Ditching Hourly

Jonathan Stark:

Hello, and welcome to Ditching Hourly. I'm Jonathan Stark. And today I am joined by guest Lauren Pearl. Lauren, welcome to the show.

Lauren Pearl:

Thanks so much for having me, Jonathan.

Jonathan Stark:

Today we are going to talk about Lauren's pricing framework. But first, Lauren, could you tell folks a little bit about who you are and what you do?

Lauren Pearl:

Sure. So my name is Lauren Pearl and I'm a CFO advisor. So what does that mean? So for context, at big companies, CEOs go to their chief financial officer when they need to make big important decisions and they need to check in with the data to know which right answer is going to lead to glory in profits. But what do you do when you're a startup founder or a small business owner and you can't afford a full-time CFO yet?

Jonathan Stark:

Mm-hmm

Lauren Pearl:

That's when you call someone like me. So I do this on an advisory basis, and I provide ongoing support to help founders make decisions based on financial data rather than just gut feelings. And there's a lot of folks who do CFO work on an advisory or part-time basis. So among those folks, my origin story is really what makes me unique. My background is weird. I didn't grow up in finance.

Jonathan Stark:

Nice.

Lauren Pearl:

I grew up running businesses alongside CEOs. So I started out as a CEO in training, running a family business. I was a management consultant for a while. I spent some rebellious years as a software engineer, but I got started in finance later in my career when I went to one of the best finance schools in the world and I kind of fell into the CFO role. So as a finance person and a CFO of eight years now, I have this unusual bias towards founder thinking. And most entrepreneurs hate finance. They think it's really annoying.

And I totally get that because I felt like that for years. But now I actually really love finance because I discovered that that's where all the answers are. Finance is the dashboard of your business. It's the language of your business and how that business tells you what's going on. So now my mission as an advisor is really to bridge that gap between finance and operators because finance shouldn't be this annoying chore. It should actually be your secret weapon.

Jonathan Stark:

Haha

Jonathan Stark:

And you said founders, so can you tell us a little, like you didn't say CEOs, so how, what kind of clients do you typically work with? What's the best fit for you?

Lauren Pearl:

Yeah, so typically I work with entrepreneurs that are somewhere between kind of like your million revenue up to like a 30 million number. Really, I'm helpful for anyone who doesn't have that full-time CFO on board just yet as kind of bridging that gap and being that person that you go to to think through these big company changing decisions so that you're doing it based on data.

Jonathan Stark:

But if we look at your portfolio of clients, is there a pattern? Like are these software startups? Are they chain of laundromats? Doesn't matter.

Lauren Pearl:

It matters a bit. would say I work often with businesses in tech a lot because of my tech background. I used to run a real estate oriented startup. So I do some real estate stuff, real estate developers. I do a bit in like agency, like services style companies. But I think one of the things that distinguishes it has to be a business that sort of

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

has time and bandwidth to be strategic about decision-making. There are some businesses that they really just don't have time to make big investment decisions. They're just sort of surviving. So I look to work with businesses that really have the ability to sit back, be thoughtful, make some decisions, and take some big bets in the market. That's when I really can help them do powerful things.

Jonathan Stark:

Right.

Jonathan Stark:

Okay, so it's more of a stage or a situation or something like that than it is like a vertical or anything. Okay. Okay. So excellent. And that does map to a lot of consulting where I work with lot of soloists and the size of the company that you indicated is like, there's this sweet spot between where they need an expert that's sort of like at the executive level, but they're not ready or they for whatever reason.

Lauren Pearl:

Yes, yeah, yeah, that's right. That's very right.

Jonathan Stark:

It doesn't make sense to hire a full time one. so they, they want some sort of like advisor consultant fractional, something like that. Okay, cool. So the, the original sort of origin of this chat came from an email that you sent out to your daily mailing list, which I'm on and it's excellent. I highly recommend people jump on there. the daily CFO, is that right? Yep. Cool. And it was about pricing. So of course that grabbed my attention.

Lauren Pearl:

Exactly.

Lauren Pearl:

Yeah, thank you.

Lauren Pearl:

That's right, the Daily CFO.

Jonathan Stark:

And you put forth a very simple framework that you would use to set a starting price for whatever. And I was hoping that you could kind of walk us through, I mean, the basics of it for sure, but then the devil's always in the detail with pricing. like, there's a lot of squishy stuff in there. So I'm curious how you work through that in perhaps, you know, anonymous, but real scenario with someone and what challenges they face when they're trying to come up with some of the numbers that they need to.

Lauren Pearl:

Totally, yeah. Yeah, it's funny when you read that in the email, that was one of the first times I've actually kind of published that particular framework. I do a lot of sort of finance content creation that I put forth on the internet. And this one was really interesting because it's one of those things I was sort of doing with clients that was coming from my background and context, both working on pricing projects at companies and from just educational background, but he didn't really realize the simple framework I was using.

that email was this great opportunity to really kind of iterate and put down on paper. Actually, these are just the few steps that I go through each time. And I think that frameworks like this are super helpful for problems like this, for something like pricing, because it's an issue where pricing, it's super high stakes, right? Like if you get it wrong and you price too high, folks maybe won't buy and you lose them as customers. You price too low and it's not

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

Profitable and it can run you into the ground. You're making any money. It's not just high stakes It's emotional, right? Especially if you're a service provider like this is not just a price of like a gear that goes in a car This is the price for something that represents you. That's really personal and that's uncomfortable and then three

Jonathan Stark:

Mm-hmm.

haha

Jonathan Stark:

right.

Jonathan Stark:

that some guy that you're going to run into the supermarket has to pay you. All right. Yeah.

Lauren Pearl:

Yeah, yeah, yeah, it's wild. It does an uncomfortable conversation. It's an uncomfortable concept. What am I worth, personally, by skills? And then the third bit that makes it challenging and why it's ripe for a framework is like, this is actually quite tricky. As you mentioned, there's a lot of nuances. Folks get PhDs in this. So it's no wonder that it's so challenging and that there's so much to say about this. so.

Yeah, think distilling it into this simple framework kind of gives you a baseline of how to go about thinking about it in a step-by-step process. But as you say, it is very nuanced and you can hang onto this framework as kind of your baseline, but there's always gonna be kind of little caveats and ways to go off the rails and exceptions and all that sort of thing. And we can talk through some of those things in our convo today.

Jonathan Stark:

Cool. So at the very highest level, what would you say are the steps through the framework?

Lauren Pearl:

Yeah, so it's a sort of a four to five step process, kind of depending on how you look at it. Step one is set your floors with your costs. Step two is set your ceiling with your customer's ROI. Step three, set your expectations with the market. Step four, set your bill frequency with your conversion and churn rate. And your bonus step five, if you can, is

Experiment, experiment, experiment. All one step. Yeah.

Jonathan Stark:

Exactly. All right, so let's let's just go through them. So what what does the word floor mean in this context for people that don't know?

Lauren Pearl:

Yeah, so floor, I think when we talk about floor, also bears giving kind of the background of floor and ceiling. In the idea of setting a price, we're not looking for like one magic price that's gonna be the perfect price for your service. Price, I don't, we're looking kind of for a range, right? There's going to be sort of a lower limit to what your price could be and an upper limit to what your price.

could be, and this whole process is kind of about triangulating that range and then exploring your service within it. So setting your floor is about setting the minimum price that you would ever want to charge for this service. And it's why you're going to look at costs. So this can be a little confusing, because here's what I'm not saying. I am not saying that you should price based on your costs.

Jonathan Stark:

Yeah.

Lauren Pearl:

You should never ever ever price based on your cost, right? You're like, thank goodness. This is not a price per se. This is a bar that you're creating below which you can't do this work, right? Exactly. This is the price at which this thing isn't worth doing. The price

Jonathan Stark:

Thank you. Yes. Right.

Jonathan Stark:

Yeah, it's a boundary line.

Lauren Pearl:

You can't go below. This is the stupid idea threshold. Sure.

