subscribers for $49 you can give $2500 for $49 you just reduce the value

6:41metric on one or all of your plans the second idea is you can just drop your lowest plan so if you have 1949 and 99 you could just go to$ 49.99 and call us it's an easy way to experiment with this and to get comfortable with the idea of maybe not having that cheapest plan the Third tip I'm going to give you is that split testing pricing is very very difficult I've seen approximately zero SAS companies do this there's been one or two but realistically most bootstrappers all bootstrappers are not going to have the volume to truly split test your pricing so you are going to

7:13have to take a leap of faith and just watch your numbers carefully so if I was going to raise prices first I would decide if this is an experiment versus certainty so if it's an experiment and I'm tentative then I treat it like one I make it easily reversible and I watch my numbers like a hawk but if it's a certainty I've actually made price increases into a marketable event where I email everyone in my trial funnel and people who are not customers and people who are customers and I try to drive either annual conversions ahead of the pricing update and I say if you'll sign

7:43up before this certain date we will be able to honor our current pricing even though we're raising them in a couple weeks now I want to separate raising prices for new customers versus grandfathering which involves your existing customers they're two separate things and you don't have to do the same for both so you could just change it for new customers and kind of sit back and watch it for a month two three and then once you realize my pricing dialed in then you can decide if you want to go back to existing customers and raise it or not so the concept of whether to raise non-existing customers is called

8:12grandfathering if you grandfather existing customers in then you don't raise the prices on them and the reason you should consider it is if you raise prices you will see some churn you'll have a lot of support complaints and a support burden and you could potentially damage your brand or your reputation but realistically and most cases raising prices on all your customers is usually not always It's usually the right answer you just need to make sure to communicate it really well you want to give at least 2 months of notice but not more than 6 months and my rule for raising prices is if raising your prices

8:44on existing customers will not grow your Mr by at least 15% it's probably not worth it that's Rob's rule of 15 in addition I never promise to grandfather for life and you should not either because in a year or 3 years or 5 years you may want to raise prices so never say that anything is for Life finally I want to talk about the messaging of raising your prices there's uh an interesting structure to price increase messages that I went and backed out of several well constructed price increase emails and blog posts first thing you do is you set the stage then you say we're changing our pricing the third point is

9:17a high level justification and then there's two optional points you can give more specifics about who it impacts and when you can give more justification and then finally please reach out with questions and if you want to see exactly the message that I've been referencing in this video that Jordan G used to raise pricing for cart hook go to the link on the screen right now or that's in this video's description and you can see the blog post that cart hook put out in the Wayback machine I know I packed a lot into this video if after watching this video You're convinced you need to increase your prices you'll want to go

9:49watch this next video where I go even more in depth on the topic during a 48 minute conference talk and if you found this helpful make sure you like And subscribe to the channel I'll see you next time thanks for watching h