The "Skin in the Game" Pricing Model

Today, I want to talk about a pricing model that you can use for some kinds of businesses that will help you close way more deals because most entrepreneurs, they leave money on the table. They're making sales 10 times harder than it has to be because most entrepreneurs price their products and services completely wrong. Or at least not optimally. I wouldn't say wrong with not the they don't optimize and they don't make it easier on themselves because a lot of pricing models are flat fees based on your time or your effort or what you know quote-unquote feels right in the market and then they wonder why customers hesitate to buy and this plagues a lot of early stage entrepreneurs. So the pricing model that I'm going to talk to you about today is the skin in the game pricing model and it's going to help you if prospects are ghosting you after sales calls. If your conversion rates are abysmal compared to some of the you know quote-unquote and gurus or thought leaders in your space because a very uncomfortable truth is that when you charge a flat fee to a customer you create misaligned incentives and you win whether your customer does or not and deep down your prospects know this and they're sometimes asking themselves well if what you're selling is so valuable why aren't you willing to bet on yourself. Now the solution isn't a better sales script or fancy your marketing the solution is restructuring your pricing model so that your success is directly tied to your customer success this is the skin in the game pricing model and it changes everything now why do traditional pricing models fail let's be honest about what happens with traditional pricing say you charge two thousand dollars for your service you get paid the same whether your customer gets life changing results or mediocre ones now this creates a subtle but toxic dynamic because as the service provider you are incentivized to do the minimum work needed to fulfill your contract and as the customer you are taking on 100% of the risk on unproven results now this misalignment it creates this distrust right from the start your customer has to fully commit while you risk nothing and even if you are ethically committed to delivering value the structure itself creates unnecessary friction in the sales process so look at this from your prospects perspective they're thinking if I pay you two thousand dollars upfront and don't get results I'm screwed but you still get paid now it's not very difficult to figure out why they hesitate or why they need to think about it or why they need to talk to their spouse traditional pricing turns every purchase into a leap of faith for your customer but what if you could completely remove this objection now what is skin in the game pricing let's describe it first so this concept comes from Nessim Talop who argues that people should have skin in the game that means meaningful downside risk when their actions affect others now when applied to business this means that you are structuring your pricing so that you get paid proportionally to the results you deliver you take on meaningful risk alongside your customer and your incentives are perfectly aligned with their goals in its purest form this looks like performs based pricing you get paid based on measurable outcomes rather than your time or effort when your customers win big you win big when they win small you win small now the underlying message here customer becomes I'm so confident in what I deliver that I'm willing to bet my compensation on it this isn't just ethical it's strategically brilliant it instantly differentiates you from competitors who insist on getting paid regardless of results now let's look at real world examples the tech world has embraced this model for years the SaaS companies offer success based tiers a growth marketing agencies charge per lead or take a percentage of ad spend but what about other industry so can a local business service provider physical product company can they implement this approach absolutely and the ones who do they usually dominate their markets so let's talk about service businesses and some examples so for personal training instead of charging $75 per session a trainer might be able to offer a base rate of $40 plus $500 for every five pounds of fat loss achieved the trainer is now directly incentivized to get results not just to show up the interior designer rather than a flat design fee charges small upfront fee plus a percentage of the home value increase after the renovation and that could be verified by an independent appraisal for a wedding photography you can offer a base packet with a guarantee if we don't deliver at least 100 photos you absolutely love you only pay 50% of your fee and now I get it some of these are risky but there could be upside in any of these situations for a product business so for supplements instead of just selling a bottle of sleep sleep supplements you could offer a sleep transformation package with sleep tracking and if the customer's average sleep quality doesn't improve by 20% within 30 days it could be measured by a tracker they get their money back for mattress companies beyond the standard trial period offer a performance based refund scale tied to sleep improvement so sleep 20% better in 30 days or get 20% back guaranteed for skincare products create before after tracking with some standardized lighting and offer partial refunds based on a sliding scale of improvement for professional services here's a few ideas so for business coaches instead of charging $5,000 for a coaching program charge $2,000 plus 5% of revenue growth for the next year for accountants charge based on tax savings generated rather than hourly rates you could say we only take 20% of whatever we can save you compared to last year's return for marketing consultants instead of charging a retainer charge a base fee plus a percentage of revenue growth attributed to your marketing channel now the obvious concern would be well what if people take advantage and people will always take advantage you put safeguards in place but ultimately how you win with this strategy is because this strategy is so compelling the customers that you are going to win and the outsized returns and revenue that you will receive because of this strategy will be more and give you and and and pay you more then you will lose through a few bad actors now let's talk about what happens when you do this properly I gave you a couple ideas you may love some you may hate some the point is I want you to start thinking this way so what happens when you start presenting skin in the game pricing and proposals well all of a sudden there's way less objections the most powerful thing about skin in the game pricing isn't just better conversations it's the complete removal of the biggest objection in any sale risk and when your prospect realizes that they only pay for results the mental calculus changes from is this worth the risk to do I want these results the conversation shifts from convincing them to trust you to simply confirming they want the outcome you provide so sales becomes consultation instead of persuasion the customers internal dialogue transforms from skepticism to excitement wait I only pay if it works they're taking on risk along with me this is a no-brainer this is the psychological shift that is worth more than any sales tactic or any closing technique now how do you implement this in your business because anyone can agree that no objections is a good thing for sales and for business so if you would like to restructure your pricing and you would like to try something a little bit different first you have to define clear measurable outcomes that's the first step you can't type payment to result without clear metrics you have to ask