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This episode is a business coaching course that provides the pricing formula.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • Today's Topic: The Formula for Pricing
  • Lesson Nugget: Understand the costs of the goods in your product.
  • The Formula for Pricing: 1. Know all the costs associated with your business.
  • Editor's Note: Email us at info@thrive15.com for a pro forma template.
  • Costs you need to know: 1. Product costs 2. Labor costs 3. Marketing costs
  • Lesson Nugget: Document what is working for you so you can improve on what's working.
  • Costs you need to know: 4. Monthly hard/operating costs
  • Lesson Nugget: Hard costs are the costs that do not go up or down each month.
  • The Formula for Pricing: 2. Know the income per product sold you need to make.
  • Costs you need to know: 4. Cost of capital
  • Break It Down:
  • Editor's Note: http://www.rusticcuff.com/
  • Notable Quotable: "Ba a yardstick of quality. Some people aren't used to an environment where excellence is expected."
    -Steve Jobs
  • Costs you need to know: 5. Shipping and handling costs
  • Editor's Note: http://surprisegiftco.com/
  • Editor's Note: https://eitrlounge.com/
  • Lesson Nugget: Today's generation cares about companies being authentic. You will want to declare what you care about.
  • Lesson Nugget: You will want to budget for charitable activities.
  • Notable Quotable: "You've found market price when buyers complain but still pay."
    -Paul Graham
    (Co-founder of Y Combinator)
  • Editor's Note: According to a 2014 article, Nike's cost of producing a pair of sneakers is about $28.50.
    (http://solecollector.com/news/2014/12/how-much-it-costs-nike-to-make-a-100-shoe)

- Okay, we are back. Today we're going to be talking about the formula for pricing. Clay Clark, you have started, sold, built, consulted so many different businesses. Talk to us about the formula for pricing. - Well, here's the deal. After you know your market, after you've gone through the process of getting to know your market, you're now going to get to this deal where you have to actually go through the linear process of defining your final price. We've started off by talking about how much money do we want to make? Now we need to know our costs. And now we're in to knowing the market. So, here we go. What you need to do, is you want to know your actual product, cause it's a formula. Okay, so take your product costs. It's called cost of goods, you might see it as cog, C-O-G, if you go to a college course on this, they'll call it cogs but you just want to know the cost of the goods. What are all the things that go into the product? So I'm making up an example for the service industry, I'll do the chiropractic center I'm involved in. So, what does it cost per patient to see a patient? How much do you pay the doctor per hour? I don't know. Okay, you paid the doctor 100,000 a year, divide it by 40 hours, how much are you paying per hour? So figure that out. Your actual, think about what material's needed? What do you mean, what materials? Well, you put down, you always wipe down the, when people go get their back adjusted, they lay down on a table of some sorts, and they put that plastic, that paper on it. - I hate that thing. - [Clay] So do I. They put it on there to make sure that it's clean. - It's safe and sanitary, I get it. - But, what does that cost? Then you have someone who's greetin' you at the front desk. What are you paying them? You print off the receipt, what does that cost? You have the software needed to save the file, what does that cost? You have the phone bill, to answer the phone, what does that cost? You know, you pay insurance for the building, you have the lease, what does that cost? Medical insurance, health insurance, business insurance, what does that cost? - Okay, so what you're saying is that there's a lot built into the cost. It's not just, how much did this microphone cost. It's how did we package it, how did we ship it? You have to think about the cost behind the cost. - And I'm gonna give you guys the linear list of all of them so you don't forget a step. And we have a pro forma, which you email us info at thrive15.com. I will give you and actual pro forma that I have used for actual businesses, that will help you. So know your actual product costs, plus your labor costs per product, plus your marketing costs. What, what do you mean? I mean, how much are you going to spend to acquire a costumer? At Elephant in the Room, we spent eight dollars per a customer. That's what it cost to get you to come to The Elephant in the Room haircut business. - [Woman] Now how did you come up with that number? What made you decide that? - Well, what happened is, we