Jonathan Stark:

Right. Let me ask you a clarifying question though while we're on it. You mentioned, I think you said service. You might've said product or service. So it sounds like, I don't want to put words in your mouth, but it sounds like what you're saying is there is an existing defined product or service and we're now deciding to set a starting price for it versus designing the product or service.

Lauren Pearl:

Yep. Yep.

Jonathan Stark:

with a price in mind in the first place the way IKEA does it.

Lauren Pearl:

Yes, I am saying that this would be how you would think about things if you already had like a product or service in mind. And I'm trying to think of like how you would do it if you did it in the opposite. If you had like a price in mind you wanted to hit or a cost in mind you wanted to hit, I guess you'd be reverse engineering about what it takes to do.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

So I'm talking about service right now in our conversation because this step is, you have to do this step whether you're selling a product or selling a service. When you're selling a product, the cost is a little bit easier both to calculate and even like conceptualize. When we start talking about services, this cost step can get a lot more confusing, right? In products, we're thinking through almost like line items of like,

Jonathan Stark:

Yeah, yeah.

Lauren Pearl:

materials that go into creating a product and then you kind of add up all that stuff and it creates a price. For service, it's less about line items and it's more thinking about like capacity to serve. And I think that often when folks go into like hourly billing or thinking about hourly time, they're actually kind of using that as a crutch to think about capacity because ours is just like a unit of measure to use as a divisor.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

or a denominator. Yeah.

Jonathan Stark:

Right. So the, don't want to go off on too much of a tangent, but I'm going to, I'm going to bookmark this and maybe do an episode about it in the future. Cause I think it's a different topic. Um, but you could start with like, just to say what, to flesh out what I meant when I said Ikea, like the management, whoever, don't know who does it product will say we need to, we need an end table that we can sell for $29 figure it out. And the, okay.

Lauren Pearl:

haha

Lauren Pearl:

Mm-hmm.

Lauren Pearl:

Yeah.

Lauren Pearl:

Mmm.

Jonathan Stark:

And they figure it out. it also these other constraints needs to pack flat or it needs to fit in the back of the car. Here are all these constraints. need an end table. We can sell for $29. And that's a whole different topic that I just wanted to bookmark. That you could use as a service provider. And I do use when I'm writing a custom proposal for someone who wants to achieve some outcome and there's like a million ways I could do it.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah.

Jonathan Stark:

And I'm like, well, what's it worth to you? And I'll come up with a way that's worth it to me to help them contribute. Okay. So what we're talking about here is more of a thing that already exists. You already know what you do. Can you, could you give us maybe an example from one of your clients? Like what's an example of something they already do? They're not looking to change the service or they've already decided they're going to launch this service and say, Lauren, help us come up with an appropriate price for this service. Okay.

Lauren Pearl:

Yep. Yeah.

Lauren Pearl:

Yeah, definitely. I can give an example, but just to quickly talk about the bookmark topic, which is a little further confusing, because I think we can actually briefly mention, make it make more sense by saying that you actually on this cost step can go in either direction and you could also potentially iterate. So like you could have a product or service in bind.

that you then think through, okay, how much would that cost? How much capacity does this take up? You could then realize, ugh, that costs too much, or that's gonna take too much time. And you could go back and say, okay, how do I deliver the same value, but with less cost, with it taking me less time? And then you just do this step again. Like this cost doesn't have to be fixed. This step is, right, you first kind of discover what the cost is with your first sort of idea of how you think you're going to do this service or product.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

precisely.

Jonathan Stark:

Perfect, okay.

Lauren Pearl:

But you can always redo it when you discover that cost and aren't satisfied with it. Does that kind of clarify things?

Jonathan Stark:

Yep. Yeah. Okay. Perfect. Yeah. So you can iterate on your cost. It's not forever and ever this cost. Perfect.

Lauren Pearl:

Exactly, exactly. So a great example for to illustrate this step and then also that point in particular would be say I'm a service provider and I have one offering for my company that's like a diagnostic, right? Process like your typical first project that you're going to do with a new client. The diagnostic is going to cost $10,000 maybe to or rather, excuse me.

Jonathan Stark:

Hmm.

Lauren Pearl:

You think you might charge $10,000 on the market, and you think that to do this diagnostic, you're going to spend roughly 10 hours of working time auditing the client, maybe five other hours to do interviews or what have you. Depending on how you value your time, which we can get into a little bit of how to value your time, which feels like another impossible question to answer, but it's possible.

Jonathan Stark:

Yeah.

Jonathan Stark:

Heh heh.

Lauren Pearl:

you can reverse engineer that and say, so to do this project that's now 15 hours, how much does that quote unquote cost me? When you discover that, you may find, well, 15 hours, like I'm never gonna be able to charge enough for this one project that's like worth the hours of 15, worth the cost of 15 hours of my time. In which case, you could go back and say,

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Right.

Lauren Pearl:

You know what, instead of this being a full and intense diagnostic project where I'm doing one on one with a client, I could run them through a survey, right? And I'm gonna charge them less, but it also costs me no time and that's where I'm gonna start my work. So.

Jonathan Stark:

Yes, right. So now you're getting at that exact thing where it's like, cause if you don't think just, let me just flesh that out a little bit where it's like, okay, we need to do this. This client needs a diagnostic before we move on to anything else. And my base assumption is I'm just going to do it. And like you just described, it'll probably take me 15 hours and

Lauren Pearl:

Exactly.

Jonathan Stark:

my floor, my walk away price, the price below which I wouldn't take one penny less or it's just not worth it to me. I, you know, you could just do it on gut instinct if it's just you or you could calculate what your value, how much your effective hourly rate you want it to be. And you could say, eh, it's, it's not worth a penny less than $5,000 to me. That's, I just want to point out to the customer or the customer, the dear listener, that that's your cost. And if you give that as your price, you're making no profit.

Lauren Pearl:

Yep.

Lauren Pearl:

Right.

Lauren Pearl:

Right.

Jonathan Stark:

So we need to, we're going to talk about that more for sure. Probably when we get to the ceiling or expectations, but, but that would be, so you'd say to yourself, self, I wouldn't do this for less than $5,000. So I have to charge 10,000 or, you know, I have to charge more than 5,000 as if you were like, as if you were going to pay someone to be you. And it wouldn't make sense to pay someone to be you and give them $5,000. And the client gives you $5,000. Cause what's the point? There's no point.

Lauren Pearl:

Yep. Yep.

Lauren Pearl:

Yeah, right, right.

Lauren Pearl:

Right, exactly.

Jonathan Stark:

Right, so you have to charge more than the floor and you might say to yourself, well, geez, I know this client is, for whatever reason I know, they told me they've only got $500 for this. So I know my floor is higher than the ceiling, which we'll get to. So I have to switch to a service. I have to change the design of the service. So that's a great point.

Lauren Pearl:

Right.

Lauren Pearl:

Exactly, that is exactly right. I think the kind of overarching equation that is helpful for this is thinking about your cost for a certain project as being the like minimum annual take home you'd be willing to make divided by the number of these things you could sell or execute per year. Right, it's sort of like your walk away income divided by your capacity to do this.

If you only ever sell one thing ever, that's a really easy equation, because you can just think through, how many of these per month or per year can I do? It gets a little more complicated when you're multiple things, because each thing kind of takes a different amount of time, and blah, which is, think, why we see this hourly billing thing, and we're like, this makes no sense. Why do people use it? I think they're looking for that common denominator. They're looking for a unit of capacity.

Jonathan Stark:

Yeah.

Jonathan Stark:

Yeah.

Lauren Pearl:

as stand-in so that they can think through like, what's my commitment to this one project? What's my kind of cost for doing this project versus another?

Jonathan Stark:

Oh yeah, yeah, it's easy. It's not right, but it's easy. It's easy to measure. Okay. So that's a bunch of good stuff in there. I like that formula actually. I want to think about that more. I wonder if you could just use, even if you did offer multiple things and sure, maybe certain things lead to other things. So you sell it, you know, loss leader type stuff, but you could say, could say, well, if I only did it, I do lots of things, but if I only did this one thing and I want to make whatever $500,000 a year and I could do 50 of them a year divide it well.

