Value Pricing and the Three Bears

The Mind 🧠 of a CFO

Read time: 3:03 minutes

Welcome to The Mind of a CFO newsletter. The newsletter is designed to help entrepreneurs grow in business 📈, mind 🧠, body 💪, and spirit🧘.

We will give our CFO's take on a topic to grow your business profitably each month.

In addition, we will provide you with a few things we are listening to 👂, reading📚, or watching 👀 that we believe will help grow an entrepreneur.

♻ CFO’s Re-Take - Pricing Based on Value

We hear, “but my competitor only charges $xx, so I cannot increase my prices”, a lot. We challenge this way of thinking by asking, “what do you do that your competitor does not?”

The list of answers that comes from this question is exactly the value your company brings to your customers. Service differentiation is crucial to justify the prices you charge customers.

Being able to make this list relatable to your customers is key. For example, your company might use a specific piece of software that your competitor does not. In most cases, your customer could care less about what software you use.

The customer typically only cares about one thing. They care about how your service makes their life easier, better, safer, etc. This is why communicating your value can be tricky.

Understanding your value and communicating the value can be difficult and take time. One way to shortcut this process is to raise prices until you get too many “nos” from prospective clients. Or your backlog begins to slow up.

This approach is similar to Warren Buffett's 20-slot rule. Here is Warren's 20-slot rule applied to your business and pricing.

"I could improve your [business] by giving you a ticket with only 20 slots in it so that you had 20 punches — representing all the [clients] that you got to [take on in a year]. And once you’d punch through the card, you couldn’t [take on] any more [clients] at all.”

Warren's rule would change your pricing mindset. He would tell you, "under those rules, you’d really think carefully about what you did and you’d be forced to load up on [clients] you’d really thought about. So you’d do so much better.”

The take here is you need to be more strategic in pricing services in your business. Stop taking the easy way and pricing by the hour.

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Goldilocks Pricing Strategy

Many business owners become uncertain about their value and are afraid of receiving rejections from customers. The Goldilocks Pricing Strategy solves this problem by establishing three different prices.

This gives the customer a choice and lets them see the difference in value between each tier. The three prices are the floor price, the just right price, and the go celebrate price. These pricing strategies entail:

  • Floor price - industry standard profit

  • Just the right price – above industry standard profit

  • Celebrate price – go out and pop bottles profit!

The first price is an anchor and should be the sum of indirect and direct costs plus your overhead allocation and minimum industry margin. You aren’t trying to get people to buy this package. It’s designed as a baseline to show that tiers 2 and 3 are more valuable.

You want to put all the value in the second and third tiers with the goal of getting customers to buy the middle package. Finding the right tier prices will take trial and error. We look at pricing as a dial that can be turned up and down based on future projects in the pipeline.

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Brain 🧠 Food

👀🧠💪 As a former college athlete, I appreciate a professional athlete's dedication and love looking behind the scenes at how pros operate. Check out Full Swing to get a behind-the-scenes look at PGA players.

📈📚This was recommended to me by Verne Harnish. Read Harvard Business Review’s take on the Goldilocks pricing by clicking here

Thanks for reading, Luke Templin!

P.S. There are two ways to work with Luke to grow your business profitably.

  1. Virtual CFO Cohort for service-based entrepreneurs with $250k - $1 million revenue.

  2. Fractional CFO for service-based entrepreneurs with over $1M in revenue.