NYT bestselling author Ramit Sethi and I continued our earlier discussion about getting your first consulting client by addressing a common pain point for freelancers/consultants, particularly those just starting out: how do you price your offering?
If you want me to tell you “You’re a Rails developer? $100 an hour if in Iowa, $150 an hour if in SOMA, best of luck” you’re in the wrong place, because you should have learned in our previous installment that you need to present yourself as someone solving business problems rather than as a mere technologist.
Instead, we’re going to go beyond the tactics and talk about the psychology of customers (and consultants) that poison cheap relationships, why we typically underprice to begin with, how to walk up your rate in such a way that your customers continue to perceive outsized value from your services, and more.
When we recorded this, our agenda was to talk primarily about freelancing/consulting rates, but both Ramit and I have run product businesses for many years, so we couldn’t resist tossing in a bit about pricing for e.g. SaaS companies and info-products as well.
(Want to hear even more about this topic? There’s a podcast coming up next week with Keith Perhac and Brennan Dunn, where we talk about how we transitioned our three very different freelancing/consulting businesses from where they were when we were young and stupid to three different models which work out fairly well for different reasons. Subscribe to the podcast to hear it when the audio engineer gets done with the editing.)
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Transcript: Ramit Sethi and Patrick McKenzie On Why Your Customers Would Be Happier If You Charged More
[Patrick notes: I have annotated the transcript heavily with my remarks, in this format.]
Patrick McKenzie: Hey everybody, my name is Patrick McKenzie, perhaps better known as patio11 on the Internets. I’m a small software entrepreneur who has run a series of software as a service businesses for the last six years. Concurrent with that, for the last couple of years, I’ve run a consulting business largely helping software companies make more money by delighting their users and increasing sales. I’m here today with my friend Ramit Sethi to talk about how you can price your freelance or consulting offering better.
Ramit Sethi: Hey everybody, Ramit Sethi here. Patrick, thanks for having me. I am the creator of a site called iwillteachyoutoberich.com. I also have a New York Times bestselling book by the same name. My background is in psychology and persuasion. I teach people how to use behavioral change, principles to change their own behavior, and to influence other people. That may mean learning how to automate your money, how to earn more money through negotiation or freelancing, or even to find your dream job.
I give away about 98 percent of my material for free and then I offer information products, also known as online courses, and they tend to be premium prices and they tend to be for the right customer.
Today, I’m really excited to talk about pricing, qualifying your customer, and working with the right people. God knows I have contemplated suicide many, many times thanks to the freeloaders who run rampant and wild on the Internet. What do you say, Patrick?
How You’re Collecting Pathological Customers And How To Stop
Patrick: Yeah, I have a word for them I’ve been calling for the last couple of years, “pathological customers.” The kind of customer that even if, technically speaking, they’re giving you money, they are giving you radically less money than other folks in the space. They feel a sense of entitlement towards you as a result of that. The general thing that people find both in pricing products and in pricing services is that at the low end of the scale you deal with people who perceive less value from you, less value from your offering, and have more and more unreasonable demands. Like if you’re writing iPhone apps, you’ll receive reviews like “This 99 cent flashlight app didn’t do my taxes, one star!”
Patrick: Or in a service business, if you make the terrible decision to sell your engineering services for $3,000 a month to a Japanese megacorp (like someone here might have) then you’re going to have people with expectations like, “Oh, you should totally be willing to come in at 3:00 AM in the morning for nothing.” Versus if you get to a better point where customers start perceiving more value out of your services, there will be no talk of 3:00 AM in the morning and also no talk of any number in the general vicinity of $3,000 for a month or anything else. That’s a little brag-y, oh well.
Patrick: Yeah, we’re going to talk to you about not under‑pricing things. In particular, I love Ramit’s advice on this. It’s really informed my thinking on the subject. Ramit’s advice has helped me 7X my consulting rates in the last two years.
Why Ramit Has Happier Customers at $12,000 Than He Had At $4.95
Ramit: I like that. I like the sound of that. OK. Let me start off with a couple of thoughts on pricing. Some of these seem straightforward and some of them seem a bit controversial. I’ll say this, in terms of consulting rates, I have started my consulting career back when I was in college, I charged approximately $20 an hour. I now rarely do consulting. I turn down the vast majority of clients. When I do charge, I charge $3,000 an hour.
So I have gone up the gamut of consulting rates and I’d like to share some of the findings and insights I had along the way. In terms of products, my first information product was a terribly priced, terribly positioned eBook called Ramit’s 2007 Guide to Kicking Ass, that’s right, and it was $4.95.
[Patrick notes: Let me elaborate on reasons why Ramit and I probably agree that was a poor decision: the eBook is very underpriced, because at $5 it competes with lattes and Ramit’s advice is substantially more valuable than lattes, hurting uptake among people who stand to benefit from it. Putting 2007 in the title of theBook destroyed any residual value he could hypothetically have gotten out of it in 2008 ~ 2012, whereas his other course offerings go into “evergreen” status after launching successfully and continue contributing meaningful amounts of money to the business every year. I also feel, audience mostly unseen, that Ramit would attract a less mature audience who would be less likely to make meaningful progress as a result of the advice than if he had positioned it to someone just a little more advanced in their careers. For example, note that when Ramit talks to young, competitively oriented men these days, he talks less about “kicking ass” (helping college sophomores manage beer money more effectively) and more about “top performers” (helping, let’s pick an example, 27 year old men in professional careers land $15,000 raises). That’s a fairly small change in target audience and messaging but a huge change in customer perceived value.]