Lauren Pearl:

Yeah. Right. Right.

Lauren Pearl:

Yep.

Jonathan Stark:

That's what the price for this should be. that's, well, I just said price. Is that how you calculate the price or the cost? Okay.

Lauren Pearl:

Right. It's cost. I think to clarify, and again, this is why as a service provider, these things often we get them wrong because it's confusing and I think labels are really important. So when we're calculating our costs, we want to think about using the like, I always get this confused, numerators on the top. We always want to think about using the numerator that is the minimum income we would want to make, not like ultimately our goal.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

because we're ultimately trying to figure out what's the cost. What's the cost of doing this thing, the threshold below which it's not worth doing? So the numerator here is the minimum income we're willing to make, or maybe below which we're unwilling to do the thing, divided by our capacity to do it. So it is a cost rather than a price. If you wanted to think.

Jonathan Stark:

Yeah.

Jonathan Stark:

Mm-hmm. Right. It's a cost. Yeah, it's a break even.

Lauren Pearl:

Right, if you wanted to think through price in the same way, which you shouldn't, but if you wanted to, you would use instead your goal income divided by your capacity to serve. But we're not going to do that because that's not how we set price. Yeah.

Jonathan Stark:

Yes, thank you. That totally clarified it. So, right. And people can figure out that number. I think most people would be able to say, well, I need to make X dollars per year or I'm going to lose my house or I'm going to have to downgrade my lifestyle or something. So that's a pretty easy number to figure out. So, okay, great. Perfect. Perfect. Okay. So that, do we need to do more on floor? think that's, I think we've touched on like a few different interesting things.

Lauren Pearl:

Yeah. Right.

Lauren Pearl:

No, I think that we've pretty much covered the floor of kind of how you set that bar so that you've got the context for the rest of the steps on. If any of these steps brings me to a price that's below step one's floor, start again, rejigger how I'm going to do this product or service or just throw this away because it's a bad idea.

Jonathan Stark:

Yep. Yep. Or to segue into the ceiling, sell it to someone for whom there will be much more value. So OK, so let's talk about number two, setting the ceiling with your customer's ROI.

Lauren Pearl:

Mm-hmm. Right.

Right, so setting the ceiling with ROI, it comes down to value. And Jonathan, you speak a ton about this when you talk about why it's important to ditch hourly billing because on the customer side of things, it shouldn't matter how much time it takes me to do a service. It's really about what does this client get out of acquiring that service? What are the results? So what you need to do is you need to figure out

Jonathan Stark:

Right.

Lauren Pearl:

what that value is of the thing that your customer or clients are hiring you to do. And essentially, if you know that value and then you charge maybe 10 to 20 % of that, you should be a no-brainer purchase, essentially. You're a small, small portion of that return.

Jonathan Stark:

Hmm.

Jonathan Stark:

Yes.

Jonathan Stark:

Right, so let's iterate on that a second, because that went by pretty quick. I totally agree. You said exactly how I would say it. But let me give an example. So I was sick last month. I had to go to the emergency room for tests and x-rays and blood tests and da-da-da, services, right? It's all services. And do I want that to take a long time or do we want that to take five minutes?

Lauren Pearl:

Yep. Yeah.

Lauren Pearl:

Right.

Jonathan Stark:

And would I pay more for it to take a long time or would I pay more for it to take five minutes? Right? Right. And none of the, as nice as all of the service providers in the audience are, I'm sure they're probably very pleasant to be around. Your clients are not hiring you because they want to hang around with you. They don't want to spend more time with you. They probably want to spend zero time with you and have you just do your magic trick and give them the result.

Lauren Pearl:

Right, no way would you pay for it to take more time, of course.

Lauren Pearl:

Right.

Lauren Pearl:

That is right.

Jonathan Stark:

So what, how much would they pay for you to wave your magic wand and give them the result that they want? And, and, and then like Lauren said, if that, if they would say, my God, I'd pay a hundred thousand dollars to have that result. If you could just snap your fingers and give us that, but you can't snap your fingers, it's probably going to take you a while and you probably are just contributing to that result. You're probably just one piece of the puzzle. You can't

probably do the whole thing. There's probably things that have to happen after you do your part and all sorts of things could go wrong that ultimately may or may not or certainly would affect the outcome of them achieving this thing that they want. So what do you do? You don't charge them the whole number. You charge them a fraction of it. Like you said, you said 20 % could whatever, whatever it is, it's a small fraction of the magic wand number. And like you said,

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

use the exact same words, I would probably say it becomes a no brainer as long as they trust that you're not full of it.

Lauren Pearl:

Yeah, exactly. think breaking a little bit into the math here, because I am, despite my biases for founder thinking, I am a finance person. So I like thinking through kind of the factors at play here. And I think too, like I know for your audience, you end up hanging out with a lot of engineers. And I think as a former engineer myself, we like precision. So I think that's helpful. From an economics perspective,

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Yes, yes, yes we do.

Lauren Pearl:

what's going on here, right? I think it's interesting to think about these different factors. So there's the factor of the value the client's actually getting, like the dollar amount of the outcome. And you could look at that not by just asking the client. You could look at that kind of objectively by thinking about the result of the service you offer. So you could say, by hiring, I don't know, if I'm going to do

maybe a financial audit for a client where I look over their books and kind of tell them, you know, what's going wrong or what things they have to anticipate and worry about. And I know when I do that for a business of a certain size, I can maybe find, you know, a million dollars of, you know, potential missed opportunities and savings that could then get implemented throughout that year. So.

In that case, the value of hiring me would ultimately be like the ultimate value would be a million bucks, right? But say you were to ask the client, if I come in and I can like get in there and I could, you know, do all this stuff and somehow communicate them that million dollars worth of value without actually saying the number. And then I asked them, what do you feel like you would pay for it to wave my magic wand and make that happen? They will not say a million dollars.

Jonathan Stark:

No.

Lauren Pearl:

they're gonna say a number that is less than million dollars, that is a proportion of that. And why is that the case? So part of that is about their impression of your ability to actually get it done, right? It's that, because the value ultimately that you're delivering, it's not just the best case scenario value of the thing that you deliver, it's that value.

multiplied by the percentage chance that it will happen.

Jonathan Stark:

Right. As Blair N says, it's the value discounted by uncertainty.

Lauren Pearl:

Yes, exactly. And so it's an interesting thing to think about when you look at your kind of quote unquote ceiling, which is the ROI for the customer, the expected value for the customer. And then you notice when you ask the customer your magic wand question and they say a lower number, the percentage that lower number represents tells you a lot about how much the client trusts you to deliver that value, both how high they perceive it to be and how much they trust you to get there.

Jonathan Stark:

Right. That's a good point.

Yeah, it's a barometer for how much trust they have. Yeah. And it might not just be in you. It could also be in themselves. If they have to contribute to the, you know, they could be like, we're, we are getting distracted. You know, we're sure you're going to give us a great architecture roadmap and, we're not going to follow it. always, you know, there's all sorts of uncertainties. It's not just trust in you, but that is a big piece of it. Yep. Yep.

Lauren Pearl:

That's right.

Lauren Pearl:

Right.

Lauren Pearl:

Right, yep, yep, yep. And also probably how much of the solution you actually represent to your point. You may be a small portion of that ultimate solution. There might be other folks that they have to pay. There might be actually a goal of income that they need to take for themselves. So, right.

Jonathan Stark:

Right.

Jonathan Stark:

Yeah, and they also want some profit. So if you're going to save them a million dollars and they give you a million dollars, well, they just broke even. It's like they saved a million, but they spent a million. So nothing happened. So you need to have this notion of mutual profit, which is something I also bang on about all the time. And there's also inequity aversion that comes in here too, which is why the price will never be the value. The price and value will never be the same number because both parties need to profit.

Lauren Pearl:

Right.

Lauren Pearl:

Yes.

Jonathan Stark:

So like both parties need to be happier after the transaction. And on top of it, you got the uncertainty things. There's a lot of stuff going on here and it's very squishy and engineers can't stand that. But the thing to note is that you just need to get into a range where the price becomes acceptable to both parties. And there's no there is no perfect number. There's not a perfect number.