run online ads, very aggressively. We do mailers, and Valpak, those blue envelopes. We do those and we do the online ads. We also do re-targeting ads, the ads that follow you around. We also do gift cards. Where you pass out a card saying, "Friends don't let friends have bad haircuts." It's a picture of a guy with a mullet. Do you have a mullet? - Come to Elephant in the Room. - That's right. Maybe you're proud of that thing, that's okay. Just rock that thing then, okay? But anyway, so we know that after all the costs we spend per month, you divide it by the number of new customers and we've got to a point where it's about eight dollars. - Okay, so is that, if I were trying to price my product, is that something that I need to splurge on? Be moderate on? - This is where it's gonna rock your mind. With the real estate company I'm involved, Sprik Realty, I'm a partner with that thing. Sprik Realty, we spent $72 per a lead. Lead, not even per deal, to acquire new customers. So it was like, 190 to almost $200 to get a customer. Now we're down to about $30. So you have to just, you have to do your research, don't be stupid, but whatever works, you want to make sure that you document it. That's why you'd ask every customer, where did you come from, how did you hear about us? Because, I used to do advertisements back in the day, in a lot of different publications. And there's one magazine in Tulsa, I used to advertise in all the time because I always did. And then one time, I thought, about how many people have I ever booked from this glossy magazine? And I discovered, zero. But I got a lot from bridal shows, so you want to figure out, what are your costs to get a customer. The next is your monthly hard operating costs. Those are all the things we talked about, like your lease, your, those are the costs that don't go up or down. It's the same cost every month. Your utilities, your insurance, your, insert anything that's, your phone bill, your boom. Then your income per product sold. So you want to figure out, okay, how much money do I want to make per product I sell? Do I want to make $4 per customer? $10 per patient? - [Woman] Thinking about that up-front and then building that into the cost. - Absolutely, you put it in there. Then you want to set the cost of capitol. What is the cost of capitol? Well if you've borrowed money, you want to figure out, what are the costs, how much interest are you paying per month? How much debt are you servicing? - So even that, you break that down and add that into the cost of the product, is that what you're saying? - Absolutely everything. This all goes into it. So Elephant in the Room as an example. When we open up a shop, we're not selling franchises yet but if you were to buy a franchise from us, you'd pay about $2,800 a month in a small business loan, if you borrowed money. And you're gonna see about 300 customers a week. So if you take 300, right? That's 12 times four a week, so there's 1,200 customers a month. 1,200 customers a month and how much was the loan? $2,800. So what does that cost? It's about 2.2 dollars per customer for your loan. - This is so amazing because typically, you just think, if this cost $10, you're just covering the cost of this item, but no, there's a lot embedded in there. - A lot, and you gotta think of packaging. Presentation, now one of our good friends, she started a company called Rustic Cuff, Jill Donovan, she's one of our mentors. And the Rustic Cuff's, I will tell you, the product's are phenomenal. - [Woman] Yes, they're beautiful. - But the packaging is also phenomenal. - [Woman] Cause you get the bag and the bag is different, it's like a different bag with each, you know, season. I love em'. - Have you ever bought an iPad, iPod? - Yes, I have. - Who here owns an iPad and kept the box? - Mine, I did keep mine. - Everyone does. - I really did and you what, just opening it was almost a spiritual experience, so sleek and clean, and you're like, haaaa. - You felt the aura of Steve Jobs. - [Woman] I did, I did. - And he was obsessed, and he said, he wanted to make packaging that is so awesome, so awesome, that people want to keep it. - Well I did, and I didn't even think through that. - So Steve Jobs, I mean, we'll put up some of the quotes from Steve Jobs. - And Birchbox does that too, beautiful boxes. - [Clay] Birchbox, absolutely. And I'm gonna tell you this, there's a Steve Jobs quote we'll put up on the screen, but Steve Jobs talks about how most people aren't used to an environment where excellence is expected. And you have to be the yardstick. You have to be the yardstick for excellence. So all I'm saying is that, you gotta budget in for your packaging. And the packaging has gotta be awesome. My brother-in-law, with Elephant in the Room, I