Ramit: I had been writing for free on my blog, no ads, no nothing. This was the first thing I ever released and predictably the comments went something like this, “Ramit, you jumped the shark. You’re just trying to make money off us now. I could find this kind of stuff for free online. You suck.”
OK, compare that to a recent course I launched which was $12,000 and compare it to another similar course, which was $2,000 or $3,000. That course called Find Your Dream Job, and over a million people heard about it. I can tell you exactly how many complaints I had about price, because I tracked them. The answer was five. Not five percent, five.
We learned how to change and radically become more sophisticated with our positioning. So today, I want to talk about how you can actually charge more, deliver more value, get better customers, and also choose who not to serve.
One thing I’ll mention is that I have policies that cost me over $1 million a year because I don’t want to serve certain parts of the market. I’m going to tell you about those and tell you about how you can use some of the same principles to choose who you want to work with, charge more, get better clients, help them more, and actually not want to kill yourself every morning when you wake up and look at the kind of emails you have in your inbox.
Patrick, have you got those kinds of clients?
Patrick: I have had [pathological customers] in the past. I’m largely getting to a point in my business where I don’t have to deal with them anymore.
There are spectrums within spectrums here. My first software product was priced for $24.95, as a one-off purchase, and that’s something I will never, ever actually do again.
[Patrick notes: Don’t ever sell a product without a reoccurring revenue component. Starting with $0 revenue every month and then having to fight your way back to last month’s numbers sucks. Words cannot express how much easier it is to grow revenues at Appointment Reminder, which is SaaS on a monthly model, than it was at Bingo Card Creator – equivalent levels of savvy are rewarded vastly better over time with the recurring model, because a $29 account sold once contributes literally almost a thousand bucks in AR when a $29.95 account sold once for BCC contributes, well, $29.95.]
Patrick: Be that as it may, BCC debuted against perhaps six other similar products. I think the very day I launched I was the second most expensive. [Patrick notes: There was one product sold directly to school districts for 10x the price, and I didn’t want to have to deal with purchase orders and whatnot to address that customer segment. I was about double the pricing of the next software under me.]
I have a very manageable support load with that product, even though the users are very non‑technical and I occasionally get emails that make me want to gouge my eyes out with a spoon, like, “How do I download the Googles to my printer?”
Ramit: What? That’s a reasonable ‑‑ [laughs] to your printer?
Ramit: [laughs] You had me until you said printer. OK, that is ridiculous.
Patrick: My users occupy a place of love in my heart. So I say this from a position of love, and not to make fun of anyone, but rather to tell you that real people really think like this: I’ve had to convince people that there are not two physically distinct Internets entitled “the blue Googles” and the “the green Googles.” This means they can use their login on my website regardless of whether they’re on the blue Googles or the green Googles. Believe it or not, any site that you can reach from the blue Googles is available on the green Googles as well.
(Wondering how someone would come to this misconception? A particular customer used the Internet using IE opening to MSN at school and IE opening to Google at home. They did not realize that Microsoft and Google were not the same company. They interpreted this as “the blue Googles” and the “green Googles”, because the Googles is the Internet to them. When they typed stuff into the two different boxes on the two different Googles, different results came out. Their natural inclination for, “Why does this strange, devil box work in different ways?” was, “Oh, they must be two different devil boxes.”)
Yeah, I deal with fairly few people like that these days.
The next time I make a software business, it will intentionally not include that sort of client in the scope of it.
Ramit: But I feel like there are certain types of people who have really dark senses of humor, and they tend to be people who work in the dark or deal with the general public at large. These people include radiologists. They include anyone who deals in video, and of course, engineers or in particular, system administrators. God bless you all for still existing on this earth, despite the kind of things you have to put up with every day.
Patrick: Ah, well. I think, honestly, sometimes we could stand to learn a little bit more from the non‑technical customers, particularly about how we pitch them on the value of our services, because we always pitch them as tech services rather than as solving an actual problem they have in their lives.
Ramit: OK. So let’s…
Patrick: We talked about that plenty on the last video. Let’s talk about how we can work up our prices to get better customers who are happy to pay the amount of money that we’re actually worth.
Why We Fear Charging What We’re Worth
Ramit: Yes. So, first of all, in general, we can just stipulate that the basic message of this call is if you charge more and deliver more value, you’re going to get better customers and have better outcomes. OK. That seems fairly obvious. So the question is why don’t we do it? Just like it seems obvious that we all know we need to work out more, we need to eat better, we need to manage our money, we need to call our mom more. All those are obvious. They’re axiomatic. So why don’t we do it?
Primarily, one of the biggest reasons is our own psychological barriers. When it comes to pricing, we are afraid of charging more for all the reasons that I myself went through. When I first charged, I was truly petrified. And you can actually see it. I’ll direct you to the page. Go search for “Ramit’s 2007 Guide to Kicking Ass.” You can actually see the fear in my copy. My copy was rudimentary. It was pedestrian. I even justified why I had to charge.
Do you know when I charge for a twelve or three or four or five or ten thousand dollar course ‑‑ I don’t justify that? I tell the people who I don’t want to leave. And I let the rest come and bubble up to the top.
So you have to understand that if you make an amazing product and you’ve tested it and you know it will help, it is your obligation to get it out to the market as aggressively as possible.
Now, if you have a shitty product ‑‑ you’re just trying to pull the wool over someone’s eyes, or you haven’t tested it at all? Then, of course, it’s going to come across as fearful, because it should be. You don’t know if your product is good or not. If I know my product is good, if I have tested results, it’s my obligation to get it out to the market.
