There is a popular pricing formula that coaches and course creators often use to figure out how much to charge for online products.
And I’m no longer sure it’s such a great idea.
The thinking goes that you should calculate the average Lifetime Value (LTV) of your customers and charge that up front.
- You sell a membership site that costs $20 per month.
- Your data shows the average customer stays for 8 months.
- Your LTV in this scenario is $160.
Instead of selling it $20 per month, this approach would lead you to just charge $160 and collect the entire LTV up front. That way, you have more cash on hand to invest in your business. You also cap the downside on your worst customers (those likely to cancel well before paying you $160).
Totally logical, right?
Here’s why it’s a terrible idea…
While your average customer may have a LTV of $160, you also have a smaller (but significant) number of customers who are worth 10x that value.
These are your Best Fit Customers (BFC).
Your product serves them so well that many will never leave. If an average customer’s LTV is $160, your BFC’s is $1,160 (or beyond).
By charging your average LTV up front, you cannibalize the upside of your most profitable customers.
Here’s what I think that means for course creators and coaches:
- Charging a 1-time price (or lifetime deal) for your flagship product is a bad idea
- Your BFCs are worth 10x everyone else
- Never cap their LTV
What can you do instead?
One obvious route is to uncap LTV by charging an ongoing monthly fee instead of a one-time fee. You’ll have less cash in the short term, but potentially make a far greater amount long term (depending on your numbers).
I made a simple calculator here that lets you play with the numbers and see what different scenarios would look like for your business.
Another idea is to charge a one-time setup fee, plus a lower ongoing monthly fee (much like Infusionsoft did in the early days).
Let’s say you sell a $397 course to 1,000 people. ~200 of those people are likely to fall in the BFC category (they would stay with you forever).
You can uncap their value by charging a $397 setup fee + $19 per month subscription to your course.
Obviously, that might require some changes to the product itself. Perhaps they get a more personalized onboarding experience and ongoing updates, live calls, etc. to justify the subscription.
There are ramifications and moving parts to all of this, but the math is clear. You’ll cost yourself 2-3x your revenue by charging your average LTV up front.
Check it out, try the calculator, and let me know if I’m making any errors or faulty assumptions.