Lauren Pearl:

Yes. Right.

Lauren Pearl:

Yes, that's right. That's right. And I think it's helpful to think about those factors because one, it's kind of squishy, but it's less squishy. It's just that there's a lot of variables, right? And the exercise of finding your ceiling, I think, tends to be about first finding what that ultimate kind of like unrisk adjusted, un-proportion adjusted, unadulterated value number.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Yeah, the magic wand result.

Lauren Pearl:

And then thinking through what portion of that does the customer find acceptable for me to take as a provider of that solution for all of these different factor reasons. And just like in the cost step, this is something you can iterate on. So say you know that the value of what you're offering is really, really high, but the customer seems to want to pay you a low portion. What could you do to note increasing their confidence percent or

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

like maybe increasing your contribution to that outcome to ramp up where you fall in that spectrum. Or you could also discover that the ultimate value, maybe your proportion is pretty high, but the ultimate value isn't high enough, well then we can iterate on maybe we need to solve a little more of an expensive problem. Maybe by like thinking through what the scope of my work is gonna be is about, we can actually tackle something that's more worthwhile, that's more worth a higher price.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

and thinking through your value that way. So just like the first step, you can iterate on step two as well.

Jonathan Stark:

Yep. And this is why the inexactness of it, sort of, I, I like what your point is. There's a lot of variables and you're going to plug in numbers for each variable. There's. Guestimates. They tend not to be like dollars and cents. Perfect. But you can get a, you can get into the ballpark and kind of like do the math and say, okay. And you can get into a range. And this is why I recommend, you know, originally Alan Weiss was the first person I saw popularize this idea. But if you're doing cause a custom project.

Give them three options that are that are I usually like the Goldilocks curve. I call it where it's like you're driving people to the middle option by giving a you know, if you think the value is roughly $100,000 the magic wand value at the end of this is $100,000 and they're spending the time to talk to you whether you're a CFO or you're a brand identity expert or whatever.

Lauren Pearl:

Yeah.

Lauren Pearl:

Hmm.

Jonathan Stark:

they're talking to you. So they must think you can contribute to the outcome or they wouldn't be wasting their time. So there's gotta be, there's gotta be at least 10 % on the table. They must think you can at least contribute 10 % to this ultimate outcome, which is why I start my, my, uh, custom project proposals at a 10 % option where the floor is basically 5 % the cost to you to deliver. He's like, come up with something that was like 5 % of the value.

Lauren Pearl:

Right. That's right.

Jonathan Stark:

and then charge 10 % or least price it at 10%. And it's almost certain unless you're just brand new to this and like completely miscalculated the magic wand worth, how much is it worth question, then it's almost certainly going to be an acceptable price. Not that they're going to necessarily pick it. They might not like what you're offering, but that amount of money is...

Lauren Pearl:

Right.

Jonathan Stark:

It's got to be acceptable. mean, it would be crazy for them to even talk to you if they didn't think you can contribute 10 % to the outcome. And then to prevent yourself from leaving money on the table, you also do an option that's 22 % and an option that's 50%. And if they jump on that 50 % number, you know you underestimated the value. Yeah.

Lauren Pearl:

Yeah, it's the I messed up number. Yeah, it's the I misestimated the value of this project number. Yeah. Yeah.

Jonathan Stark:

Yeah, underestimated. Okay, so with the clients, we could, so I love all of the, I love that we're servicing all these variables and I hope that after this you listen back and you make a spreadsheet. Because that would be a great email. But when working with a customer, how would you recommend, if you can think of an exact example or a particular example, how would you recommend your clients get to this number?

Lauren Pearl:

Yeah!

Jonathan Stark:

So like in a service situation for a custom project, I know how I would do it. You just have a sales interview, like you talk to them. But, you know, do you have anybody that's got like maybe a productized service that they know they want to offer? And they're like, well, how do we price this? Like what actual exercise would you have them do to get the customer's ROI number? Would they just sort of...

Lauren Pearl:

Yeah. Mm-hmm.

Mm-hmm.

Jonathan Stark:

be smart and research the company and do some homework and figure out what their annual earnings are and feel well it must the value must be about this much or do you is it a conversational thing with like the founder of the owner or something.

Lauren Pearl:

I would say both. And I think they tell you two different things. So I think the research step, understanding more about the company and what they would reasonably hope to gain or lose as an impact of hiring or not hiring you, I think is a really good exercise. It's funny, as a financial modeler, I'm very comfortable at making guesses and estimates in models.

as long as I know how the math behind it works. And I think that instinct is really helpful here. So what we're looking for is we need to know that there exists ultimately a value that the client is getting. And when we're doing research, we are going after like, what will be the impact on my client's P &L for the next couple of years? Like what will happen to their profits because of hiring me? And

You can look at their current revenue. can look at, if you exist in the marketing side of the business, this can be pretty easy because you're thinking through, maybe if your service is going to create leads for them, like, well, those leads have a dollar value, right? If you just know their contract value, you know what one lead is worth to them. if you're on the cost side of things, maybe there's like a cost savings that they're going to be getting. If you're on the tech side of things, you're enabling them to have a product that exists.

Jonathan Stark:

All right.

Jonathan Stark:

Right.

Lauren Pearl:

And you can think through, okay, what is the dollar impact of a product that's working well versus one that has a bunch of bugs and is messed up? it's you can think. So it's sort of translating that like picture of the future that happens if they hire you versus the picture of what happens if they don't into dollars. So, and I think that's really helpful because you want that number.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

And then you also want to have that conversation with them to ask them how they feel about the value because that gets you their psychology independently from that objective number, even though it's an estimate, that unemotional number of what this service should be worth. Because it helps you both set your initial price and also helps you decide what to do next.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

It helps you not just decide the price, it also helps you decide, do I need to build trust here? Do I need to educate here? Do I need to actually point the client to the value that I'm seeing that they seem not to see when they say what their magic wand price is in this sales process, right? Because there's more you can do.

Jonathan Stark:

Right.

Jonathan Stark:

Yeah, there's a whole bunch of marketing and sales stuff that factors into your pricing power. But for the purpose of this conversation, I kind of want to just say that's static. The person that's listening, they've got a certain level of market gravity or brand reputation. They've got a particular service. They've got a particular level of trust built up with their audience.

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

And changing those numbers is like a separate exercise in the moment. like if so.

That said, there more, there's gotta be a little bit more to say about ceiling because I know this is one of the hardest things that people have. People have a very hard time wrapping their head around this, I think. So what are some, I know they do, and I think there are a few ways that are useful in figuring out these numbers and getting into the, just get into the ballpark.

Lauren Pearl:

Mmm.

Lauren Pearl:

Mm.

Jonathan Stark:

for the kind of clients you serve. One really, there's at least two ways, three ways, two ways that we haven't mentioned. like in a sales conversation with a new prospect, if you're really good at this, you can get a really good answer, but it takes a lot of practice. like a performance art. It's easier to go back and get a particular kind of testimonial from past clients if you ask the right questions, because there's no pressure at this point.

And they know they've got a better idea of what the ultimate result was. The uncertainty is gone. So they've got a better idea of what changed about their business. So you can get really good testimonials, know, assuming you did a good job and you have a good relationship with people, you can reach back out, even if it's been a long time, and say, hey, I'm redoing my website. I'd love it if I could send over a few questions to potentially include as a testimonial. Would it be okay if I sent over something really easy? shouldn't take you more than like five, 10 minutes.

And they're going to say yes, and then you send the questions and they are going to do it for like three months and then you have to keep bugging everything. But eventually if they answer these particular questions, they'll say things like, without Lauren, we would have lost a million dollars on the first real estate deal that we did. Like no, no doubt about it. Or, you know, not stuff like she's really professional. She was always on time. she never talked down to us. Like they'll, if you ask the right questions, they'll give you.

Lauren Pearl:

Yeah

Lauren Pearl:

Mmm, right.

Lauren Pearl:

Right. Right.