[Patrick notes: I think this is important enough to emphasize, twice. If you got into this business to make peoples’ lives better, and you have produced something which will succeed with that, and you are aware of truth about reality such as “better marketed products beat better engineered products every single bloody time”, then you have an obligation to get better at marketing yourself. To do otherwise is to compromise the value of your offering to the world based on selfish desires such as appeasing your own vanity (“Everyone should realize how great my work is without me needing to tell them”) or indulging your own unspoken fears (“If this were really good, it would sell itself, so if I try selling it, it must not be good.”)]
Ramit: Here are some of the fears I went through when I was first charging. I’m scared of finding out that people won’t pay for this product that I spent 12 months building. I’m scared of making them mad and them calling me a sellout. And my favorite one, which is exclusively the paradigm of engineers: is if I have customers who pay me, then I’m going to have to offer customer support. That is seriously the most crackpot crazy thing I’ve ever heard. If you have people paying you, money solves many problems.
[Patrick notes: Ramit is a very responsive guy, but also has had a team of people working for him for the last few years, answering customer support inquiries. Can I mention that I also thought that CS would be a major timesuck prior to launching my products? Turns out, nope, not so much. I support hundreds of thousands of users, and thousands of customers, by myself. No CS team or virtual assistants involved. I even did it when I had a full-time job. If this notion scares you, read Start Small, Stay Small – Rob Walling gives great ideas on how to systemize the process then ship it off to virtual assistants.]
Charge More, Get Less (And Better) Customer Support Email
Ramit: If you have money, you can hire a customer support rep to deal with your customers. By the way, when you start charging, you’ll find that paying customers ask for support much less often than free customers do. What do you think, Patrick?
Patrick: That is absolutely the truth. This is very relevant to people here who run products. You can actually draw a graph versus whether someone is a free user or a paid user of the product, and see the support request decline. I have four tiers for one product of mine. The level of support requests per account per month (lower numbers are, generally, better) in the various tiers goes something like:
The cheapest tier ($9 a month) has 7X
The Professional tier ($29) tier has 4X
The Small Business tier ($79) has 3X
The Office tier ($199) has X
Patrick: Customers who pay more also tend to be more sophisticated in the use of the software. They have more internal resources that they can ask questions to, rather than emailing me “How do I reset my password?” or “The Internet’s aren’t working. Can you get me back the Internet?”
Instead, users on higher tiers tend to ask questions like: “We’re using this to create value for our business. We have this scenario that we don’t know how to work with in your tool. Can you explain to us how we can do that to get the next big win for our business?”
Patrick: I’d much rather answer that email than “I forgot my password. Can you reset it again? The find account box didn’t work for me.” Particularly because the problem was likely “I didn’t type my email address correctly.”
Pricing Your Consulting Services Cheaply Does Your Customer No Favors
Patrick: You talked about mispricing your first product at $4.95 and how it was partially out of a fear of charging people money for value. The first time I ever consciously started working on consulting was I went to visit a business friend of mine in Chicago over Christmas one year. The only thing on the agenda was we were getting coffee. A couple of minutes into the coffee date, he locked me in a conference room with him and one of the cofounders of the company and said, “We just want ask you some questions about the stuff that you do, in terms of search engine optimization, conversion rate optimization, that sort of thing.”
I love talking about this stuff. We talked straight,for the next three hours. Then he said something to me, literally life‑changing words, at the end of that. He said, “I just want you to know that if today had not been a coffee date, you could have charged for this conversation and I would be pulling out my checkbook right now and write you a check for it.” I was a young engineer. I had this mental model that a young engineer’s time is worth a hundred dollars an hour and that is an iron law of nature.
I said, “Well, I’d expect that would be about $300, and $300 doesn’t feel worth worrying about right before Christmas. I don’t even know if I would have been comfortable doing that.” I was inventing excuses – in real time! – as to why I couldn’t have possibly delivered the value he already reported having gotten from the conversation we just had.
He said, “No, I think I’ve got $15,000 worth of value out of this. I would write you a check for $15,000 right now.”
He asked his cofounder, “Do you think $15,000 is about right?” His cofounder said, “Well, I don’t know about $15,000.” I’m like, “Oh, thank God. Sanity.” His cofounder said, “For $15,000, I would need to see a printed report about it too. But $5,000, yeah. We could pay that out of the petty cash. It blew my mind.”
Patrick: If you are genuinely creating value for businesses, you are no longer in the “trade defined small units of time for defined small units of money” business model. This is what most employees do. This is how you have spent most of your life working. You have left that life behind.
You’re suddenly judged against the price of other strategic initiatives. Amounts of money that are mind blowing to an individual human’s personal experience are nothing next to what a business pays for even the most trivial of things.
Ramit, you run a pretty motivationally sized business yourself. You have probably spent more on, I don’t know, website hosting in the last year than my Hacker News buddies could countenance spending for the next century.
Would You Rather Work With Successful Businesses Or Bottom Feeders?
Ramit: [laughs] For me, it’s very simple. It’s not about cost. It’s about value. Let me just tell you all the things I don’t want to do, as a non‑technical guy. I don’t want understand how web hosting works. I don’t care. Just make it work. I don’t want to understand how security works and I certainly don’t want to read textbooks about it. I don’t want to get paged when I’m out to the bar on a Friday night. I don’t want to do all these things. I only want to do a few things.
Let me pay for the rest. Listen, you can find clients who are willing to pay. They are the ones whose businesses are already doing relatively well and they want to do better. Or you can go after bottom feeders, who are going to try to negotiate you at every single turn. They will question the value of what you’re doing. They’ll say, “Can’t I get it cheaper? Can’t you do this? Can’t you do that?” Those are not the clients you want.