gotta tell ya, we've had some spiritual conversations. But I'm goin', "Do we have to spend this much money "on the logos and the labels and the packaging?" And he's like, "Yes." And I'm like, "Come on." Now, he's right. But as the guy who's teamin' up with him, to finance the business, I'm like, dude. Now in his defense, we did dollar for dollar, we matched. So whatever he spent, I matched it, dollar for dollar. But he's like, "No, we need to have great packaging." And I'm like, "Come on, just." - [Woman] But see, he's following your outline, he's doing a good job. - He is, but in the emotion of the moment, where you're like, "This business hasn't made any money, "and all we're doin' is choppin' mops." And the next thing is, you want to figure out your shipping and handling costs. What does it cost to ship it? - How do you figure that out? - Well, one lady I'm workin' with, has a great company. You should check it out, it's called Surprise Gift Co. dot com, I believe, Surprise Gift Co. Hopefully I'm not a bad consultant. But if you go up there, she has a fabulous product and she has fabulous packaging. And in her mind, the packaging needs to be a certain standard. Now, she weighed everything. She thought it would be this much, she thought it might be this much, whatever. She weighs it and discovers, okay, this is what it's actually gonna cost to mail it. - Okay so you gotta go to UPS or the Post Office and do some reconnaissance on it. - Don't go to the Post Office. - Don't go to the Post Office. - Have you been to the Post Office? - I haven't in awhile. - Have you ever been there before? - I have but not recently. - Was it good, is it a good one you went to? - Ahhh. - Did you have a good experience? - I mean, you know, I haven't been back in awhile so. - Okay, I'm just sayin', there's no overhead music. You walk in there and you're like. - I once waited for a passport for like, three and a half hours, and I had to have it. So I'm with you, FedEx, UPS, where would you go? - [Clay] I would go to UPS and FedEx. And I would have them compete for your business. I'm gonna tell you this, they don't want to compete when you're shippin' one thing a week. But when you say, Elephant in the Room, check it out, I'm not trying to, this is my new thing I'm doin'. Any time that I try to sell you something. The Illuminati. - [Woman] It's the Jedi music. - So go to Elephant in the Room, go to EITR lounge, dot com. Click on our store, buy as much as you want. To see how the system works. But the thing is that, when you go up there, when you buy something, we didn't know what it would cost per item to ship it to you, until we had done it, a lot. And then when you go to your rep at the UPS store, and you say, "Hey listen, I want to ship a bunch of stuff "through this site." Then they go, "Well, if you ship a hundred units a month "or more, we'll give you this price point." It's very important. Now the next thing is a charitable give back. We're in a generation, right now which I think, in a lot of ways, is becoming more authentic than the previous generation. I could be wrong. - I like it, charity water, different things I see. They're giving back, I appreciate that. - I feel like now, this is the culture right now. You say, what does a millennial want? This is my theory. Here's what a millennial wants. A millennial wants to go, "How much fat is in that burrito?" And I tell you, and they go, "Okay, so that burrito, if I eat this burrito, "and I eat that ice cream, how much fat's in the ice cream? "Where was it sourced? "How did you, did you feed that cow well?" I did. "So you're saying that this cow, and this ice cream, "that I eat. "And I eat this huge burrito, "this atomic, massive, game changing burrito. "If I eat this freshly sourced burrito and this ice cream, "it's gonna definitely cause me to gain weight." And I go, "Yeah." And they go, "That's fine, but at least you're honest." But that's like, what a millennial wants. Where my generation, I'm 35. And people from 35 to 50, we're like, "Put fat-free on it, say that it's fat-free." But I think that's what we wanted. - I know some people who do, but yeah I'm not. - And then we bought that branding. Now millennials are like, No. - But I don't believe it, cause I'm like, how'd you make it fat-free? Like, where's the fat? Like, what'd you do? - Yeah, you can't have zero calories. - And it tastes like cardboard, you know? - People are like, "Rumor has it, the zero calorie beverages are causing cancer." Obviously! What do you think they're putting in that thing! So all I'm saying is people want to be authentic. So one way to be authentic, work with me here, is to go ahead and say what you care about. Now we have a lot of thrivers, I'm just bein' blunt about this. Probably 35, not 