Jonathan Stark:

they'll be able to give you actual numbers, which is fantastic. And you can kind of extrapolate into the future that if you have clients that are like that or bigger or smaller or just up or down, but if you have clients that are like that, then it's reasonable to assume that, you know, some, something in the ballpark is going to happen for similar types of situations in the future. So testimonials is a really good one. And then another really good one. This one, this one is kind of Goldilocks in the middle of

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

Being able to do a sales interview really well and going back out to asking for testimonials from happy clients. The middle one is the jobs to be done framework approach where someone just bought. And this might be tricky for a big custom project, for a productized service or for certainly for a product or a course, something really finite. If you could get the decision maker to just talk to you about

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

why where they were right before the purchase like why did you decide to buy that and you can do this in a way this I first heard this from Michael port and it kind of terrified me when I read it but it's a genius idea is to right after someone agrees to buy they give you a verbal yes you try and talk them out of it

Lauren Pearl:

Yeah.

Lauren Pearl:

Ha ha ha!

Jonathan Stark:

And you say, you really sure you want to spend all that money? You know, why are you, you know, cause cause in the beauty of this, it's terrifying because it's like, you just close the deal. Like, what are you nuts? But refunds are a thing. Yeah. Take yes for an answer. Refunds are a thing. You know, like low client satisfaction to the thing. Low client commitment is a thing. And it's really, I will admit that I've never done this.

Lauren Pearl:

Yeah.

Lauren Pearl:

Right, take yes for an answer.

Lauren Pearl:

Yeah.

Jonathan Stark:

But it's really smart because it just really solidifies the commitment in the moment, especially for a coaching thing. This is genius for a coaching thing because the coach E has to show up so much in a coaching thing. the thing that you'll get out of that is all of the just right in the moment while it's still fresh, the testimonials, it's different. It's about the results. It's still the jobs to be done approach gives you

Lauren Pearl:

Mmm.

Lauren Pearl:

Yeah. Yeah.

Jonathan Stark:

the state of mind at the most inflection point when they flip from, I don't think this is worth it to, my god, this is gonna be, I am gonna do this. I am gonna buy this Peloton that I've been thinking about for six months or whatever it is. you can, if you, I think it's probably a very specific situation where you.

Lauren Pearl:

Hmm.

Lauren Pearl:

Hmm.

Lauren Pearl:

Yeah. Yeah.

Jonathan Stark:

would do this, but I wanted to put it out there in case there people in the audience that are like, I already kind of do something like that, or I was already thinking of doing something like that, or that could be part of my onboarding for whatever this weird thing is that I sell. So those are three points where I think you can get really, really good information. And they're just different points on the customer lifecycle, I suppose.

Lauren Pearl:

Right. Right.

Lauren Pearl:

Yeah.

Jonathan Stark:

And there's things like listening tours and, you know, all other sorts of things, but that's probably enough about the ROI thing.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah, yeah, yeah, yeah. I think that's really interesting. I think also, like, as you were mentioning those techniques, which both resonate, I feel like they could work really well for getting more info. That idea of asking customers who don't have anything to lose from revealing the value to you is really interesting. Like, just kind of spitballing here in the same spirit, a client who's already purchased a service from you for some

kind of value to potentially lock in their rate as what it is, but then ask for future customers, how much should I be charging for this? What is this actually worth? Like your deal's not gonna change, you're gonna stay at the, but should I be doing more, right? Should I, should the next person actually have to pay way more because the value is so big and kind of getting that no negative impact feedback.

from someone who probably has some pretty goodwill towards you because you've helped them and you've done a great job. yeah, steps like that to kind of just bluntly ask the information of customers feels very valuable because that's what you're looking for. You want to know what this is worth to them and they're really the best judges of that after the fact.

Jonathan Stark:

Yeah.

Jonathan Stark:

Yeah, that's exactly how I tell people to do it with new productized services. Get three beta clients, do a pro bono in exchange for feedback. And at the end, if they're happy with it, you say like, you know, like, well, as, as I said upfront, I'm glad you're happy with it. I'd like to send over these questions, you know, to get a testimonial. And I'm curious about pricing. If I was selling this for $5,000, would you recommend that to a friend of yours who was kind of in the same business?

Lauren Pearl:

Mm-hmm.

Mm-hmm. Mm-hmm.

Lauren Pearl:

Right.

Lauren Pearl:

Yeah. Yep.

Jonathan Stark:

And if you can see them either on video or in person and their eyebrows go down, then you know your price is too low because they'll be like, yeah, that's a no brainer. If their eyebrows go up, that's sticker shock. And they'll be like, no way. I never would have paid that. And I wouldn't recommend it at that price either. But it's exactly like you said where it's no risk to them. The deal's already over. They got it for free in this case.

Lauren Pearl:

Ha!

Lauren Pearl:

Ha

Lauren Pearl:

Wow. Yeah.

Lauren Pearl:

Right, right, right, no mistakes. I love that idea of incorporating eyebrows into your pricing strategy.

Jonathan Stark:

Eyebrow pricing, Eyebrowometer. Maybe we get AI image recognition on here. Cool, all right, let's move on to the expectations of the market because this one I can guess at, but it's a little bit outside of my normal process.

Lauren Pearl:

That's great. huh. That's really great.

Lauren Pearl:

yeah.

Lauren Pearl:

Mm-hmm. So this one, it's about setting your expectations with the market is about going in to the market with eyes wide open. Right. So we know what the floor is below, which it's not worth doing. We know kind of what the ceiling is on the price. We have some understanding of the ultimate value to the customer. What we don't necessarily know is

What else they're seeing? What do they expect? So actually in step two, as we have discussed it, we're actually starting to get a little bit into what they expect because we're asking them directly. But this is particularly important as a step to do, especially when you can't ask directly or you're not getting good data directly and your ceiling price is actually calculated in a more kind of outside observer way of

Jonathan Stark:

of course. Okay, yeah.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

ultimately the value of a solution like what you provide to any given business owner. And now you're looking at like, what have customers seen in the market when they've gone out and looked at your competition, right? So it's a research step. And sometimes when we get to the step, the reaction from founders will be, oh, I don't have any competition.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Yeah

Lauren Pearl:

So two things to say about that. One is, if you don't think you have competition, you are probably wrong. And actually,

Jonathan Stark:

Yeah, you're always wrong because doing nothing is an alternative.

Lauren Pearl:

Exactly. Well, in terms of direct competition, you're probably wrong. And you're hopefully wrong because if you really don't have any direct competition, that's like a red flag on the viability of your market. Startup ideas are like water. They flood to wherever there's an accessible gap that exists in the market almost as soon as it's made. So if no one else is there, it may be because it's not worth being in.

Jonathan Stark:

Yes, also true.

Lauren Pearl:

And the second thing about if you think you have no competition is exactly what you said, which is if you don't have direct competitors, and maybe you don't, or if the competitor's prices are hidden, so you do have them, but there's just no way of looking at them, the client that you're selling to has alternatives. Alternatives are, just as you said, doing nothing. Even if you, for example, examples are good here,

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

Say you invented a life-saving prescription medicine that has never existed before. You have zero direct competition. You could still do this step based on alternatives like symptom management, home remedies, spiritual medicine, doing nothing. Like death could be an alternative you're pricing against. Because you still exist in that competitive context. So that's what this step is about. Yep.

Jonathan Stark:

Yeah, yeah. Yeah, yeah.

Jonathan Stark:

Right. If the problem is real, people are probably already solving it in different ways. You might be a better mousetrap, which is the competition type of thing, or you might be a brand new, I don't know, mouse AI, know, like rodent removal AI robot that never existed before. But people have been doing something about mice for a long time. So there's always some kind of alternative. I want to...

Lauren Pearl:

Exactly.

Lauren Pearl:

Yes.

Lauren Pearl:

Right. That's right.

Lauren Pearl:

Right.

Jonathan Stark:

emphasize your point about if you literally have no direct competition, that's a huge red flag.

Lauren Pearl:

Yeah, it's a huge red flag. Competitors are a good thing.