yourself what specific outcomes do my customers want how can we objectively measure these outcomes what time frame is reasonable for seeing results and you have to be ruthlessly specific better health is too vague 5% body fat reduction in 60 days measured through body calipers or some sort of other tests it's specific and measurable to you want to create a two part pricing structure so most successful skin in the game models include a base payment that covers your basic costs that is important and a success fee tied directly to results the base payment reduces your downside risk while the success fee creates upside alignment this isn't about working for free it's about structuring compensation to reflect confidence step three set meaningful stakes your skin in the game must be meaningful to be credible token gestures don't work if you charge two thousand dollars for a service and you offer a hundred dollar rebate for missed targets that's not skin in the game that's a marketing gimmick your downside risk should be significant enough that you feel it step four build tracking and verification without proper tracking results based pricing falls apart so you need clear baseline measurements before starting regular progress tracking during the engagement and then final verification that both parties trust for businesses selling physical products this might mean partnering with an app that tracks some relevant metrics or you have to build your own tracking system there's so many tools out there though I don't think you really will have to something that tracks cookies tracks conversions third party you get it you have to track and then you have to test before full deployment so do not just completely abandon your existing pricing overnight test the new model with a segment of your customers first this gives you room to refine the mechanics before going all in now let's look at some real success stories that have done this properly one of my favorites is actually not even a big chain but I think it's one of the most practical examples one of my good friends he owns a small fitness studio in Minneapolis um back in 2018 he was struggling to compete with some of the cheaper gyms trendier fitness concepts there's so many different there's so many different styles of gyms that are popping up so um he told me the strategy and I didn't realize how genius it was until now thinking back but instead of lowering pricing or chasing trends he implemented a very at the time I think still a radical pricing model is called the transformation package so here's how it worked members paid a very modest monthly membership so $79 instead of the standard $129 they committed to a 90 day program with baseline weight measurements and at the end of the 90 days they paid a success fee based on their results so I think if I remember it was like a hundred fifty or a hundred dollars per pound of fat lost and it was something like twenty five dollars per percentage of strength gained and they benchmarked their lifts basically members who hit their stated goals not only hit their goals but they received the next 90 days free so this was a whole thing that paid the fitness studio more it allowed them to actually achieve their goals they got some free fitness studio membership time and the results were insane a member retention jumped referrals increased average revenue per client increased despite the lower base rate but the most interesting part is that members who paid more under this model were actually happier because they value their results more when they paid in proportion to their achievements and this just completely transformed the business from selling hope which is what a lot of gym sell to selling results and his members became walking testimonials now why do more businesses not do this this is a very creative strategy why do more businesses not do like this now the easy answer is it forces you to actually deliver you can't hide behind fancy marketing or sales tactics you can't blame unrealistic customer expectations when you don't get result your income becomes directly tied to your ability to create value and for many businesses that's terrifying because it exposes mediocrity it reveals whether your promises are legitimate or just marketing hype but for entrepreneurs who truly believe in what they offer this is a liberating model it lets the marketplace reward you fairly for the value you create it's much easier to charge premium rates when both parties know you only get paid for delivering skin and the game pricing is just one aspect of I would say business alignment business customer alignment the most trusted businesses they can take this philosophy beyond pricing to every aspect of their operation they can have transparent processes they can show their work not just results they can have shared risk ventures they create partnerships rather than vendor relationships where everybody wins but they also absorb the risk equally and you can also be very candid about your limitations as a business you can openly discuss what you can and cannot deliver again these are all different ideas that tie back to business customer alignment transparency win win whatever you want to call it but when you structure your business around alignment pricing becomes just one expression of a deeper philosophy and that philosophy is we succeed together or not at all now whether or not you agree with me on the fact that you should do this for your business we are entering into an era where trust is the most valuable currency in business you cannot debate that generic products generic services they're being commoditized information is abundant information is free the differentiator is increasingly becoming who customers can trust and skin and the game pricing isn't just a sales tactic it's a business philosophy that builds trust at a structural level and people who embrace this model they will find themselves with an increasingly powerful advantage as markets continue to evolve as customers care more and think about your own buying habits if you ever want to make a decision as to whether or not something is a good strategy or a good idea to incorporate into your business think about your own buying habits what would this mean in terms of you buying a product would it make you trust the business more would it make you trust the business less would it make it easier for you to make a purchasing decision think about it through that lens because you can ask yourself who do you trust more the coach who charges $5,000 regardless of results or the coach who charges based on how much they help you grow and the answer is obvious it's the same answer your customers are going to give so I would challenge you if you are saying oh Scott that's not doable for my business model I would challenge you to just take a second and think about whether or not that's true because most business models can find a way to incorporate it and again you don't need to completely reinvent your business model overnight start with a single offer or a single product line you want to choose one service or product that has clearly measurable outcomes you create this pilot program with skin and the game pricing present it to your best existing customers and use their feedback and results to refine the model and then roll it out more broadly once you have proof of concept the key with this is just starting even a small step towards aligned incentives creates a very powerful shift in how customers perceive your offering and once you experience the difference in your sales conversations the ease the trust the excitement from customers you're never going to want to go back and when you align your success with your customer success everyone wins and at the end of the day isn't that how businesses are supposed to work