"Put something on your menu that's 100x more expensive." In this episode, Alex (@AlexHormozi) shares a few quick frameworks and tactics on pricing that will immediately help you drive more profit no matter what product or service you sell.
Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned and will learn on his path from $100M to $1B in net worth.
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In this podcast, I want to give you a couple quick tips on pricing that will make you more money if you just do the stuff that I outlined in this podcast. Enjoy. Have something extremely expensive to sell that you never even plan on selling. I learned about this anchoring tactic from a friend of mine and he said, "Listen, man, you can just put something on your menu of items or services that you sell that's 10 or 100 times more expensive." And just by having it there, it'll anchor everything else on your menu or the rest of the prices that you have. And just make it something that if someone actually bought it, you'd be stoked that they did. But what ends up happening is that, one, you'll sell more people on your core offer because they have this big price anchor. Second, it allows you to nudge up your main offer's price because related to the big one, it looks like almost nothing. I was talking to a different friend of mine and I said, "Hey, you know, you should consider just adding one of these things in." And he had a weight loss business, a very generic online weight loss business. And so he added a six times higher price version of his offer. And then the craziest thing happened. People started buying that more than his core offer. And when he did that, he tripled his profit overnight. And so the thing is that it also breaks you, especially if you're starting in business, out of this fear of raising prices by just saying, "Hey, there's no way anyone's going to buy this. I'm going to make this so expensive, no one's going to buy it." And that's okay. So you give yourself permission to just fly it out there. But what you will find is that 10% of customers just want to buy the most expensive thing. These are the whales. And the only thing worse than making a $1,000 offer to somebody with a $100 budget is making a $100 offer to someone with a $1,000 budget. Because in the first scenario, you lose $100. In the second scenario, you lose $900 of the money that you should have made but didn't. Raising prices almost always makes you more money, but you hear no more often. And so let me break this down. So I had a sales guy in one of our portfolio companies, and we doubled the price of a product. So a lot of people are really afraid of 10% or 20% increases. I'll test 4X, 5X price differences. Pricing in many instances is far more inelastic than you think it is. So elastic versus inelastic pricing. I'm not going to get into that. But basically, if you have a $5 sandwich going to $10 sandwich, there's a lot of elastic to do with food. Meaning people are very responsive to small increases in price. The classic counter example is if you have a life-saving medication, it's not very elastic at all. Meaning if you double the price, people still are going to pay for it because they need to live. And so the thing is that if you have a very valuable thing, the price is usually a lot more flexible than you think it is in terms of how much you can move it up. And so I like making massive price tests. But the thing that you have to have when you do this is the balls or the stomach to deal with more nose. And so when I walked that sales team through the price increase, I said, "Hey, we're going to double the price," I said, "You have to understand that we're for sure going to get less or fewer yeses." But the question is, will we get half the yeses? So we had a 35% reduction in conversion percentage, but we doubled the price. And so we made more money in multiple ways. So one, we made more absolute revenue. We literally just made more top line. But the magic of this is that, let's say the cost to our thing was $500, and we sold the thing for $1,000. Okay, so we have 50% margins. Well, if we double the price, we go from making $500 in profit to $1,500 in profit. So I actually tripled the amount of money I make by doubling my price. And so even if I have a 35% reduction or a 1/3 reduction in sales, I tripled how much money I made on the other 2/3 of my sales, which means me doubling the price with a 1/3 reduction in sales still doubled the profit in absolute amounts, despite selling 1/3 fewer customers. And one of the nice benefits of having fewer customers is that you have fewer costs associated with delivering on them. So not only is the gross margin per customer higher, your fixed costs that you have to incur to continue to expand your infrastructure go down. And fundamentally, a smaller amount of customers that make more money is an easier business to run than more customers that make you less money. And let me tell you how important this is, because this is specifically from all my 40 plus business owners. All right, so if you're 40 years old or higher, you tend to be more receptive to this concept. All right, I've seen businesses that have not changed their prices for five, six, seven years, right, because they're afraid to do it, whatever. But I want to give you some real hard truth right now. In 2017, if you sold something for $100, that was your only product, and you were running 20% margins as a business. If you did not change your price from 2017 until 2024, that $100 now means that your costs in that business have gone up by 20%, which means that your profit is now zero. And so if you feel like your margins continue to compress year after year after year, it's usually because you're not appropriately adjusting your prices. So to give you context, $79 in 2017 is the equivalent of $100 today. And so that would be like you going back in time where you had a 20% margin business and running it at a $79 price point rather than a $100 price point. And so you just like that eliminate all the profit in the business. And so you have to do the reverse of that because inflation is a compounding threat to your business that every year stacks on top of itself. And so if you're not making three, six percent increases in prices, at least annually, you're not even keeping up with inflation. And to give you a little story around this, Warren Buffett, when he bought these candies, said that he only wanted to control one thing. And so what that one thing was is that every year, he would look at all the prices of all the candies and he would ship them the new pricing. And he has raised prices 50 years in a row, sometimes in a single year as high 17% onto their pricing. And as a result of that, he's cleared himself a billion dollars in profit. And so if it was the one thing that he focused so hard on, it might be something worth thinking about. So if you do make a pricing change, there's two components to this. One is new customers, the other is old customers. The easiest thing to do is just change the price and just apply it to everyone who's new. That's simple. And if you're in a transactional business, then it's fine. Even because the old customers come back and buy again. But if someone's on some sort of recurring service, it's a little bit trickier. Now, I have some tactics around this, but I'll just give you the high levels, which is you want to have a price increase letter, you want to talk about all the things that they're going to get as a result of the investment that you're now making into the business, and that it's the only way that you'll be able to stay in business, given inflationary pressures, etc. All right. And so you just want to say, here's the thing. Here's the stuff you're going to get. I want to keep my promise to you, which is to keep our thing as good as possible. And only way for me to ethically keep my promise is for us to reflect that in the prices, which are now having to be changed effective this day. But don't worry, I've grandfathered you in to your old price by this time. And it's key is that the old customers, you say, I've grand, everyone wants to be grandfathered. You say, so I'm grandfathering you in until this date. And that way, it's not like it's changing tomorrow. It's delaying the pain and giving them a gift right now as a way of honoring the fact that they've been loyal customers to you. Those are the main bullets of what that price letter would go out and say. And if you are going to raise your prices, you want to be measured about it. You should know what your conversion rates are prior to you making the price change. And you should be able to give a statistically significant sample size of shots on goal with the new price before you make a decision. If you get on the phone and the first two people say no, well, we won, new more people are going to say no, we already expected that. And if you have call it 40% close rates right now, well, if you make double the price and you go to 30% close rates, then that's still a great deal for you. You might just be getting the first two nose out of the seven nose you already know you're going to get when you talk to 10 people. And so talking to two or three people getting nose doesn't mean you need to change your price. It might have just been the nose you're normally going to get even at your lower price. And so you can't be emotional about this. You have to be calculated. And this in my opinion is the reason most people don't raise their prices or can't do it successfully.