50, out of the thousands who've got upset that we support the military. Meaning, when you buy a subscription to thrive15.com, we give a free subscription to thrive15 for anybody who's in the military. So if you're watchin' right now, ask yourself, who do you know that's in the military? It's free, call em' up, say check it out. - [Woman] Why were they upset? - They thought that America shouldn't have a standing army, and they thought that we should not be a country that's involved in, that we shouldn't have an army at all. - So not necessarily that we were being helpful to those people, just the political. - I literally talked to someone, and I talked to them on the phone. They're very nice, I thought they were a reasonable person. I can't respect any country, that has an army. Or anybody that would support a country that has an army or support an army. And I'm not gonna agree with everybody, but you put your cause out front. So, Tom's Shoes, and you mentioned the water. - The Charity Water, I've bought things where they give to make wells in areas where there's no water. - So the Starbucks has the, their brand of water, they give back. Warby Parker, if you buy a pair of glasses, they give a pair of glasses. Think of your cause. Once you do, think about this, this is so huge. This is huge, think about this. When you run a business, how good would you feel, just secretly, how good do I feel? I feel great, knowing that you're a paying subscriber and you should feel great too, because you know you're helping somebody and giving them a hand up. I don't like the handout game, but when you buy a pair of glasses and you know that you're helping a kid who couldn't normally afford them. Google did the laptop, you buy a laptop, they give a laptop. I mean, guys, that is, you talk about, Now you look at your weekly reports, we call it the KPI's, but if you look at your Key Performance Indicators, and you see, hey look, we have a thousand customers this week, but you know, that just allowed your company to drill another well? How awesome do you feel? - Sowing and reaping, good karma, good juju, whatever you want to call it, you gotta give some away. - I highly recommend you budget for it. Otherwise, people are gonna think you're a Scrooge, because you don't have any money to give away. And now they're like, "How come our boss doesn't ever "support anything?" Well you're like, "Because I didn't do the pricing "systems on thrive15.com." - So again, it's not just giving away the charity water, not giving away the shoe, it's not just giving away the inventory, you build it into the cost of your product. - Absolutely, and I'm gonna leave you with a quote. Cause all this equals the price of your product. I'm gonna give you a quote, I'm paraphrasing, we'll put the actual quote on the screen. Paul Graham is the guy who started, it's called Y Combinator, is a company he started, it's an incubator, where entrepreneurs who have big ideas, transformative ideas, come to him and he helps them launch them, but very few people get in. He helped launch Dropbox, he helped launch Reddit. He helped launch Airbnb. His whole thing is, he says, you want to charge enough where the customer complains, but still buys. So you know, ultimately, you add up all this stuff, and you gotta figure out, what is the customer willing to pay for it? And it's a little bit of a trial and error, because if the customer's not willing to pay that much. - [Woman] Cause Netflix went through that, didn't they? When they upped it and it was like, "Uh, we're out." - And so, think about Nike shoes, they've now.. We'll add this stat to the screen here, Nike now is making shoes, they're selling, how much are Jordans? - [Woman] I don't even know, they were like 250, 300 when I was teaching school and the kids wore them. - So I'm saying, Jordan's are now, and Michael Jordan still makes 100 million dollars a year, now off of endorsements, just in Forbes, he makes 100 million a year, still off of endorsements. But they're makin' the shoes, for I'm just gonna say, 60 bucks, 50 bucks, over in third world countries. So, the price of your product has nothing to do with the cost of making it. It's all of these things added up, to give you the price. And I'm gonna throw it back to you. - Thank you so much for sharing all of these tips, to give us insight and information on how to formulate your pricing. As always, if you have any questions, need help, need tips, comments, give us a shout at info@thrive.com, thrive15.com, left off the 15. - Hey don't worry, if you go to thrive.com, you're gonna go to a weird place, do not go there. - Thrive15.com, that's important. Thank you. - Ah, awesome, let me get one more big boom. - Boom.

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