We have talked about how to find those. We’ll talk about those on a future call as well. When it comes to pricing, again, we have talked about the main axiom we are covering today, which is deliver a better product, charge more, find the right customers and everybody wins. That’s how you can go from thinking, “Oh, I’m only a hundred dollar an hour engineer,” to actually charging gargantuan amounts, but, more importantly, delivering gargantuan value.
There are a couple of people who have influenced me. I’ll share one. One is Jay Abraham. He is a very, very famous marketing consultant, particularly from the ’80s. He is one of my mentors. He has talked about putting the client at the center of everything you do. One of his books, called Getting Everything You Can Out of All You’ve Got, made me six figures in one month. Then I got on his email list, after buying his $10 book and making six figures a month.
Let me just tell you how I paid Jay a lot of money. I got on his email list. He announced that he was having a course, where you would have to fly out to LA once a month for 15 months. I live in New York. You would have to apply. You would have to get your references checked. By the way, if you doubled your revenue during that time period, you would have to write him a big fat check. Do you know what I said? I said, “I’ll do anything to be in this course.”
I applied. I haven’t written an application like that since college. I had him call my references. I met him. Here’s what I paid for it. I paid thousands a month to fly to LA on my own dime, sit in a chair next to him and asking questions for 45 minutes ‑‑ 45 minutes a month. I paid him thousands. That investment alone, and notice I called it an investment, not a cost, has already paid off in multiples of what I paid.
These are the customers. You want to find the customers, who look at the thing you are charging for, the service or product you are delivering, as an investment. It doesn’t just have to be ROI financially, although that’s the easiest to justify. It could be, “Look, I’m sick and tired of having to wake up in the morning and do all these tasks. I want an assistant.” That’s ROI for me. It could be to take away fear. I fear that my data is going to be lost. Therefore, you have solved my problem by giving me arrayed storage or cloud storage or whatever it is you want to do.
Understanding what it is and who your customer is, which would have covered before and will cover again, can help you determine your price. Just in general, then you want to look at the band of pricing that you have available to you. You want to think, “Am I in that band? Can I be higher than that band? What do I want to format my pricing at? Do I want to charge hourly, weekly, et cetera?”
Working For Free (Don’t!)
Ramit: Patrick, why don’t we talk about working for free? Also, you and I somewhat disagree on how to quote our rates. Let’s talk about that as well. What do you think about free work?
Patrick: This is largely from the perspective that we are talking about technologists here. If you aren’t aware of it already, the market for people across most of the United States and increasingly other parts of the world too, who can successfully execute technology projects is just absolutely on fire right now. If you have heard the whole “software is eating the world” thesis, it means that the people on the top of the food chain right now are the people who can get software to do what they want. This is particularly true if you can solve business problems using software. If that is you, the world is your oyster. There is no reason you have to give away the pearls for free.
I understand that there are other people in the world, who might just be getting started or not become comfortable with that, who might actually benefit from building a portfolio of a project or two delivered for free. If you put a gun to my head and said, “You are doing a project for free. Get value out of it,” I might think of telling the client, “OK. Look. As a prerequisite of doing this project for free, I would like the ability to turn it into a case study that I can put on my blog, put in my portfolio, and shop around to other clients as social proof.”
Patrick: “You, this company that people have respect for, entrusted this part of your business to me. Therefore, they should also feel that it’s less risky for them to entrust a part of the business to me.”
Ramit: I love that.
[Patrick notes: Let me pull back the curtain on why I use words like “entrusted” and “ownership” when talking to clients. Peons do “work”, where tasks are created by other people, carried out by the peon, and then judged by other people. I have never desired to be a peon, so I have always made a point of not talking like a peon.
Can I tell you a little anecdote? I was once a $10 an hour CSR for an office supply company (had to pay for college) and was, in actual fact, a peon. When I applied, I a) very much wanted to get the job and b) wanted to never work as a CSR again. When I went into that job interview, they walked me to the telephone bank and started going through a sample call, then the CSR started explaining some minor trivia about how to arrange a dropshipped order in their systems.
She started to explain: “A dropshipped order is…”
And I finished “A dropshipped order is when, rather than shipping from your warehouses, you take the order from the customer and transmit it directly to the manufacturer of the product, who ships it to the customer directly. Most relevantly for our purposes, this means that dropshipped orders don’t use the standard shipping service, and as a result aren’t quite as flexible with regards to delivery options as we generally are. They can only get delivered to the front door if there is no elevator or, if there is an elevator, to the floor which the customer physically resides on. For $45 we can instruct the dropshipper’s shipping company to use a dolly and take the order to the customer’s actual location at the site.”
This rather surprised the people who were interviewing a 17 year old for a near-minimum-wage job, so I said “Umm, page 78 of the catalog. I called up and asked for one last week. I made it my business to learn your business.” (I knew, as soon as I said that, that I was a mortal lock for that job.)
They offered to make me head of that department the next year, but I didn’t really want to manage CSRs doing paper sales for the rest of my career, so I passed.]
Things Clients Value More Than Money
Patrick: That’s a big thing, by the way. Clients pay for two things in the main, either increasing revenue or reducing costs. But they will also pay, in a very direct way, for trust and for the perception of reduced risk. One of the things that allows you to increase your rates over time is think of it that there is a tremendous fear in every client’s mind, when they get into a new technology project (or any kind of project really), that the project is just going to totally blow up and they will get no value out of it. So they discount the rate that they are paying to you, the maximum rate they think they can afford to pay you, by the chance of the project totally blowing up. If a client thinks that, “OK. The last five times I hired a tech guy, I only got one project which created business value,” he is probably going to discount the rate that he could pay you by about 80 percent.
