 Hello and welcome to today's Business Skills webcast, Pricing, getting it right for your business. My name is Sarah Gonzalez and I'm from Redback Conferencing. Whether you're in finance, sales or marketing, pricing transcends all areas of the business. In this webcast, we'll be joined by Rachel White and she'll take us through the nuts and bolts of pricing. How are you today, Rachel? I'm really well, Sarah. Thank you. Thanks for coming. So, first of all, I think we should start off really high level and can you just enlighten us on why pricing is such a big deal? Look, Sarah, that's a really good question. It's a question a lot of people have asked. In your business, there's probably no decision that impacts your profitability more than pricing. There's no decision that impacts how your customers perceive you more than pricing. Let's start with the profitability question first. We'll just walk you through an example of why that is. These are two different options. On the top left-hand corner here, you sell a thousand units at $100 each, just very simple maths, so that's revenue of $100,000. Your direct cost, so these are your costs of delivering your product, whether that be making it, whether that be customer support, whatever your product is or service is. Your overheads are the cost of running a business so that's your rent and your office and paying yourself, which is fairly important really as a business owner. That leaves a profit at the end. Everybody's ratios are fairly normal. You have a 20% profit, 30% direct costs, and 50% overheads, that's pretty normal. Let's look at the second option where we've actually increased prices by 30%, so all we've changed is that prices have gone up from $100 to $130. In terms of the costs, the direct costs have gone up. Why is that? The product's more valuable. When you deliver something more valuable, generally speaking, it costs you more to deliver that. It's more premium products, better service, better branding, whatever it happens to be. The overheads generally stay about the same. If you look at the arrows there, you can see that with a 30% price increase, the profit percentage has gone from 20% to 32%. With a 30% price increase, we've had a 50% uplift in profit percentage rate and the actual dollar value itself has gone from $20,000 to $41,000, so it's doubled. You can see there how a price increase there of 30% basically doubles your profit down the bottom. On the other side of it, and we'll get to this later, around discounting in particular, you can see how discounting would actually have the absolute opposite effect to that. All I'm thinking right now is electricity and energy bills. That's what everyone talks about. You think a small little increase and the impact that that can have, I think all of a sudden when you put it down and you actually see the numbers, it's, wow, almost. But one thing you did mention there just slightly was value. So I just want to talk about the discussion around value. So what's the connection between value in yourself and how others value you? And what does that have to do with pricing? Yes, Sarah, that's a really good question again. The focus for today's webinar is very much on service providers. So if you're a service provider, the product you're selling is effectively your knowledge. It's you, yourself. Whether that be a solopreneur out there, if you're running your own business, or if you're working for an SMA. If you're in the services area, it's all about the people. And so mindset matters. Pricing absolutely sends a message on how much you value your product and your service offering to the market, which in some respects talks about how much you value yourself. And that absolutely comes through. It's almost like the non-verbal body language that's 90% of communication. Pricing is kind of like that. All the signals that sense of the market absolutely talks to how much you value yourself. And so therefore, how much you value your relationship with your clients. And hence, how much your clients will value you. It's a circle. The psychologist can probably talk about this better than I can. But it is a pattern I've definitely observed over the years. So let's look at some of the difference in the language. So on the left-hand side, we have language that's used for premium products and for very valuable services. Exclusive offer, loyalty bonus, rewards, lifetime membership. It's all about building a relationship on the basis of trust, long-term over time. Whereas on the right, free, bargain, on sale, and never to be repeated. It's very transactional. It's very, almost adversarial in some respects. There's a lot written on, I saw something the other day about the dark side of free. We'll get to that later on in terms of what that means. Where free sits in the value chain. But it's just to show you an example of the difference in language. Now in retail, and especially in the moment in bricks and mortar retail, I think everyone's been on sale for the last four years. So it doesn't mean anything anymore. The price has been reset. That's just the way it is. Versus someone like Apple who set up an Apple store. And that's a marketing thing for them. And to also teach people how to use their products. It's actually not about sales. The irony, of course, is with all the accessories they sell in there, they make money hand over fist in those stores. But that was never their intention with them. So they had a very different intent with that bricks and mortar retail. And it was all about the fact they value their customers and their customers' experience with their product. Versus the traditional bricks and mortar model where you have stock in the store and you buy it, etc., etc. And the experience, I know I shop a lot, and the experience is not spectacular. So it's not something I feel any particularly loyal to any particular shop. Because the actual experience itself is, well, subpar really. Yeah, so it's just to illustrate some of the words that you'll have seen in the market. And the difference in how your clients will feel based on when they see those words. And I think this is something that we experience in everyday life, especially as consumers with the retail stores that we like. And it's all starting to sort of make sense in my head now with the brands that you like and you know. Whereas if something does come across as free, it's almost a little bit dirty. And it's like, oh, where's the catch? Yeah, there's something going on there. So I guess that talks a lot to messaging then. So what does this mean in terms of messaging? How can we sort of incorporate this in terms of what we do in everyday life? Yeah, so you'll see there in this slide, messaging sitting in the middle on both sides. And messaging is probably the most important part of pricing. The point of these flows is the one on the left, being financial messaging and mindset, is that's