Jonathan Stark:

Yeah, there's a reason they build Burger Kings across from McDonald's.

Lauren Pearl:

Uh-huh, uh-huh, competitors are good thing. It's a sign that there's something to sell in the market.

Jonathan Stark:

Yeah, people are buying burgers on this corner. Okay, so how would someone, how would you counsel someone to actually do this though? So would you, know, it's kind of outside of it. I mean, CFO, this is more of a CMO type of thing, I would think, or it's like, hey, you would you would you literally say to a client, like, get your CMO or, or founder, you do this, do a competitive analysis, or would you help them with that?

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah. Yeah. I competitive analysis is something that we often do in finance departments, especially when the strategy team exists under the finance department. so actually back in my consulting days, I did, different studies of the different operating makeups of big public companies. And sometimes strategy and kind of competitive analysis lives in the finance department because it's data. and sometimes it exists outside of that.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Okay.

Lauren Pearl:

So yes, this is something that many finance professionals can also do. Yeah.

Jonathan Stark:

Cool. Okay. just to paint a picture for probably, most people listening are soloists or small firms. Can you paint a picture of what that might look like for someone like that? And I know that's a smaller, probably a smaller business than you'd normally work with, but that's who's listening. So is there anything they can do to kind of get a sense of this?

Lauren Pearl:

Yes.

Lauren Pearl:

Yes, absolutely. So at a high level, what you're trying to do here is you're trying to take a peek at each competitive product or offer or each alternative as well. And you're trying to ask a couple of questions. You're trying to ask, how does this compare to all the other products or services in this competitive set? How does this compare to my product or service? And how are these differences

correlated or related to its price and typically, I mean this is something where you could literally just go around and research and like learn about the different petters in their space, learn about their prices and kind of get like a gut sense about what features make something more expensive versus what features or lack thereof are in like the bargain basement version. But the more analytical way to do this is using a spreadsheet. So

Jonathan Stark:

Mm-hmm. Mm-hmm.

Lauren Pearl:

And it's basically you open up like a Google Sheets and you're creating kind of lines where each line represents like a different alternative that you're considering or competitive that you're considering in their kind of like product they're offering. And then you're looking at the different sort of features that that single product has. know, everyone's seen.

at the bottom of an Amazon page when they are suggesting other alternatives to what you might want to buy, they have other alternatives they provide. And then for each of those alternatives, they provide some stats on how each of them differ. Well, this one's actually 12 inches wide versus 10. This one has a water filter. This one has the different features, how they stack up. You're basically doing that for your competition, for all the features.

By the way, great customer service is a feature. It's all of the things that make this thing different that might matter to customers. And then you have the price. And what you're looking to see is how the price goes up when a product that's similar in nearly every way but different in one, if that one feature really explodes the price,

That's an important thing to think about when you are thinking about your own offering and whether or not you have that feature and how that impacts things. So you're getting this sense of how the building blocks of your offering impact what customers think that your product or service should be worth. And in the context of a service provider, like,

like I mentioned, great customer service is one feature. Another feature, if you're a service provider, could be being seen as the number one specialist in your field of this thing. That's a competitive feature that might note a huge bump in the price for this service versus if you're just, yes, exactly, exactly. So that's really, it doesn't have to be.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Yeah, I wrote the book on thing that you care about, right?

Lauren Pearl:

crazy and only exclusively for big companies. A small service provider can provide this. You're just kind of getting a sense of the things that customers care about and are willing to pay more for and the things that don't seem to matter so much to them.

Jonathan Stark:

Yeah. So I want to, I want to add some nuance to this because generally speaking, I talk about this in the context of when I'm doing positioning with people and there's like this unique differentiator at the end of the positioning statement. And it's like how you're different from the competitors or the alternatives that people, your clients would be considering. And this requires a certain level of knowledge and perhaps even empathy with the kind of clients that you hope to land, the kind of your ideal buyers. Like you need to understand, you need to

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah.

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

You can't understand your ideal buyer until you know kind of who they are. okay, so this is certain bit of niching down or like at least, at least who are the people in this market that are shopping for this thing, either looking for this solution, probably because they all have the same problem or maybe the solution solves different problems, but ultimately they have a problem and they're shopping for a solution. So that, that thing for sure is in common with all these people, but you need to have some kind of idea of who it is who's shopping around.

Lauren Pearl:

Yeah.

Lauren Pearl:

Totally.

Jonathan Stark:

And then you can start to research the competitors and alternatives that might be considering this either through conversation with prospects through conversation with, it could be mentors that are in the space. It could be, start a limited run podcast to interview your ideal, you know, your ICPs and ask them things about how they would go about doing this. It could be that you reach back out to past clients. This is a really common one. Um, a lot of people who I work with who have been doing it air quotes the wrong way, don't even know.

Lauren Pearl:

Mm-hmm.

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

Why? Like they just got lucky and landed a deal and they don't know why they were chosen over anyone else or how their price compared or whatever. So you can just go back to these clients who you probably have a good relationship with who you're not even working with anymore. Same with the testimonials. Like what other options were you considering? Why did you pick me? Why did you trust me? What, you know, what were you afraid of before you hired me? What was the thing that made the difference? Did I seem expensive or inexpensive?

Lauren Pearl:

Hmm. Yep.

Lauren Pearl:

Yep. Yep.

Lauren Pearl:

Mm-hmm.

Mm-hmm. Yeah.

Jonathan Stark:

You know, all of these things. what ultimately what you need to find out, because at the end of the day, you don't, can't just compete on features. That's how SaaS companies end up completely bloating their products because they're just in this arms race of adding, of copying the feature of every other, every other thing out there. Hello, Instagram. So, and as a SaaS, I probably...

Lauren Pearl:

Sure. Yeah.

Lauren Pearl:

That's right.

Jonathan Stark:

I'm subscribed to a dozen or two dozen SaaS products and I can't stand when they add updates because I liked them the way they were. That's why I bought it. So you don't want to just add features and especially in a service business, that's probably not what you're planning on doing anyway. But the long way around here, the long winded way I'm making this point is the difference, whether it's a feature or a benefit or a niche specialization, world class expertise in something for a particular person.

Lauren Pearl:

Right. Right.

Lauren Pearl:

That's right.

Jonathan Stark:

Whatever that difference is between you and the alternatives or your competitors, it needs to be, this is the important word, meaningful or more importantly valuable to your ideal buyers. You can have plenty of differences like, well, I've been doing this for 30 years and everyone else has only been doing it for 20 years. Like, well, is that a meaningful difference to your buyer? Probably not.

Lauren Pearl:

Mm-hmm. Mm-hmm. That's right.

Lauren Pearl:

Right.

Yes, right, right. And I think that's part of the usefulness of this exercise is it forces you to be honest when stuff doesn't matter. mean, so I think too, like this speaks a little bit to, there's a caveat here, which is this simple pricing framework is meant to price anything. And we are specifically talking about services offering. this step.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

often comes up, I think, when I'm dealing with software startups who are selling a product in the context of a lot of different software offerings. And one of the discoveries that they typically have when they're in this space is sort of they'll initially think that they're going to price just like the current huge software company that currently exists in the market, right? They're like, well, this, you know.

Jonathan Stark:

Yeah. Yeah. Well, they're giving Salesforce this much. So.

Lauren Pearl:

Yeah, they're giving them like 10,000 a year per seat. And so that's definitely where we're starting. You have to kind of, this is an exercise to level set and be like, no, no, see yourself. You're not there yet. You're not Salesforce. So I think the spirit of that same discovery is kind of can go on as well for a service provider. You're not like counting up features and trying to race to get as many features as someone else. are forcing yourself to take a disciplined look on.

how you actually stack up against the competition and what the market actually cares about. You're going to run into a lot of issues here because folks can just put prices on their website. You don't know if people are paying those necessarily. you have to do it. Yeah, you have to take.

Jonathan Stark:

Right. That's another. Yeah, that's another big one. Copying stuff that doesn't work is not a good idea.

