Case Study – Should You Raise Your Rates

Every business coach or mentor says that you should raise your rates. I think it’s a bad idea and a very poor short or long term cash flow strategy. In this case study I’ll show you why and prove it with the numbers.

And as I always say, if your customers say that your rates are too high, then your rates are too high and you either need to lower your prices or change your audience.

You hear it all of the time from business coaches, you need to raise your rates. But if you do that without considering the needs of your market and their willingness and ability to pay a higher rate for your products and services, you may find that raising your rates decreases overall sales and negatively impacts your profits.

How do you price your products and what criteria do you use to select your pricing?

You can choose whatever price you want, from free to $1 to $100,000+ 

Some people charge $250K for coaching services and they get them but they’re established in a specific market and they also offer other, lower priced services and products.

One thing to remember in pricing – basic finance principle – the higher your price the smaller your available pool of buyers

Ferrari makes 8500 cars a year,   GM makes over 2 million – Ferrari knows that their buying market is very small because a $300,000+ car is not in everyone’s budget.

Cannot price on value alone – doesn’t matter how much it’s ‘worth it’ to get the problem solved, if they can’t afford it, they can’t afford it

Is raising your prices or rates a viable and profitable cash flow strategy? Let’s look at the numbers in this case study.

Here are the details for this case study:

Subject is a course creation product marketer

During a webinar she revealed her Stripe sales data and I picked up on a few key metrics

During her first launch the program was priced at $997 and 75 people purchased

 Facebook advertising spend around $500

The next launch doubled the program price to $1997 and doubled Facebook advertising to $1000 35 people purchased

So doubling the price resulted in 50% decrease in signups even with increased Facebook ad spend – this should have been the first red flag that her price was too high

If she had kept the price at $997 would she have doubled her signups?

Here’s a couple of other results of price doubling:

With the higher price at risk transactions were at 20% and refunds were at 5%

And there is the ‘won’t pay’ factor, people who would make one payment and then refuse to or cannot pay the rest

Refund policy was 100% so all $1997 would be returned if a customer wanted a refund

20% at risk transactions was 7 out of the 35 people which is $14,000

Let’s look at the numbers;

Launch 1 at $997  75 signups   about $75,000     FB ad spend  $500

Net profit about $74,500 without considering non payers or refunds

Launch 2 at $1997 35 signups about $70,000 (already has  a-5,000 deficit over Launch 1)

            20% payment/fraud risk         -$14,000

            10% won’t pay/refunds          -$6000

            Less $1000 fb ad spent   Estimated net profit $49,000 (not counting non payers)

What if she had kept her prices the same for Launch 2?

Double signups at $997 would have been 150 people, approx $150,000

5% no pay would be 7 people  -$7000

Refunds at 2%  3 people or $3000

FB ad spend $1000 == Net profit $140,000

Would keeping the price at $997 increase signups? Yes and it would have reduced the at risk payments, as well as  maintained some good will, which must also be factored as a revenue loss.

During her offer, when she announced the $1997 price, at least 5 people wrote in the chat that they expected the price to be $997 which indicates she is not pricing for her market.

Does raising your prices pay in the long run? No and it prevents people who do need your products and services from getting them, as well as attracting people who will default on payments, won’t be able to pay, or want refunds in the longer term.

It is also not a good long term strategy for customer retention.

The results of this case study, using numbers that were available during the sales webinar, show that raising prices had an overall negative impact on sales volume and increased revenue risk. 

As I have said many times, if your customer says your prices are too high, your prices are too high and you need to either lower your prices or change your target market.

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