actually how pricing is often done today. So a lot of people, I've seen, it was also written the other day, you have to go talk to your CFO about pricing and that's all a bit scary. Yeah, yeah. The CFO is apparently a little bit scary. But it is because of the impact it has to the bottom line, that's generally why it sits in the finance function. But it does start with the finance focus and then you eventually get to messaging and mindset's a poor third if you ever get to it. And mindset is all about that, how you value yourself and the value that's inherent in your brand. My philosophy is to actually turn it around the other way. We start with mindset, we then look at messaging and I partner with a lot of marketing people on this. And what I tend to find is the finance result that spits out the bottom is actually a lot healthier. And so it is still very much with profitability from center. But I tend to find turning it around actually improves the result. So if we do turn it around then, obviously that's your advice. What's an example of how this would actually work and why doesn't the first approach actually work? Yeah, Sarah, that's a really good question because I appreciate that's a really big call. So let's have a look at an industry, I think we've all seen a lot of and especially in the last year or so is the media business. Now the media business has been having a bit of a meltdown for around 10, 15 years now. Just keeps going doesn't it? It just keeps rolling right along. But never ending gift. Oh yeah, it keeps on giving. But and I do feel for people in the media business because their business model is being eaten alive. But if you think of the transition from print to digital media. When they looked at it from a pricing viewpoint, a newspaper had a face value of $2. For example, I don't even remember it's been so long since I bought a newspaper. And then digital media had no printing costs. And so the assumption was, oh okay, we can just get rid of the face value because we've got no cost to delivery. So we moved from a token price of $2 to zero. Now in print media, the bulk of their revenue did not come from the face value that $2 you spent to buy the paper, it was from advertising. And that was what paid for the creation of the content. And obviously everyone's heard an awful lot about the difference between quality journalism and fake news in the last 12 months. And I'll get to that in a moment. So in this model, how do you deal with the cost of creating the content? So given we've started from a financial viewpoint, i.e. the cost of delivery has gone down so we can just drop our price to effectively free. The messaging that sends to the world is the value of that content is diminishing. And so if we just go back just a moment, from a mindset viewpoint, the message that the media business has now sent to the world is that the value of what we create, the content is actually not that high. I don't think it's a coincidence that the whole fake news thing started to rear its ugly head about eight months ago. And obviously I'm not gonna get into politics today. Each side is accusing the other side of fake news. This is fairly rampant. But I think from a business viewpoint, that's not a coincidence. And I think we can learn a lot from how the media industry has got it wrong. And they're desperately trying to put paywalls up now and various things. I've even heard stories of journalists suggesting that media should be a government-run organization, which just terrifies me, because that's not the answer either. But if we can look at an industry that's just got it horribly wrong as business owners and people who are charged with making pricing decisions, I think we can definitely learn a lot from that experience. So this once again comes back to flipping it around. So how do we do this? It's all very easy for me to sit here and say this. Yeah, exactly, yeah. How would you have done it? How would have I done it? Look, that's a really good question. And so let's get into that now, because this sort of gets into the real nuts and bolts of how to approach pricing. So let's talk about some of the mindset stuff first. So there's a couple of quotes I've got here. That, yeah, that I've just noticed observationally over 25 years of doing this. And the first is that if someone doesn't pay for it, they don't value it. Whether that's content in terms of the news, whether that's strategic advice for a not-for-profit, the number of people I know who work for not-for-profits and the frustration they feel that they not listen to. And it's like, oh, how much did you charge them for that advice? How did it for free? Yeah, so I actually encourage people to charge not-for-profits, not because of the money side of it. Obviously their heart's in the right place and they want to help this organization. But because to make sure that there's actually been, there is a value exchange from that viewpoint. So I know personally in my model, I don't do free. I do mentoring for a lot of the accelerator programs or in the early stage startup space. And for me, that's actually part of the marketing value chain for my brand and my business. So that's how I view it. So yeah, so I don't get paid for it, but we'll get to what that means from a free context later. But in terms of the engagements I do, I just don't do free. And I think that's, like you said, a lot to do with the messaging, the whole mentoring, like thinking of ways that you can actually give value, but not actually say, oh, I do free consulting. I'm actually mentoring someone. So what about the link between customers and users, what you've got here? How does this all play into it? Because I don't think a lot of people would actually realize this or think on this topic. Yeah, and I saw Alan Kohler do something on Twitter once where he referred to Twitter's 300 million customers. It was like, you are a very smart man and if you don't get this, then no one gets this. So if you think of Twitter as always the example of they, that was used a couple of years ago in this. So I have a Twitter account. I'm sure you have Twitter account. Probably most people watching this have a Twitter account. We are users of Twitter. We are not customers because we don't pay them. Twitter's customers are people who pay them money, which is actually the advertisers. So I am no more a customer of Twitter than I am a customer of Channel 7. In the, I watch a certain TV shows on Channel 7 because I enjoy watching them and I put up with the ads because I'm old school and haven't gone to Netflix yet. I'll get there one day. But, and yeah, Channel 7's advertising revenue is, well actually not just Channel 7, all of them. They've got a problem. And this absolutely gets to the value chain. But yeah, and the other example I've seen is Google with, you might have a Gmail account, which is free. You're not a customer of