But, if his perception is that you are not a 20 percent chance of success guy, you are a 95 percent chance of success guy, then it’s worth paying you much, much more that he would pay the 20 percent chance of success guy, just for that feeling that you are more likely to actually deliver on this product. This is true even if the business value you are claiming is the same as the other guy. It is true even if maybe the other guy is technically superior to you.
There are ways that you can influence that perception of likely success. One is by being able to actually communicate what you are doing, better than the typical engineer can. If you are talking about RAID arrays, performance optimization, HTTP headers, and all the other stuff that engineers love so much, we run the risk of losing business folks. Instead, we should say things that they understand and will perceive value from, like: “Here are other people in the industry that I have worked with. Here are their problems. Here are the problems that I surmise you have, because you are in this industry. Am I right? Awesome. Here’s how we can align our work together such that it influences these core things that you care about in your business.”
He is thinking, “He gets it. He can talk with me. When I have a problem, I can talk to him and get it fixed, rather than that other guy I worked with, where I sent off an email and didn’t get a response for two weeks and then it was two lines, “OK. I rebooted the server.”
The Unreasonable Difficulty of Shopping In A World Of Infinite Choices
Ramit: [laughs] What you are talking about, I love it. It’s really understanding the client’s hopes, fears and dreams, in many ways better than they understand it themselves. With my students, I want to be like the wife, who knows her husband better than he knows himself. She can predict what he’s going to say. We know this from research. People will be reading my sales page and they are about to have an objection. They will say, “Does that work, because I live in a different country?” Right as they are about to consciously think that, they are scrolling down the page and they see, “Yes. This works for international students. In fact, here are 10 from the UK, Spain, everywhere.” What do they think, after that happens two or three times? They think, “This guy understands me. He gets me.”
It is so rare in today’s day and age that someone understands you that you will pay almost anything. I’ll give you an example. Put yourself in the mind of, let’s say, a 30‑year‑old young woman, living in Manhattan. She is shopping at Nordstrom.com. She sees this shirt and it looks incredible. She says, “Oh.” She clicks it to enlarge it. She sees a model wearing it, who is 27 or 28 and looks just like her, walking down the street with her purse. She says, “Yeah.”
Then she clicks the next button. She sees another photo, but this time it’s some 16‑year‑old girl, who has got a punk look to her, wearing the same shirt. Then she clicks the next button and she sees a 78‑year‑old grandmother wearing the same shirt. What’s the first thing she does? She closes the window, because, in a world where something isn’t made exactly for you, in a world of infinite options, if it’s not made for us, if it doesn’t speak our language, if it doesn’t speak to my hopes, fears and dreams, I’m gone.
When you can actually do that, when you can deliver that, pricing really becomes a mere triviality. My competitors will often charge $49 for an e‑book. I’ll charge $3,000. Is my course better? Yes. Not only does it have more in it, it is tested with thousands and thousands of people. But selling a $3,000 information product is difficult no matter what, no matter if you have 80 TB of video. It’s about understanding the customer and client better than they understand themselves.
Why I Go Out Of My Way To Say “This Product Is Not Right For You”
Patrick: Let’s circle back to a point you just made. The notion that a particular product is not right for other people is a very powerful one in sales. When you are doing client qualification, about which we will be talking in the next talk, you are explicitly telling people that, “I only work with people who stand to get a lot of value out of doing business with me and I stand to get value out of doing business with them. It is entirely possible that we might not be the best fit for each other. So, for example, if X, Y or Z is true, maybe we just shouldn’t do this and I can recommend someone who is better suited to your needs.” When you say something like that, when you tell people that you are upright and ethical and would rather turn down perhaps a motivational amount of money right now, just because it won’t be the best thing for them, if they hear that, “OK. I wouldn’t work with people, whose situation was X or Y or Z. But, when I am listening to your needs, you seem to be totally in the sweet zone. We should do this,” they will think “Hell, yes.”
Patrick: Let me give an example of that. These days, when I’m talking to a new company, basically, if they are not a software company, I’m not interested.
There’s no one thing that I do in my consulting practice. I guess I could call it, “Rent my brain and I make you money.”
[Patrick notes: The CEO at a prospect recently recommended me to someone internally and introduced me as “the [UX design] consultant I was telling you about earlier.” (It wasn’t actually UX design – think “something that a software company would reasonably want which I have done before, successfully, but I wouldn’t actively seek out engagements for.”) Pro-tip: “I don’t know if I would call myself a [UX design] consultant, per-se” would not have been good client relations. Clearly, if the presentation I did for the CEO was impressive enough such that he is recommending me to their UX design team later, they stand to get some value out of working with me, and one should not dissuade happy clients from paying you money for advice which is in their best interests.]
I have previously worked with clients that I didn’t understand as well as the software industry. I couldn’t have that feeling of customer connectedness, when I was talking about them. For example, I once worked with a company that sells something similar to… high‑end men’s shirts. I don’t really understand the market for high‑end men’s shirts. People in that market don’t tend to think the way I do.
People who have made high‑end men’s shirts their life’s work don’t naturally feel simpatico with me when we sit down at the table and start talking about things. Whereas, software? Man, I love software. I can get everybody at a software company, whether they are the marketer or the CEO or the head of engineering, to like me and feel like working with me will be valuable. When we talk, they’ll enjoy the experience and think that I’m someone they want in the foxhole with them on the next project.
When we are starting the Getting To Know You dance with the client, I just say, “Look, I’ve had client relationships in the past that have been very successful, generally when I’m selling a software product and specifically generally when that software product is sold to businesses. If your company is primarily interested in increasing their B2C sales, that probably isn’t the best fit for us. I have some ideas on how you could take that forward.
