From: alexhormozi
Pricing is identified as the strongest lever for profit in a business, even more so than acquiring or retaining customers [01:14:10]. Nailing a business’s pricing is considered the most impactful skill for increasing revenue [01:14:15].
Four Levers of Business Growth
To grow a business, four key levers must be optimized [02:28:01]:
- Traffic – Increasing the number of potential customers [00:15:02].
- Conversion – Turning more leads into customers [00:15:03].
- Price – Setting the optimal price point for offerings [00:15:04].
- Churn – Decreasing the rate at which customers leave [00:15:05].
The overall goal is to maximize “earnings per click” (EPC) or “earnings per eyeball” over the longest period [00:15:24]. This is achieved by optimizing for conversion rate x lifetime value (LTV) [00:15:56]. LTV can be calculated as Price / Churn Rate [02:27:45].
The Impact of Price on Conversion and Churn
Price has a bidirectional relationship with conversion and churn [02:28:31].
- Conversion Rate: Prices over $100 tend to significantly drop conversion rates [01:19:00].
- Churn Rate: A high churn rate (e.g., 50%) indicates that the price might be too high for the value delivered, with ideal churn rates for communities being between 5-10% [02:37:42].
It is crucial to collect data on conversion rates, LTV, and churn for different price points to determine the most profitable strategy [00:15:21]. Even if a higher price yields a higher LTV per customer, a significantly lower conversion rate might result in less overall revenue [00:17:05].
Testing Pricing Strategies
Companies that frequently analyze and adjust their pricing are significantly more profitable [01:19:25]. This means being willing to test different price points [01:19:16].
High-Ticket vs. Low-Ticket Adjustments
When testing prices, it’s observed that high-ticket items are less sensitive to price changes in terms of conversion, whereas lower-ticket items show significant shifts [02:22:08]. This is because high-ticket purchases often involve a human interaction where the value proposition is more deeply understood [02:22:16].
Value-Based Pricing and Retention
The perspective on pricing has shifted from simply charging the highest possible price to creating a massive “value-price discrepancy” [01:13:10]. The goal is for customers to be “blown away” by the value, leading to higher retention and word-of-mouth referrals [01:13:20].
One-Time vs. Ongoing Value
A common mistake in the information and education space is blending one-time value (e.g., education, checklists, blueprints) with ongoing, consumable value (e.g., community, calls, updated content) into a single payment plan [01:10:48].
The ideal model, referred to as “big head, long tail,” separates these two types of value [01:13:15]:
- Upfront Price: For the one-time, permanent value received (e.g., core education or skills) [01:13:15].
- Ongoing Price: For the consumable, recurring value (e.g., community access, weekly calls, updated ad creatives) [01:13:15].
This approach ensures that the perceived value continuously outweighs the ongoing price, significantly reducing churn [01:11:10]. It allows for a more sustainable business model that prioritizes long-term customer retention over quick, high-ticket sales that may lead to high churn [01:14:11].
Managing Churn and Refunds
High churn rates (e.g., 50% monthly) are a significant problem for business growth, as they negate the benefits of customer acquisition [02:32:04].
Refund Policy
A flexible refund policy is crucial. Denying refunds can lead to customer disputes, negative sentiment, and potential regulatory issues [03:24:11]. It’s better to process refunds easily, even if it feels like a loss, because it prevents negative perception and allows customers to potentially return later or purchase other offerings [03:25:56]. This is sometimes called the “friendly goodbye” [03:26:54].
Prioritizing Growth Levers
When deciding where to focus resources (time, money, effort), identify the single biggest constraint in the business among the four levers (traffic, conversion, price, churn) [01:47:43].
A simple framework for prioritizing is “More, Better, New” [01:48:40]:
- More: Can you simply do more of what is already working? For example, if ads are profitable, can you spend more on them? [01:49:00]
- Better: If you can’t do more due to limitations, can you make what you’re doing better? This could involve improving ad creatives, refining landing pages, or enhancing the core product [01:49:22].
- New: Only when “more” and “better” options are exhausted should you consider implementing something entirely new [01:49:39].
For solo operators or early-stage businesses, the first priority is usually traffic to ensure a consistent flow of customers. Once there’s enough flow, focus shifts to churn and improving the product to ensure customer retention [01:52:22]. This strategic focus ensures that effort is directed where it will have the most disproportionate impact on financial growth [01:45:06].