Google. They're basically, you've given them your data that they can use to create products for advertisers in particular. And also in other areas as well. So basically you've effectively, the stuff you talk about on your email address, they mine it. They have these huge algorithms that do it. There's no one personally sitting there reading your emails. But that's why they do it. That's why it's free. There is no such thing as free. So you are not a customer of Google in that regard. You are not a customer of Twitter. You're not a customer of Facebook. You're a user. And that completely changes the dynamic. So what's the benefit for an organisation or someone who runs a business of actually sitting back and understanding this and using the right language? What's the benefit for them? Yeah, and I think that gets into your strategy and especially in the early stages of your business when you're trying to get your brand name known because that's when you're most vulnerable on this. You don't have a known brand name yet. You don't have that trust with your market. And I think that is, that's where in your product development area you absolutely do need to start building up that trust with the market. And so it could be that you need to have a bunch of people use your product for nothing and then give you testimonials on your website and then get customers. Yeah, because the purpose of them using your product to give you a testimonial is to help you then bring and especially in the digital world is to build up trust to then allow you to reach your market and paying customers. And so you've almost, those people, they're not your customers. They're helping you build your product versus those people who pay your money, they're customers. It does sound simple, but. Where it gets complex is I'm talking about some very general principles. We've then got a for you individually and obviously I'm CFO of Redback so I do this with Redback but where we actually drill into your business because the answers to this for any business are unique to that business model because it's unique to the people here in that company. And that's where it gets complex because I can't give you an answer that's a one-size-fits-all. For all the people watching this webinar, the answer would actually differ depending on who I'm talking to. So the messaging, just talking about this, the fact that it needs to be easy to understand, easy to work with, valuable. We've pretty much spoken about that and I think even the example that you gave using the word mentoring, would you suggest that people sort of take a step back and understand what they want to achieve and then different ways of using words and messaging to sort of get that out there because sometimes you want to give stuff away for free, right? But you just need to have a different sort of tech. Oh yeah, in terms of how you're presented to the market and the purpose free actually serves in your business. I think that you talked about mentoring. I actually find mentoring by far the best way of getting those very in advance of artificial intelligence and robots that will be able to figure all this out. For now, whilst we're still in the world of human beings, wrapping yourself in a circle of mentors is absolutely your best bet. So people who know your industry. The other thing is it takes out the, if you hire consultants, and I am a consultant so I'm gonna sabotage my own pricing here, but there's a lot of work that goes into making sure that you can demonstrate trust. I know a lot of what I do in my model is actually talk about when you are not gonna need me anymore. I have one client at the moment where I was meeting them yesterday and I was thinking here at the end of the month they're not gonna need me for a while and so I need to put that forward and just say that's where you're at and that's, so it's part of building up that trust. The thing with mentors is there's less of that and so you can do a bit more quid pro quo. The other thing is because they're in your industry they can actually ferret down into the specifics of your business model a lot more effectively and you can do the same for them. So I was doing some reading yesterday about for web developers for example there's a couple of online groups out there for web developers which talk about the mentorship programs they have specifically for web developers because web developers have a very unique set of challenges compared to acupuncturists for example or compared to people who are working in associations and so it is just surrounding yourself through for people who just know your industry backwards and can give you guidance but also always knowing that the decision is ultimately yours. And you just, you touched on the sectors and then a few moments ago you also spoke about the not one size fits all and I think it's, oh actually yeah that's right so sometimes you do have to get into the nitty gritty and the nuts and bolts of it. So when it does come to sectors what does this work for and are there any other sectors where this approach might not apply to someone? Yeah so I think for anything services related it absolutely applies because the value of what you're selling is what you know and so why can you be relied on? Why are you an expert? And so that value and trust and all the rest of it is absolutely inherent and I think the banks in particular given it is a services based business I don't know all the details of the departure of the CEO of CBA yet the rumor mill is alive and well but yeah clearly there's a definite suggestion of a breach of trust there which and all the banks have it I'm not picking on CBA but yeah so I think in the service provider model it is absolutely holds true where it may not be the case is for example, as I said I haven't quite gone to Netflix yet I actually still rent DVDs you know there's green hoitz kiosks which are in the supermarkets they're brilliant and the reason that works so well for Can I talk to someone? Pretty much it's just like I press three buttons well it's just I'm looking for functionality and utility I want a video that's it and obviously those kiosks don't have all the overheads of shop so Blockbuster could never have done that because they just would have cannibalised their own business model Okay so on that quickly then you know how sometimes they do buy three movies or buy two movies and get one for free what do you think of that model? Yeah and for them their pricing and profitability is a volume thing so if it is high volume then it's the classic those videos are making them no money while they're sitting inside the machine so the cost of actually producing the video is next to nothing it costs three dollars to rent it I'm going to take a guess it probably costs about two dollars to produce it so every time they only have to rent it out once and they've broken even I think I don't know the model