Lauren Pearl:

That's right. So it has to be huge grain of salt here, especially when dealing with service providers, because people will limp along selling things for super high prices and never selling them. And you don't know until they stop doing business within a year. But it's meant to be a step that forces you to look at when you first maybe come into the business, you think, oh, I'm so valuable. I've been doing this for 30 years.

you know, literally wrote the book on this 10 years ago, I should be worth, you know, a thousand dollars an hour. And then you come into the industry as a service provider and you realize, wait, this whippersnapper who's been doing this for two years is charging that much. clients are balking at me charging even half the price that he's charging what's happening. And it's like, well, he has a better value proposition because customers are valuing that and they don't.

actually value your 30 years of experience quite so much. yeah.

Jonathan Stark:

Right. that reminds me, sorry to interrupt, but I want to jump back to number two is when you lose a deal, ask you, you can ask it's again, it's a no risk situation for the, for the prospect. Why did I lose it? You know, and right. So that, that's a fourth one to add in there, but thank you for reminding me about that. I never lose deals. So just don't think of it. Yes. Kidding.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah! Yep. Yep. Yep.

Totally. Totally. Yeah, yeah.

Okay.

Jonathan Stark:

So that's another great one. on the I'm looking at the clock. I know we need to keep going. the key piece here, I think we've revealed that a key piece here is that you need to know who your market is. know, I mean, the market is a big thing with lots of different people in it, but you need to know what your the bullseye for you. That's your target. You're shooting for the bullseye. You might land in a, you know, a ring outside of the bullseye. And that's fine.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yep. Yep.

Jonathan Stark:

But you need to know who you're shooting for to answer any of questions. And I'll in the show notes, I'll try to remember to link to a resource where I think his name is Ryan. His first name is Ryan. think his last name is Ryan Doll, but he was the he was the he was either CMO. Anyway, he was a high level employee at base camp. And there's an excellent video of him describing.

Lauren Pearl:

Yeah.

Lauren Pearl:

Okay.

Lauren Pearl:

Okay.

Jonathan Stark:

their ideal buyer and how they air quotes competed with the other product management software that was out there at the time. And they made it very strategic. made a very clear strategy around staying simple and fast for a very particular kind of buyer. And they didn't, they didn't really broaden their market because it was like small businesses that, that were not super it friendly or comfortable with it.

Lauren Pearl:

Mm-hmm.

Jonathan Stark:

And that's a huge market, you know, especially for a smallish company. So it's a it's great because you might think Basecamp's in direct competition with I don't know what's out there these days, but like Notion or Monday or or ClickUp or whatever. and in their minds now, we're not even in competition with them because the differences that they chose, the features that they chose to include or more importantly, not include are way more important to their ideal buyer than.

Lauren Pearl:

Mm-hmm. Yeah.

Jonathan Stark:

adding Gantt charts and blah blah blah and waterfalls and burned down graphs and all this other what they would say is crap that just gets in the way and distracts people. So.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah. Yeah, that's right. That's right. Yeah, in order to do this stuff, you really do need to know who your customer is because that decides what their alternatives. It kind of has that assumption of you have that ICP in mind when thinking through what is this person looking at in terms of alternatives to hiring me. But it's

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

It's thinking about them specifically. What are they considering, not what is the entire market considering, right?

Jonathan Stark:

Yeah, the market's not a person. The expectations live inside of someone's brain and you need to find out what someone's you care to serve and hope, fingers crossed, that they have similar expectations.

Lauren Pearl:

Yeah. Right.

Lauren Pearl:

That's right.

Lauren Pearl:

That's right, that's right, that's exactly right.

Jonathan Stark:

Okay, so moving on to number four, the last one before the bonus round. This one is very interesting to me. So set your bill frequency with your conversion and churn rate. So this sounds very sassy or at least subscription-y because you mentioned churn. And even conversion feels very sassy to me depending on where in the funnel you're talking about the conversion. So let's talk about that hopefully with examples from sort of real world scenarios.

Lauren Pearl:

Yep.

Lauren Pearl:

Yep.

Yeah.

Lauren Pearl:

Mm-hmm.

Lauren Pearl:

Yeah, yeah, so this step and I think as these steps progress, I'm kind of going from like easiest to harder and harder and harder and sort of like concrete to squishier and squishier and squishier. This step I think is really about from the first three steps, we sort of triangulated on where you want to put your first, your kind of first draft price. Like you've got your cost.

Jonathan Stark:

Mm-hmm. Mm-hmm.

Jonathan Stark:

Yes, I like that.

Lauren Pearl:

You've got a rough idea of how the customer values you. You've got a rough idea of context. You're not going in blind. You know what your customer's already been looking at. And now it's about how are you actually going to execute this product? How are you going to package it as it relates to the pricing? And the idea here is that the way that you do so can impact

Jonathan Stark:

Hmm, okay.

Lauren Pearl:

the buying behavior and that you want to think about that before rolling this out because that same price rolled out in a slightly different packaging may be appealing or unappealing to your specific customer. So it's really about aligning the packaging with what you want to get out of customer buying behavior. So, yeah.

Jonathan Stark:

So yeah, is that like annual versus monthly plan or are you talking about, you know, payment plans or arrears versus paying upfront? what are, okay.

Lauren Pearl:

Yeah, all of it, all of it. we're thinking about, so, and bill frequency is one that I think is maybe most dominant, but there's also probably other considerations for how you charge customers to think through. Bill frequency is just the one that most often comes up in nearly every pricing case. So the two kind of alternatives to think about would be, are you charging like a big upfront payment for what you're doing?

low frequency, high price, or are you charging like little amounts on an ongoing basis for what you're doing? And obviously there's a spectrum between those two, but those are kind of like the extremes. The idea that is that a high frequency billing means that ultimately the price that the customer sort of sees that they focus on is a lower price ultimately, because they...

Jonathan Stark:

Hmm.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Yeah, psychologically.

Lauren Pearl:

only pay little bits, right? So because of that, conversion tends to be higher, because it's like a lower barrier to entry. there's only $14 a month to have this offering. Like, yeah, sure, no problem. I'll try this. No big deal, right? Same thing if you are a service provider. there's only a couple of thousand dollars per month. Yeah, I'll do that. No problem, right? So.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

It's great if you want to get that first sale. So it's really good for offerings that are, you know the customer's gonna love it, right? This is a very consistent, nearly everyone does this. It doesn't cost you much if they go away. This is great for one to many coaching. This is great for low cost maintenance offerings because the flip side of this is,

Part of the reason that the customer converts so easily is because they can also just stop any time.

Jonathan Stark:

Yeah, that's the, you're probably going to get to this, but there's a very low commitment on their part. So if the thing that you're offering requires high commitment, it's, it's doom. Like I used to charge, I used to have a monthly option for my highest ticket, private coaching. Doom. Cause they're not bought in and they just don't do anything. And they're like, this isn't working. So then they can't, the churn was like through the roof.

Lauren Pearl:

That's right.

Lauren Pearl:

Exactly.

Lauren Pearl:

Mm-hmm. Yeah. That's right. That's right. That's right. There's low commitment. That's right. That's right. That's right. It raises churn, but it increases conversion. It's an easy yes, but it's a harder stay. Lower frequency billing. This is like the other side of the spectrum. Big upfront payment.

Jonathan Stark:

Mm-hmm. You're right. Yes.

Lauren Pearl:

This is an annual plan. This is you pay me for three months of service. You pay me for one big, huge project. You're gonna charge them once. So all of your price, all of what they perceive as their cost has to be paid in one chunk so they see all of it, which means your conversion, it's gonna be harder. It's gonna feel like a harder initial purchase, but it's gonna be

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

really low conversion, both because they already paid and second, I think more importantly, they've committed.

Jonathan Stark:

Very low churn.

Right? You mean very low churn or very low...

Lauren Pearl:

Low churn, they, it's low churn one because they've already paid and it's also low churn or low returns, right? Cause you could, could pick up potentially ask for their money back, but they're less likely to because they already mentally committed to this thing, right? They're less likely to cancel cause they thought really hard about them. They made a decision that they are going to do this thing.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Right, the conversion rate's lower, but the people who convert are like so bought in.