“But really, if we’re looking for a big win, the last times I got a 20 to 100% increase in revenue was with a client with parameters X, Y and Z. Does that sound like where you are and the expectations you have with regard to an engagement?”
I’m reasonably competent at using both the green Googles and the blue Googles, so I’ve presumably learned by now what their core product offering is, at this point, they’re like, “Uh huh. uh huh, uh huh. That sounds right. Yeah. Yeah, 20 to 100 percent. That sounds pretty good.”
Ramit: One of the key takeaways that I am hearing here and that I want to highlight for everyone is study people who have mastered pricing. It’s remarkable to me how many start up websites you go to and it says, “Plans and Pricing.”
[Patrick notes: Copywriting microtip: this is the suckiest possible headline for your Plans and Pricing page. I know you did that because WordPress put it in my default. Is WordPress going to go home hungry if you don’t sell anything? You are. Get ye to CopyHackers and rephrase with something that your customers actually care about in the headline, like “Start [Core Value Proposition] In 30 Seconds.”]
Ramit: You click on it and it says, “$9 a month for $WHATEVER.” This kills the little Patrick and I have left in our souls, leaving us a vacuous void of what used to be human beings. It’s actually sad, because, first of all, just mathematically, it’s almost impossible to create a serious business on nine dollars a month. Those companies never actually run the models. They never actually say, “Hey, wait a minute. With customer churn and LTV and all these things, how can I ever justify nine dollars a month?” You can’t. It’s very difficult.
By the way, we all know the first dollar problem. Getting people to spend one dollar is the problem.
If you can get them to spend one and you have a very, very good product, you can get them to spend ten. You can get them to spend 100. Now, there are different gradations. For me, there is a taxonomy in my market of information products.
eBooks: you can charge roughly $27 to $47
eBooks plus video: $47 to $97
Video courses: $497 to $997
There is this taxonomy that exists. It exists and it’s real. But it is also malleable. You can move things around. You can know that, to justify $1,000 for a product, there’s certain things that you’re going to have to do.
Patrick: I love that point about the taxonomy of value. We were talking earlier about having different billing increments for consulting services. I often try to put things as weekly rates, which are roughly aligned to business goals. In a particular week, we will be able to get X, Y and Z accomplished, which accomplishes a meaningful result for the business. The reason I quote weekly rates is that I feel that people have a taxonomy of value for labor, based on how that labor is packaged.
If you quote hourly rates, engineers figure, “OK. A week is 40 hours. This means a weekly rate is mathematically comparable to an hourly rate, trivially. Why make this meaningless semantic distinction, foolish math-averse marketer guy?”
Why? Because of the taxonomy for labor. People have a preconceived notion of the proper cost of one hour of time. An hour is worth, “Well, OK. Two figures, maybe low three figures at the high‑end,” where the equivalent amount of hours, balled up into a project aimed at accomplishing a business goal, occupies a different level of the taxonomy.
If you are in the taxonomy of strategic initiatives that can increase my business’s sales the next year from 20 to 100 percent, that is not priced against the, “high two figure, low three figure rate” for our wages.
Ramit: Right. What we know what marketing is, for example, there is a reason why the maximum you can get for an eBook is roughly $97. Because of the race to the bottom in Amazon pricing, people often say, “An eBook? That should just be $13. Why should you charge more?” That is why marketers add video to the equation. It’s difficult to compare an eBook plus video.
However, don’t let this immediately make you think that this is a scam. It’s not like these marketers are just trying to get one over on you. Virtually every information product out there has a money back guarantee. For me, you can take my entire course, which costs thousands of dollars, depending on what course you join and if you don’t like it, just ask for a refund and I give you all your money back, even the credit card processing fees. Why? Because I have to prove myself and so do most of us.
With engineers it works a little differently. You prove yourself up front. Then you probably have milestones. There is rarely a money back guarantee, although that something you could experiment with as well.
[Patrick notes: Customers who ask for a money-back guarantee for consulting services are typically signaling a poor match between you and them, because they have high uncertainty that you will be able to deliver what you claim you can deliver. In general, I would be hesitant to work for someone who believed this, because even if I successfully execute everything I set out to execute, it is highly likely that a client who is not trusting of me will not perceive that as a win.
Here’s an actual line I use on the few occasions where this comes up in prospecting: “We live in an uncertain world. I’ll be totally honest with you: not every engagement I’ve ever had has been an epic win. You’re a businessman – you know better than anybody that e.g. software development is risky, and sometimes you spend 6 man-months on something and end up with nothing to show for it. That’s why, when things work out, the business profits way the heck more than what the fully-loaded cost for 6 man-months of engineering time is. My clients often benefit substantially from the upside to our engagements. If you need a guarantee from me for results, you’re asking me to shoulder the downside risk for this engagement. I don’t typically do that, and here’s why: if I shoulder the downside exposure, I should likewise partake of the upside exposure, and my pricing for that upside exposure would sound like ‘Well, if I double your sales, to a first approximation I should end up owning half of the business.’”
This is not an offer presented for negotiation. No successful software business will countenance giving 50% equity to an outside consultant, ever. It will never happen. Even an early stage startup, which I virtually never work with, would have a hard time getting sign-off for more than like a 1/4th of 1% equity grant. (Worth mentioning: For a variety of reasons, I would almost certainly not work for that.)
This is a way to frame a discussion. I am just trying to reframe the discussion away from “Risk of a negative outcome” to the (true fact) that I have, in the past, delivered huge wins for my clients, and that next to the enterprise value of a huge win, my consulting paycheck is a tiny, piddling number. The only way that math works out in a mutually satisfactory manner is if the client pays the sticker price. Many do.