specifically but that's what I'd assume it is every time it gets rent out there's a royalty stream that goes to the actual movie producers and obviously they have a whole distribution model behind them around the IP but the thing is Hoyts makes no money whilst those DVDs are sitting inside the machine so they're looking to create volume and turn over but yeah the reason that works was so well for Hoyts is because they're not doing anything to destroy their brand everyone's talked about the demise of cinemas for 30 years they're still there I know I go to the cinema to hang out with my friends and get the huge big screen experience and especially 3D I saw Avatar 3D and it was those six legged dogs were actually willing to do it that was just amazing that's not something that I'd even want to do at home to be honest so I think Hoyts have figured out that their value is actually the experience that's got nothing to do with the product and so they could actually create those little kiosk things without in any way cannibalizing their product, their value but for them it's a commoditized product and so 3 for the price of one etc etc starts actually making sense for them it's also an end of life product eventually it will all go 100% digital I can 10 years time those kiosks won't exist but then this is known as a cash cow and that's what it serves in their business model and that's fine I think that's so interesting when you think about it you've got Pete the same industry the same sector movies and they've got the same the whole idea is for people to watch the movies and enjoy but you've got two totally different pricing models two totally different experiences and I think we can probably learn a lot from that in terms of looking at our competitors as well and trying to do things differently and that's where this comes into it now I want to meet Stella yes please I've heard a lot about Stella so tell us a little bit about Stella what's she doing right what's she doing wrong hi Stella oh yes please allow me to introduce Stella Stella is one of the characters I use as a teaching tool so she's 42 she's been in business for eight years she is a web developer so she's created her own web design agency eight years ago she used to work for someone else for a long time in her I guess mid 30s she jumped ship and built her own business and that's not unusual very familiar very familiar indeed and yes so Stella web design is the name of her business so Stella like everyone else has a lot of pricing challenges in the beginning and it's something that she still works for now so she used to so we're going to go through Stella's experience just as a case study just to sort of see some of the things especially around the messaging what messages her prices communicate to her customers now by the way the messages in here are the same messages that accountants and lawyers are struggling with in their pricing in terms of how they're so entrenched in the per hour model whereas Stella was a lot easier to shift so we're just going to walk through this for her so what she used to do is she would price each job and the job was to design and build and roll out a website for a business so she'd price each one individually she'd scope it out she'd figure out how many hours she thought it was going to take she had a per hour rate that she used and she'd create a fixed price quote to give the customer certainty but with a very specific scope now the problem with that of course is the customer had no idea what was in scope and what wasn't and this is a 20 page proposal document and to get into the munisher of that you know that whole trust thing we were talking about before just so accountants and lawyers and all the rest of it have exactly the same problem People don't really look at it and they're like what is this? It's like a different language It's talking Martian it's just like I just want a website It's really a website and give me any voice Just make it work and so because of that every time the scope change she'd have to change the pricing and so of course she's then got to go back and talk to the customer about that which is another opportunity to create this trust and especially when it's an uncomfortable you're starting from the point that you feel uncomfortable because you should have known this and I know you recently did something on the imposter syndrome so that's all alive and well in this process so it's almost set up to create issues so from a messaging viewpoint Stella's pricing in the past it did protect her from scope creep and scope creepiness in the service provider model is a real problem it was easy for her to calculate because she did know the number of hours and times by an hourly rate so from her viewpoint it's actually really simple it's very easy to associate with her cost and everyone did it that way so you know those were the benefits so at least looked familiar to the market the downsides there was no way she could advertise her prices on a website an hourly rate on a website it's not helpful it's like well how many hours it's going to take I have no idea so most people don't put it on there when that's their model she couldn't answer pricing questions in the first meeting because then the whole it depends comes up and therefore there's two words that you should not use in pricing it depends are up there I'm going to write that down as one of my key tips please never ever use it depends I do my absolute damndest I'm in the finance profession and it's rife but I do my damndest to avoid those two words because it's just again the uncertainty and distrust it's like I know something you don't yeah it depends on what yeah precisely and I'm now going to have to swim my way through the quagmire to figure this out so there are two words I just avoid if I possibly can also because you can't answer the pricing questions in the first meeting you've got a length and sales process you as a marketer wouldn't completely understand why that's a problem and so your customers are confused and again all of that doesn't help you promote those messages of valuable and easy to work with and simple to understand and also that your customer is valuable because the fact they don't understand what you understand doesn't make them stupid and your customer has the imposter syndrome too yeah so yeah so everyone's just stuck we're all just stuffed in this quoting per hour so where to next so what Stella did so what she did was and there's four P's of marketing as you know pricing is one of them packaging is another and so what she did and a lot of web developers are doing this so you can either have a small medium and large package you can have in support you can have bronze, silver and gold the tech industry's been using that for years there is a general view that you have three and there's some psychology behind that most people tend to go to the middle