HBI #7: Pricing Problems

Sometimes, the hardest part of building a business is deciding what to charge.

Sometimes, the hardest part of building a business is deciding what to charge.

On one hand, you need to charge enough that you can cover your cost structure.

On the other hand, you need to charge a rate that your customers perceive as valuable and worth paying.

Which is a tough balance to strike.

For me, I kinda landed on the price for Crypto Tax Made Easy’s “done-for-you” bookkeeping service by accident.

I didn’t have a hard cost structure to cover. But I did have an 'opportunity cost’ structure to cover.

My effective hourly rate for work is about $500 per hour. Meaning, my earnings per month divided by hours worked is an average of $500.

So when it came to pricing the done-for-you-service which directly required my time, I needed to charge $500 per hour or more.

Otherwise, it wouldn’t make sense to redirect my attention from other opportunities.

I just happened to be lucky that my early customers saw enough value to pay for this service. Probably because:

1. There are no perfect alternatives to my service.

2. The closest alternative - traditional Accounting Services - cost $300-500 per hour anyway.

3. About 80% of clients saved more in tax than they paid me.

4. Even if they didn’t save more than they paid me, they used the service because they didn’t want to do it themselves. And they wanted peace-of-mind it was done right.

For the first few months of business, everybody happily paid this rate.

But as I grew, I started hitting points of pricing resistance.

One point of resistance was people not understanding the pricing structure. A failure of communication on my part.

The pricing was $500 per hour and I told people it took 1-2 hours per 1000 transactions.

I required a $500 refundable deposit to hold a spot on my calendar (function fo a 2-4 week waiting list) and a $500 per 1k transaction retainer for me to begin work.

Most people understood this pricing model.

While others thought the service was $500 regardless of how many transactions they had.

I realized “maybe the pricing isn’t clear enough”. At the same time I also got the process down to an average of 1 hour per 1000 transactions.

So, I decided to simplify the pricing.

The price became $500 per 1000 transactions reconciled.

I also started to have people who didn’t have the budget for the service, and I started to question whether to drop the price.

This would have been a huge mistake, and a mistake I see a lot of service business owners make.

Service businesses have ‘step fixed costs’. Meaning that in order to grow a service business, you generally have a point where your fixed costs take a massive jump.

Ex. you have 100 clients, in order to serve 101 clients you need to hire a new employee, buy more seats on your software suite, dedicate time and organizational resources to training, etc.

That 101st client better be worth the increased time and $ cost!

But if you drop your price in order to get more clients, and your costs increase as a result you just turned a profitable business into a shitty job with lots of risk.

I was considering whether to lower my price when I had a 6-week waiting list of people paying full rate.

The price drop would have been to accomodate more clients, but I didn’t have capacity for more clients.

So I would have had to increase my costs in order to serve them

Not to mention, I didn’t consider how by improving my process I had already cut the price in half.

When I first launched the service it cost and average $1000 per 1k transactions.

By switching to a flat and simple $500/1000 transactions I was able to provide more value to clients without hurting my margins.

So the decision has become clear to me:

The price stays the same until process improvements allow for a lower price with margins intact.

And due to my first-mover advantage, I know my process has a ‘moat’ because it is more productive than any new competitor could manage.

Even if someone charged half the hourly rate I charge they will be less efficient/effective and cost their customers more in the end.

Or, they won’t have the margins I do in order to grow their business.

I have plenty of time to adjust course and maintain my competitive advantage due to my pricing strategy.

Hope this was useful to you, especially if you run a service business.

If so, please share your takeaways!

Big love,

Matty Dubs