Lauren Pearl:

That's right, that's right. So this works really well if you're offering something that's really high touch with a limited capacity and big upfront costs because you really care about customers sticking around and they represent sort of like a commitment on your firm's part as well. So you as a firm, or rather as a service provider, have to make a commitment to provide that service. You want that same commitment from the client too. So you may choose this lower frequency billing.

you're going to get lower conversion potentially, but you're going to way decrease your turn and decrease your downside from customers leaving.

Jonathan Stark:

Yes, exactly. there's, you know, these are dials on the Etch-A-Sketch. You can move them around. You could say like, there's a half upfront, half in 30 days, or there's, you there's all different versions of this or, you know, three, it's a, it's a three month contract. it's, it's three months or, how does, trying to think, minimum three months. It's monthly, but it's minimum three month commitment. they mentally, yes, they could still cancel a month too, but mentally they're, the expectation is they're not going to cancel.

Lauren Pearl:

Yep. That's right.

Jonathan Stark:

in the first three months. And so they'll just do the math and say, okay, it's a thousand dollars a month, but it's minimum three months. And the real decision I'm making here is three months worth $3,000. And so that's sort of in the middle ground. But it's more friendly perhaps to their cashflow situation or whatever. And these are all things that I would tend to negotiate. I never negotiate price, but I will negotiate things like this, like payment terms.

Lauren Pearl:

Right.

Lauren Pearl:

Yeah.

Jonathan Stark:

I'll work with a client who's who, you it's like I can definitely afford this, but I haven't got it sitting here in an account or I would have to move a bunch of money around and incur penalties to pay this in one thing, but I could do it out of my cash flow if we just do it like that. I'll do that with you know, that's I'm flexible on that sort of thing.

Lauren Pearl:

Yeah.

Yeah. Yeah. And I think it's OK to be flexible. I think it's just important to think about the impact of this billing frequency on your own business when you're a service provider. I think sometimes we are quick to negotiate on these things. Oh, don't worry. You can pay at the end of the project. Oh, don't worry. You can pay half up front. it And the reality is that your pricing strategy, your pricing model

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

No, not that. I won't do that one.

Lauren Pearl:

needs to align with your business goals and the way you want to run your business and your cash flow. So it needs to be something you're thoughtful about when you set that price and the expectation with the client.

Jonathan Stark:

in your cash flow.

Jonathan Stark:

Totally. Yeah, good one. Cool. All right, do you want to do a couple of minutes on experimentation? I know this is a marathon episode, people, so thank you for continuing to listen. let's talk about experimentation for a second.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah

No, probably. Thank you, dear listener. Yeah, this one's quick because it's really just about do it. This this step is experiment, experiment, experiment, right? You're going to all of these steps have been about kind of analyzing and being thoughtful and hemming and hawing before actually putting a price up to the market. But the reality is, and we all know this as entrepreneurs,

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

You never know how customers will actually react until you actually try and get a deal done. And I think this step is all the how on this step is all about finding opportunities to test, like being sensitive to when you encounter an opportunity where it's like, I could test pricing here, taking it, Whether that's starting

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

with one price, but making sure it's a price that you can bump up if you sell the deal and you want to test out if the market's willing to take more, if your customer actually the value could be higher than you anticipated. I know that on the proposals that you encourage folks to send out, there's like an expiration date and something like that is great because it's like, this is not the deal forever. This is the deal for now. And you're setting that expectation.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Right.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Cool. So yeah, I just want to pile on there too and agree with you and say like, you know, a price is not something you set it and forget it. It's a key piece of not just it's a key. It's so key to everything. It's key to your cash flow. It's key to operations. It's key to your product and service design. It's key to your marketing. Like it is a huge lever that you can move to.

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah. Yeah.

Lauren Pearl:

Yeah.

Jonathan Stark:

signal the market to increase your profitability or to destroy your profitability. It's super duper important. And I think a lot of people, generally speaking, just punt and they say, it's $150 an hour. Or, or they just lowball estimates to get the, get the project. And then they find out it ends up taking long. know, if it's not hourly, they lowball. And then they're like, I feel like I'm losing money. Well, you are losing money.

Lauren Pearl:

Yeah.

Yeah.

Lauren Pearl:

Yeah, yeah.

Jonathan Stark:

If you feel like you're losing money, then you are, because it's below your floor.

Lauren Pearl:

Right? Yeah, yeah. That's right. And it's important to constantly test, even when you think you got it right initially. Say you've been doing this for years and you really triangulate on a price that works. Things are gonna change around you. The world is evolving. New alternatives, new competitors, new pain points for clients that may supersede.

Jonathan Stark:

Yeah, new alternatives, new regulations.

Lauren Pearl:

what you were solving for, all this stuff is moving. So you always wanna be finding those opportunities to test. Other things I will often look for is like sometimes, like you mentioned pricing in tiers, continuing to do that every single time because it gives the opportunity to see, people seem to continue to be picking the lowest option. I wonder what's going on here. People continue to pick the higher option. I wonder what maybe changed or, also I think about this when,

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Right.

Lauren Pearl:

There's a one to many opportunity selling tickets to that in tiers and seeing how quick each of those tiers sells can give you this interesting insight into buyer psychology. And then there's also even the opportunity to do some A-B testing, right? Like a little bit of try selling it at one price, see what happens, try selling it at another price, see what happens. However you do it, I think the imperative here is really just the do it and keep.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

doing it because you have to have in mind that this is likely to change. You likely don't have it perfect and there will always be the opportunity to adjust. And really it will drive the success of your business. So it is really worth the time.

Jonathan Stark:

Mm-hmm.

Jonathan Stark:

Excellent. I feel like you've spawned at least two follow-up emails from me for sure. not, not, if not twice as many. Touched on so many great things here. So, but I see the clock on the wall. We need to wrap up. So where can people go to find out more about what you're doing online? Maybe get in touch with you or introduce you to someone they think might be a good client for you, anything like

Lauren Pearl:

Hahaha!

Lauren Pearl:

Yeah.

Lauren Pearl:

Yeah, so the best place to reach me and follow what I do would be one on LinkedIn. I'm Lauren Elizabeth Pearl. Or to sign up for my newsletter, The Daily CFO. I'm also planning on this topic of pricing is really interesting. I've gotten a lot of outreach from my email sharing my framework on it. So I think I may do a class on it in 2025. So you can follow me on LinkedIn or sign up for The Daily CFO to get updates.

on when that cast is available. I always offer for daily CFO readers, like they always get first access and like a little discount for any courses I do. if you think you might be interested in the course, definitely sign up and join our crew. Also, if you are a finance person, if there's any finance folks listening, you also may want to check out a podcast that I co-host with a fintech company called Upflow.

Jonathan Stark:

place.

Jonathan Stark:

Mm-hmm.

Lauren Pearl:

It's called the Growth-Mited CFO. And on it, we interview a lot of like famous, very impressive CFOs and finance leaders about the future of the CFO role and the finance role within organizations and how they're really being innovative. We just did an interview with Charlie Kevers, who's the CFO of Carta, with Rita Kale, who's a former regional CFO of Roche Pharmaceuticals. So those are two really good episodes to start with, really impressive leaders. So yeah, if you're a finance nerd like me,

Jonathan Stark:

Yeah.

Lauren Pearl:

That's another thing you might want to check out. If you're not a finance nerd, you can check it out too, but it's a bunch of CFOs hanging out and chatting about finance, so be warned.

Jonathan Stark:

Fair warning. anybody that's on my mailing list I think would love Lauren's list. Very engaging, nice and short, but you always feel like you're learning something. And there'll some pricing tips in there.

Lauren Pearl:

Awesome, I appreciate it.

Jonathan Stark:

Cool. Well, thanks again, Lauren.

Lauren Pearl:

Yeah, thanks. This was super fun. Thanks for nerding out with me about pricing.

Jonathan Stark:

Alright folks, that's it for this week. I'm Jonathan Stark and I hope you join me again next time on Ditching Hourly. Bye.