one so you want to make sure your middle one really is something you can make profitable with good systems because most people will gravitate to the middle one and so basically it was $5,000 for a medium, midsize one is 10 and large and now this is where this is where the work really comes in because then how do you this looks like just two or three sort of levers in terms of the number of pages, the functionality do you have a shopping cart, do you have a membership site it looks simple this is actually the really really tough stuff and this is where having mentors in your industry is really really helpful how do you break it down if you have more than two or three triggers, levers for your customer you'll lose them so you need to keep... Too much choice, right? Yeah, too much choice so what was it Steve Jobs and many other people have said simplicity is the ultimate sophistication Works for Audi What we need Yeah, getting it down to a short list where the customer feels like they have options and they have control over which choice is right for them without feeling overwhelmed is really hard and so there are companies and especially in the text base pricing is something that's just a constant iteration thing and it is all about how do we bring it down to something simple something that's very straightforward and easy to understand I think one of the reasons the Uber model was so powerful was because you already I mean I used a taxi to get here this morning from an Uber viewpoint it's slightly cheaper it's something I was already doing anyway I understand the model and so they made the experience better because you don't have to pay for it at the end of the cab journey and you can track your cab and all the other features but from a pricing viewpoint they actually didn't disrupt the pricing model in many respects they disrupted your interaction with how the money moves in payments the actual pricing itself is fairly similar in many respects to booking a cab obviously just cheaper and so they actually didn't disrupt the one thing they didn't disrupt was pricing in some respects they did because it was cheaper but it was actually all the other stuff and then they got everyone used to them and they did the surge pricing yeah especially what New Year's Eve is $400 to get an Uber which supply and demand makes sense it's like Uber walk it's tend to be your option the other one and especially in services models and I think this is really important where you don't want to turn down those larger more complex projects it's where you learn a lot as well they can be extraordinarily valuable and they're the the ship coming in type things so you don't want to cut those out so what I usually recommend to service providers is you actually just have an option on the website which is you want more than this let's talk about it and pricing available on request and for people who want to spend more than your large package they expect that and that's the exclusivity bit as well isn't it for those people because all of a sudden they feel okay I want more I need more I'm willing to pay more to be a more exclusive customer this actually helps start communicating the value as well because it's like I need more than a shopping cart on a membership site for example so the one thing though I'm struggling with is Stella this seems like a very one-off thing with her and I've had discussions with you in the past you know holy grail of how do we get recurring revenue and how do we make sure that this money is constantly coming in so it's not okay thanks I've done your job now see you later so what is recurring revenue for people out there who don't understand it and why is that a good idea and how can someone like Stella incorporate this or how did she incorporate this well let's talk about some of the bigger picture stuff of other companies Apple struggled with this so one of the reasons the iPod was so revolutionary for them I don't know the tech was that particularly profound maybe it may or wasn't it was the whole iTunes thing because that became recurring revenue for them so all of it they moved from a product sales business to iTunes to music downloads and that sort of stuff I know personally I now have my music synced on three devices and I pay $30 a year for that or something I cloud or whatever it is and you don't even notice it and for them obviously there's probably several hundred million people around the world doing that so for them that is gold and for them that creates predictable revenues so they can plan their business they can actually experiment with those big short fronts they did because they would have lost money hand over fist on those to start with so it gave them capacity to actually experiment with different ways of doing things and that's what it does it gives you certainty so you can adapt your business model because you're not worrying about having to keep the pipe full all the time so you can pay the bills next month to give you another example of the big accounting firms with their current cash balance plus their current bookings in their consulting arms not their audit arms and some of their compliance arms because they do that every year so they actually have recurring revenue in that part of their business in their consulting arms they have three or four months payroll covered that's it we're talking about big enormous global organisations here so for the people on this webinar who might be small business owners or work for smaller businesses who think the big companies have got it sorted can I show you they don't and this is a challenge for them too so let's talk about how Stella did this in recurring revenue and again this is also an opportunity to communicate value and the fact that her customers are valued more get to a good example on that one in a minute so what she did is she created a maintenance or support product and so it's a recurring it's a recurring revenue product so it's a thousand dollars a year on the small product for the small website it's two thousand for the mid and three thousand for the large so she's done a slightly lower price on the large and for her bigger customers again it's she's passing on some of her economies of scale to them I value a year so it's not just a percentage of the package price for small and mid it is for large she's just brought it down just to charge and again that just sends a very powerful message on that I'm going to pass on some of my volume discounts to you in terms of what's included in this there is the hosting there is the content updates there is the new plugins if you use WordPress for example there's a billion new plugins every five minutes so Stella keeps on top of all that so you don't have to to give you an example where I heard this recently now I work in the tech business so when I ask you who does your hosting I'm expecting to hear Google or Amazon or Microsoft