For folks who aren’t willing to, oh well. Things cost what a buyer and a seller mutually agree on: if the buyer can’t make the seller a mutually satisfactory offer, no sale takes place. I enjoyed the conversation and would be happy to introduce you to someone else if I know anyone. As a consultant, you should be thrilled to let prospects go if they signal that they would not benefit from working with you, such as by not agreeing to your rates. As the monopoly supplier of your time, you get to be choosy. (P.S. This directly implies that if you have a more solid situation, via a filled pipeline or external financial resources or what have you, you can get away with charging more. That’s Microecon 101 but people don’t seem to apply it, so let me say this for emphasis: If you’re scheduled at or near capacity, charge more. If losing a client would not meaningfully impact your standard of living, charge more. If you have a product business partially subsidizing consulting, charge more.
Ramit: But the point is, when you are pricing your service or product, make it congruent with the market.
Patrick, you know that your customers, on a weekly basis, care about their goals, how much they are allocating and stuff like that. You have properly priced it, as a result, like that.
For my students [of Earn1k, a course where Ramit teaches people to freelance without necessarily quitting the day job], hourly charging is a good way to get their feet wet. [Patrick notes: That’s an important point. I turned down all consulting offers prior to quitting my day job, and literally have never thought of balancing the two at once.]
Ramit: But my most sophisticated people then use other strategies, like retainer models, and packages and things like that. That’s how you can really get really rapid growth in terms of revenue and pricing.
[Patrick notes: That’s really good advice, if you and your clients are mutually amenable to that. I have a baseline of recurring revenue, and an infinite sink for future hours, as a result of running product businesses. Retainer models, which might commit me to future work with a particular client, don’t uniquely offer anything to me, and they also might commit me to working with a client while my businesses would really like the first crack at my attention.
But if selling your time is your main source of revenue, retainers are a great thing for you.
How might that work? Well, let me spitball some numbers. Say you charge $100 an hour for Rails programming. You have delivered a project for a client. You might write them a monthly retainer contract for up to 20 hours of maintenance work. Crucially, you get paid $1,500 regardless of whether you do any maintenance work at all. You tell the client that any time above the retainer is available on a new contract at your then-prevailing rate, subject to availability. The client pays for the certainty that you will be available if they need you, not primarily for actually getting you to code patches.]
Ramit: The main things for everyone here to listen to are that you have to deliver a better product or result than anyone else. Without that, you can’t put lipstick on a pig.
[Patrick notes: Weak disagreement here – I think Ramit is overcorrecting to avoid a common criticism. You don’t have to be better than everyone else. Every doctor in America, save one, is not the best doctor. Every lawyer, save one, is not the best lawyer. Every Rails programmer, save one, is not the best Rails programmer. Being the best isn’t a prerequisite to running a successful business. You need to be capable, and to deliver fantastic value to your customers. That does not require being a ninjedi gurumensch. A lot of fantastic value can be delivered with capable, workmanlike coding. Enterprise Java, not exactly a well-known spot to find ninjedi gurumenschen, makes the world go round – planes don’t fall from the sky, cities don’t descend into bedlam, stores don’t run out of food, banks don’t suddenly discover they’re insolvent. Well, most of the time, and that isn’t really a Java problem so it isn’t here nor there.]
Ramit: Two, make sure that you are charging as high as you can to find the right customers. If I were Target, I wouldn’t charge $500 for a scarf, because no one would pay it. However, if I am Barney’s, you had better believe I’m charging $500. It is strategic. The type of people that walk into a Barney’s are very different than the people that walk into a Target.
Finally, run some goddamn numbers. If you are charging eight dollars a month for your product and you think that’s going to make you a very healthy lifestyle, just run the numbers. Factor in churn. Factor in cancellations. Factor in support costs and realize that that’s a very difficult way. If you can charge eight, maybe you can make a better product and charge $57 or $97.
[Patrick notes: Or re-target the same product at people who will perceive more value from it. Bitwise identical codebases support 10x to 100x ranges in pricing all the time.]
Patrick: Yeah. Here’s an admission against interest, given that I actually help companies decide pricing strategies and therefore should be competent about it:
Even knowing that charging nine dollars is a stupid amount for business, I succumbed to my engineer weakness last time I launched a SaaS company and had a nine dollar personal plan at the bottom. I’ll tell you exactly what my self‑serving justification was for putting that nine dollar a month plan there. I thought that I would get blog articles out of productivity bloggers, if I had something that would appeal to their needs.
A) It was a total failure. I never got one single blog article out of a productivity blogger about it.
B) I refused to admit that I was a failure and kept that plan up there for a year. I had ungodly support headaches. That entire pricing tier made less money than individual other clients on the higher tiers.
Patrick: You don’t even want to hear about the, “I got called at three AM in the morning Japan time, because the text on the website is gray. I think it would look better black. I emailed you about that 20 minutes ago, but you didn’t respond. So I figured I would call you in Japan at three AM in the morning with customer support issues.”
Yeah, don’t underprice your stuff.
Patrick: It’s the same with services. You will get the most demanding clients, when you’re under‑pricing or when, God forbid, you are trying to compete with people on Elance or the other freelancer sites. Someone asked me why I’m not on Elance.
“Well, I don’t want to compete with people on Elance and the customers that are really in my wheelhouse and get a lot of value out of working with me would run screaming if they saw me on Elance.”
For the same reason that, sorry, what was that high‑fashion place that is not Target that I’ve never heard about?
