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Erica Douglass, "temporarily retired" after selling a successful business at age 26, writes thought-provoking blog entries challenging you to change your life and daring you to become more successful.
Updated: 3 hours 25 min ago

Why “Charge Less” is Almost Always the Wrong Advice

Mon, 2014-09-15 19:47

When I decided to become a coach in July, I sought out several experienced coaches for advice. After all, if I was going to make this my new business, I wanted to know what to do–and what not to do–to make my business successful!

One coach I spoke to advised me, “Charge less so you can build up a client base.” At the time, I had an almost visceral reaction to it. I replied, “No, I’m going to charge more.” She looked at me with surprise.

“Charge less so you can build up a client base.” It’s seductively simple advice that, no matter what industry you’re in, you’ve probably heard someone say. It’s one of those pieces of advice that seems so right. It seems like a good idea–but, in reality, many businesses fail by following this type of advice.

Why is that?

Why “Charge Less” Is Broken Advice

“Charge less” forces you to build a larger client base to support yourself. When you are just starting out with any new business, your goal is simple: Get one paying client. With all of my businesses, I was able to do that in the first 30-45 days I’d built the business.

The biggest challenge is getting that one client to pay you. It’s not how much they pay you. It’s that they pay you at all!

You might think, “Yes, but we don’t have the features/product/service that others have, so we can’t charge more.” This is a falsehood too. It’s a fear-based mentality that will bring you the wrong clients. Do you really want the client who would go with the better product (in his/her mind), but can’t afford it, so they go with you? Of course not!

Why People Actually Buy (Hint: Not Features)

Clients don’t buy a product entirely based on features. I know it sounds strange to hear that, especially if you’re in the startup/software industry, where pricing tables with bullet points are the norm. But it’s been true with every company I’ve built, from web hosting to software to consulting/services to my coworking space.

They buy the product because they believe it will help their business in some way. They buy a product from a startup because they believe in you. They are basically your early investors. They are placing a bet on you.

When I sold web hosting, I hired a coach/consultant who came out to my office for 2 straight days. We dove deep into my business. We found my most profitable product was a web hosting package I sold at 50% off our regular price. “Aha!” I can hear you thinking right now. “See, your web hosting clients bought on price.”

No. Turns out, they didn’t buy it because it was 50% off. They bought it because the way I pitched it was an opportunity to give feedback directly to us about what they wanted to see in the product. I said there would be a mandatory survey in the first 30 days where they could give feedback.

Then I got crazy busy with new customers and decided the survey wasn’t that important anyway, so I didn’t send one.

Do you know what happened next? People emailed me directly (and emailed our support desk) asking where their survey was. Some just wanted to make sure they hadn’t missed it because they were happy with their web hosting package and didn’t want it to be taken away from them because they didn’t fill out the survey. But an even larger chunk were hungry to give me feedback.

How Much Can You Charge? (Perhaps More than You Think…)

In talking to my clients, I discovered their biggest issue with the hosting industry wasn’t price. It was that, in the race to the bottom, customer service in the industry had become shockingly bad.

Here is the best part: Do you know what price I charged for that web hosting package? In a world of $10/month packages, my half-price offer was $40/month. The regular price? $80/month. For nothing fancy–just a shared hosting package with extra disk space. And the ability to give feedback–which found a “sweet spot” in a world of people who were frustrated with those $10/month hosting packages and the robots who seemed to be in charge of customer support at those companies.

I charged four times the going rate for hosting. What would have happened if I would have taken the advice of “Charge less so you can build up a customer base?” I would have failed! How many annoying, frustrating $5/month clients would it have taken for me to build a full-time income? Thousands.

I took that lesson and what did I do? I charged more! By the time I sold my company, we were into high-end dedicated servers and colocation, and our ARPU (average revenue per user) was $425/month. The clients who were writing us $8,000/month checks turned out to be just as awesome as the $80/month customers!

How Many Clients Do You Need to Pay Your Bills?

How many $8,000/month clients does it take for you to make a full-time income? Probably, even with expenses included, one. Perhaps two.

What do those customers look like? Well, they’re probably running successful businesses. They’re making good money. But they have real and significant problems that you can help with. They need to set up a better sales pipeline. They’re struggling to find the right people to hire. They’re reaching the limits of email and need better solutions to manage leads, sales, and support. They’ve taken on too much work for themselves and are trying like mad to delegate.

And they’d be grateful for your help.

I came into coaching looking around at the going rates for business coaching, and deciding to come in at the top of that range. Not only because I knew I’d attract the right people–but because I knew the hardest part would be getting people to write me that check at all, no matter what the number was.

The Real Reason Most People Don’t Charge More

I also charged more for one other reason, and that was because it forces me to be a better coach. At these rates, clients have high expectations (and well they should!) “But shouldn’t you charge less because you’re just starting out?” No, I should charge more because it’s a challenge. Because it forces me to think quickly and learn on my feet.

I know I’ll be a better coach, and a better business owner, if I charge more and force myself to live up to their expectations. If the expectations become too much, I can scale back, humbly admit my mistakes, and move forward. (And I will make mistakes–as will you! That’s all part of running a successful business.)

I risk much more as a business owner by coming in and charging at the top of the spectrum. And that gets down to the real reason “Charge less so you can build up a client base” is such popular advice, even though it will have devastating consequences in most businesses. It is because we don’t feel worthy of charging more. We don’t feel like we deserve to charge that much. So we charge less out of a deep-seated fear.

I’ve just told you that people don’t buy software based on features. (A dirty secret.) But I still see many business owners compare their company to some software that’s been on the market for 10 years and say, “Well, they have more features.” Great! But do they have the features your clients need? Find the clients who need 1/10 of those features and charge them a premium price just for that. Offer clients the opportunity to give feedback. Go out and be the 37signals in your industry. Build the UNIX philosophy into your company–do one thing and do it well!

What’s the worst-case scenario? No one will pay what you charge. You’ll probably find a customer even at the top rate you can charge, but just in case you don’t, look closely at who you’re having conversations with. Are you talking with broke startups who are stretching to pay $50/month for web hosting? Are you talking with wannabe business owners who’d have to pay the money for your business out of their own pockets?

Are those the customers you really want? Or can you find the one person who’s willing to pay 10x what all those other people are willing to pay, because you’ve hit the nail on the head with the exact solution for the problem he or she is trying to solve?

I don’t want everyone as a client. I want a few awesome business rock stars. And truthfully, that’s all you need to get started, too. Stop letting fear run your business–and by extension, your pricing. Charge more. And when people say “Charge less so you can build up a client base”, feel free to refer them to this blog post so they can charge more, too!

The intersection of finding a handful of great clients and charging them a premium is where successful businesses are built. It takes a lot of courage that most people don’t have. It’s time for you to put away that fear and build a business at that crossroads.

Here’s to courage, and charging more!

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