Azure or whatever she said to me a person's name I was talking to this friend of mine who'd had a problem with her website her website had been hacked and it was all of a sudden covered in well adult images which was a serious problem for her brand because her brand was personal image branding yeah major major problem for her value proposition and this poor woman was just having a complete meltdown and so when I spoke to her I asked her who does your hosting and I actually the answer I got was a person that we both knew who was already on it and was fixing it and it was looking at how to make sure that this wouldn't happen again and because of the maintenance product this lady had with her web designer was why she could get it turned around that fast and in that sort of situation yeah it's like on it immediately and I know how much she valued that so that comes down to this right the value base part and her brand as well so for that lady she would rather work with a human being on those things without having to understand all that could for her she just felt for her to even take her business online was a big step yeah let alone dealing with all that stuff and like that does come down to that relationship between marketing and pricing as well and I know that even with our site as well we have people manage it but if anything goes wrong or if I notice something's up I know I can email that person straight away and like you said talk to that person yeah and this is what Stella's done because she's actually created her brand around the fact that do you know what you will have to pay for this but you are going to have a real person at the end of the line it's almost the insurance policy yeah in some respect so yeah and so this that recurring revenue allows Stella to communicate how much she values the relationship insurance is about certainty yeah someone's going to be there when it goes wrong and just the experience Stella has on actually dealing with that issue she knows immediately what to do she doesn't feel overwhelmed by that whereas this lady I know was just because once the once the overwhelm kicks in your ability cognitive well it's actually been proven the ability cognitively is the priority brain that sits about here actually shuts down so you actually can't solve it yeah you know so it's actually working with people who will so just on this because I know there's a lot of people in Stella's in terms of her industry yeah a lot of people are doing this and a lot of people watching the webcast today as well will be thinking I'm in an industry where commoditization is definitely a risk and you know for some people they may throw into the too hard basket for other people they might try and change up their pricing what can Stella do here to actually decrease that risk I know you love decreasing risks well I do yes yes that makes me very happy yeah and I think the big thing around commoditization is let's use hosting as an example the example I use before in the tech industry when I ask who does your hosting I'm expecting to hear a tech company name because if you know what you're doing in hosting you can do it yourself they've set it up in such a way that you can just buy it as an off the shelf commoditized product yeah but not everyone wants to learn how to do that now the day by the way will come when hosting will be an app on my phone and in fact there will be a virtual assistant who can actually figure it out for me absolutely it's for Stella this recurring revenue stream she's got that's called maintenance around maintenance and hosting won't last forever what it does is gives her a bit of capacity to figure out how she adapts to changes in the market she may for example be able to run classes to teach people how to do this stuff that's just one example but the other thing is it gives a time to figure out how she adapts and changes her business model that still very much gets to valuable relationships and certainty and all of those things and it could be that just that product's not called maintenance and hosting anymore she actually calls it something else because a bit like for Hoyts it's got nothing to do with the movie it is actually about the experience and this is actually where you truly get to learn what it is your customers value about you and so all your messaging actually then goes around it's actually almost got nothing to do with the product in many respects I don't know what the answer is for Stella in that regard in terms of where the industry is going to go I would encourage her to continue what she's doing now and to be open and adaptable to different ways of doing things and the other thing is her whole industry is going through this and so to be at the early there's a difference between trying to invent a new way of doing things that the market's not even aware of yet versus being an early adopter and jumping it on fairly quickly and early depends where you want to sit in that and I think as long as she's aware of it then you can put in things and you're not going to have that experience one day when you're just overwhelmed and you're just like holy crap when did this happen so before we get into you're going to do a quick demonstration on costs and how that all works within Stella's business but first of all people ask these when they were signing up for the webcast today and they want to turn the difference between discounting and rebates what that all means what's the difference between it what should you be doing can you just elaborate a little further on that and again this is in the messaging area just go back one so in terms of discounts and rebates the reason this is a messaging thing is whilst the financial impact may be the same the message it sends to your market absolutely gets to brand value whether you value your customers whether your customers value you and obviously then with the knock-on effects to profitability we'll go through in a minute so whilst the maths might look the same it actually because it sends such different messages I always encourage people to use rebates rather than discounts so to give you an example a discount is a bricks and mortar retailer doing this everything's just on sale I have no loyalty to that store I'm walking along the street and go oh that looks pretty and I go in and have a look and of course I get the sugar hit because it was a bargain and so I've saved all this money really which is very addictive there's a problem I used to have but yeah it's there's no long-term loyalty in that I'm not going to come back to that shop another one was was the things like groupon and spritz and stuff and so people would sell coupons at a massive discount as a marketing tool to try and get people into their store or their shop or whatever and it just never worked because those customers never came back they got their one off hit and they were never to be seen