Patrick: Barneys. Barneys, if you were some sort of fashion house that’s trying to make a name for yourself and you go to Barneys and you say, “Look, we can get our scarves made in China, so we can afford to sell them to you for $5 and you can put them on your tables for $10, the buyer for Barneys is going to say, “Oh hell no. We’re not interested in that at all. We don’t care if it’s the reincarnation of some famous designer and some other famous designer who had a love child, someone who understands fashion. Please put in names for me here.” But it just would do so much damage to their brand and to their perceived positioning in the market being available for $10 that it is not even worth picking up that revenue for them.
Price For Dear Or Price For Free But Never Price For Cheap
Patrick: Similarly, you can price it for free or you can price it for dear, but never price it for cheap. You will just have lots of headaches and it makes life difficult both with that customer and with any other customer who will ever discover that relationship.
Ramit: Wow. OK, so Patrick, you just said something that everybody needs to hear again. This was taught to me by my mentor, Jay Abraham as well. My students were clammering for a low price product. I’ll cover this in the qualification talk, but I don’t allow people with credit card debt to join my flagship or very expensive courses. That decision alone cost me over $1 million a year, but it’s the right thing to do.
So people were saying, “Hey, can you give me something low priced? How about something around $9 or maybe $20?” I asked Jay, “What would you do? The market is begging for this.” He said, “You know what? If I were you, I would actually just create something incredible and I would give it away for free. I would make sure that I tell them why.”
I did something very similar, I actually interviewed another one of my mentors, BJ Fogg. I spend 16 hours preparing for that call. I read my old textbooks and I pulled up my notes and we had a great call about behavior change.
Then I wrote an email to my list and I said, “Guys, this interview is incredible and I’m giving it to you for free. But I want to tell you something. I could charge $1,000 for this interview. I would easily sell it. But instead, I’m investing in you. I want you to take it seriously, treat it like a thousand dollar product. Close your computer. Turn off all your other stuff and really treat it with respect. Treat it like a $1,000 purchase because that’s what it is.” The response was incredible.
The point here is do not try to serve everybody and also decide what market you want to play in. You want to play in the high‑end market? Then just give away your stuff for free at the low end and make sure people know why you’re doing that.
Overall, as Patrick said, your pricing is strategic, your pricing will communicate to the market what type of clients and customers you’re willing to put up with and what kind you want.
Patrick: Right. I turned down potential client work all the time. My minimum engagement is a week, and I’ve only deviated from that once or twice, this time for good strategic reasons. I just don’t want to deal with the overhead of selling a one‑hour, two‑hour engagement. That immediately prices me out of affordability for many, many people… who would largely not be good fits for getting excellent value from working with me.
I’ll often get emails inquiring around my hourly rates and what it would cost to get me on a phone call for an hour or two. I say, “Look, I’m not available for formal consulting for an hour or two. Because I love the space and because I like helping out bootstrapped entrepreneurs, if there is time available in the schedule, I will be happy to get a Skype chat with you or whatever. We’ll talk. I’ll give you some ideas. Then I’ll point you to the right blog post and then you can go execute on those. But I am not going to be the one in charge of your marketing for what you think an hour would be worth.”
If I quoted them a rate for an hour (by taking my weekly rate and dividing by forty), they’d probably think, “Oh God, that’s an insane amount of money.”
Patrick: In addition to there being a karmic benefit here [Patrick notes: I’m using karma here in the loosely metaphorical sense to mean “one should act in the service of others; this will be rewarded / this is its own reward”], there are occasionally knock-on effects for the business. For example, somebody told that in one context will occasionally mention that they got really, really good results to someone who does have the resources to pay for a week of my time.
I can’t tell you what clients that’s gotten me in the door with, but you know their names.
Ramit: Love it. So Patrick, Let’s wrap here. Where can people find you? What’s your URL and what will they find there?
Patrick: I’m at www.kalzumeus.com/blog for my blog [Patrick notes: you’re here!]. It’s mostly about topics of making and selling software. Generally what I’m talking about in any given blog post is whatever I’ve been working on recently. If you want a more structured, deep dive into things, go to training.kalzumeus.com and there will be a video on improving the user experience in the first run of your software.
Ramit: So anyone who makes software or serves clients or customers would be really well served to check out Patrick’s stuff. It’s very much similar to I Will Teach in a sense that I Will Teach seems like it’s a money blog, but it actually has very little to do with money. It’s about psychology. It’s about understanding people. It’s about improving your communication. So I love reading it. I don’t build software. I build information products, but I love reading your stuff, Patrick, because you really dig into test results, data, and my most favorite of all is you dig into why people behave the way they do. Why do they chronically undercharge even thought they quote “know” that they should charge more? Why do they think that technical skills matter most when in business that’s questionably true? And why do they not trust things that have worked in other industries like marketing for years and years?
So I love the way that you show your own test data, you communicate it beautifully to engineers and it happens to communicate beautifully to me as well. So thanks for putting up your site.
I’ll share my site as well. I put up a special giveaway for people listening here. It’s iwillteachyoutoberich.com/kalzumeus-pricing. That’s a free mini course on pricing that should help you really change the way you think about pricing and again, how I went from charging $4.95 for one product to $12,000 for a recent product with a dramatic fall in complaints and whiny freeloaders. Hopefully that helps you guys.
Patrick: Let me give a quick little mini testimonial for Ramit here. We had dinner a couple of years ago. He gave me some advice on pricing my consulting services. For a variety of reasons I never quote my rate publicly, largely because it goes up all the time and I never want to have my own rate quoted against me as evidence that I should cede ground in future negotiations.
That said, it went up hugely as a result of some of the advice he gave, particularly regarding how you position the rates in the context of your discussion with the client. You cannot possibly waste your time listening to him on that subject.
Ramit: I appreciate it Patrick. All right, we’ll talk soon. Thanks.
Patrick: All right. Talk to you later, bye bye.