again so discounting doesn't create loyalty and repeat business the point with rebates and that works best on a volume basis so what we talked about the hoitz kiosks before when your cost of delivery is not huge the more you sell of your product the better and so if you have a customer who's buying $10,000 a year with you versus $100,000 a year with you that $100,000 a year customer is going to be a lot more profitable just based on sheer volume as long as you've got a good system set up and again we'll get into that in a moment the point is that then for your capacity to give a volume rebate to the $100,000 customer is fairly substantial so it could be at the end of the year there's a 30% rebate for them and so your net revenue is actually $70,000 so the math is the same as a 30% discount but the point is they've actually already spent the money with you they have paid you $100,000 which means they value you you then send a $30,000 back the other way and I actually encourage people to move the money because there's something about the money moving that actually communicates value I don't know what it is but I've seen it so basically in that particular scenario let's say there's a 30% rebate because they've spent $100,000 with you that year you're communicating the fact that they are very valuable to you you want to reward them for their loyalty and so their likelihood of spending $100,000 with you next year is much higher and again it's just all of those messaging that you communicate which then creates a very very valuable and thus profitable customer for you so can you start seeing how focusing on this spits out good finance results do you just say oh by the way guys here's a 30 grand rebate what's your explanation and that's where you need some good thought processes because you communicate this at the beginning so when you're talking to a customer about how they're going to work with you especially this is about creating the long-term relationship so the multi-year engagement you have a program you show them it's in the contract that if you spend up to this level because it's a good conversation to have I'll give you an example of how I used to do it in my own business model as a consulting CFO I have a discount and my price is reasonably high I'm managing other people's money in high risk situations and the investors truly value that so what I do is I actually do a at-risk portion so basically I set a percentage of my fee I'll set aside which you can then pay me on success at the end which is normally around capital raising if we raise more capital than you thought then it doubled so it's against me communicating necessary to make this capital raise happen for you and I'm also I'm backing myself so it's effectively deferred payment terms and it's a tool I use to then not discount so it's deferred payment terms rather than rebates but what it is it's sending the message that I back myself I believe in myself, I believe in your business because I'm taking a risk on your business I'll make it happen and I'm aligned to you I will do everything necessary for you to be successful and I find that sends a very powerful message okay so what I want to do now that is very powerful by the way we're at the end now so I want you to do a live demonstration sure let me pull across one I prepared yes exactly it's been baking in the oven it has a few hours now so what we're going to go through here is you know there's some questions that still are that we might be asking here in terms of cost and stuff like that and everyone might add that you can also find a copy of the spreadsheet that Rachel is going to go through now in the resource library and that's yours to keep and we'll send that out in the recording email if you do complete the survey that would be great we'll send that out to you and that's something you can use for your own business so let's go through this what's it all about and how can we actually use this to help ourselves in business so Sarah these questions which are on the screen now actually get to how pricing impacts your profitability the questions you need to ask yourself to understand that now some of this is then gets into the systems you have around delivery which is a whole another topic as such but is helpful to be aware of because if you've done value based pricing you do need to focus on these systems and again I'll point people to their mentors around this in terms of how they deliver but because that also has a massive impact on profitability it also says if you've invested in that stuff again you value the fact that you'll do a good job for your clients so that's why some of that stuff is relevant and also it just has a fairly substantial impact on the maths so it's just important to keep in mind and I know everyone loves maths so Sarah I know you're not so fond of maths so I'm going to ask you a question I'm going to ask you a question here what does 2 plus 2 equal? 4 you have enough maths to do this let's get into it I'm excited now so if we just bring the spreadsheet up so what you should see on screen at the moment is the pricing template Stella used to use to quote on number of hours and to create a quote for every job so at the moment she has three people and so that's the number of staff there and that costs her in salaries so salary is not super and all the rest of it but the salaries are around $20,000 a month in terms of the cost rate per hour that creates I'm just going to bring up the formula on screen here so basically we take the monthly staff cost of $20,000 and we divide that by the number of hours how we figure that out is 40 hours a week times three people times four points there's 4.3 weeks in a month the month thing gets a bit funky because it's not four weeks it's 4.3 and I've seen that catch more people out than I care to remember so that gives a cost rate to her business for having those three people on staff Stella's heard about the rule of thirds and the rule of thirds is used in the legal profession and the accounting profession as well but it's something a lot of web developers are taught to use the rule of thirds in their pricing to take the salary cost of your staff and times it by three to come up with a charge hour rate now obviously it comes up with a number of $116.28 now if you use getting back to messaging $116.28 your customers will look at you like you have three votes so generally what's done and I've just left that formula in there so there's just one less step in this generally you know you'd round that up to $120 so what she then does is she has a proposal on the table she believes it's going to take around 70 hours to deliver that engagement and so again that's what I was saying before from her viewpoint the maths is fairly simple once she knows it's 70 hours she times that by the charge out rate of $116 and she's got the price and again it's just an odd number and in terms of what that can you see how some of these odd numbers just what it communicates to your clients now by the way she had figured that out so it was $120 an hour and that would come up like $8,250 or something again just it's a round number it just looks more sensible so let's take a look when she changed her pricing model from quoting based on hours to packaging so what you need to look at here is actually volume and I tend to find in a services based business because the thing is with her medium and large project she doesn't deliver them all inside a month so the best way to do that and again this is very specific to her business model is to look at an average over a three month period because all of that stuff just evens out so what we look at here is so we've got a package pricing here of $5,000, $10,000 and $20,000 and so how many of those does she deliver now Stella used to a couple of years ago she changed her business model to focus more on the larger projects because she thought they'd be gold in them their hills it actually created major problems for her profitability because of the systems issues and the expectations that her clients had and her ability to service that so she's actually now gone back to predominantly smaller projects with the recurring revenue and with more of them and that's working a lot better for her and again that's taken experimentation whereas for another web developer it actually might be a different mix which we'll get to in a moment let me just walk through the maths first and then I can show you how you can actually use this to see how things change it's $170,000 the average price per project is just literally the revenue divided by number of projects so she can sort of see where she's sitting and that's a good trend metric and then the average hours per project so there's a certain number of hours available over a three month period in her team and so it's sitting at around 50 hours a project and so she knows that it's making sense remember in this model we've lost the nexus between specific hours on specific project and price so these metrics help her keep an eye on that stuff to make sure her overall business model is working a lot of web designers have very specific project management systems where you actually track your hours per project and I would encourage them to continue to use that because that's actually your way of making sure that these metrics stack up and make sense but they then no longer form your basis for pricing so obviously this all then gets into capacity which we'll talk about on the next page by the way before you start any marketing or pricing capacity is actually the precursor step but that's a whole topic for another day so her average revenue per month is 56,667 over those just 170,000 divided by 3 let's say she keeps her package pricing the same but she changes the mix so she only does 12 of those she does 9 of those so let's keep that to 6 and she does 3 larger ones you can see how things move around a little bit obviously the amount of hours spent per project has gone up from about 50 to around 60 her average price per project has actually gone up to similar to that quoted price before and so this probably gets into where she was trying to go up the value chain a bit and so this you can see how this actually changes the mix quite substantially whereas the actual the revenue the total revenues move from 170 to 180 so it hasn't shifted a lot I mean she's doing extra large projects yeah but it's also it has changed the dynamics of how her internal systems work quite dramatically okay so it's just again these sort of tools just help you do the what if planning and again you do this with your mentor and the numbers are a guide for you the decision sits with you they're to help you make decisions they don't make the decision for you so let's get into obviously the final magic number around profitability so this compares the two scenarios for Stella so in the first scenario where it was ours our base quotes there was 516 hours available per month in her three staff generally speaking people don't work at 100% capacity 80% is pretty good it's about as good as it gets so there's 413 hours available as billable in a month people go on holidays people get sick you do actually need to let people go to the bathroom occasionally you know that sort of thing and so that creates the estimated revenue per month which is just literally for her is 413 hours times that hourly rate got it so that's effectively her capacity that's her maximum revenue can you see how it's all coming together in the packaging model it goes up so let's talk about the other costs for three people I tend to find per month there's the best way to look at this and if you need to look at some of these other cost lines you average them over three months and then divide that by three to get an average monthly cost again it doesn't have to be perfect it just needs to help you make decisions so this is where 80% accurate is good enough so her other direct staff cost remember this is only salaries the other staff cost this is the the on costs on salaries so this is your super annuation, your payroll tax and your workers' company staff training you know how much I talk about that stuff there is, sorry that's down here so that's the staff on cost and then your fixed cost fixed cost is things like the rent and insurance bills and just the stuff of keeping the lines on these other staff costs and the vendor it costs she has a marketing admin and she's got some other people as well and so that's what that cost is so in the first scenario her net profit and this becomes her income from the business so she may draw this as a salary she may take it as owner's drawings if she had a sole trader she would pay dividends she needs to talk to her accountant about what the right method is but this then becomes her net profit for the month which then becomes her income more with the packaging side of things which is great this is a great spreadsheet I think for anyone to download from the resource library and take a look at excuse me and I think even just seeing that difference in one little change how it could impact someone's overall profitability and I haven't even put the recurring stuff in here this is just to keep it simple this is purely on projects so thank you that's been great thank you everyone for joining today and like I said please complete the feedback survey we'll then send you a copy of the recording within 48 hours as well as a copy of the spreadsheet if you haven't had a chance to download it thank you very enlightening today good to understand how it all sort of comes together and how pricing does take over a whole company and how everyone sort of needs to be aware of what they're doing all the way from the beginning all the way down to the end so thank you thanks everyone we'll see you next time