How Lesswrong helped me make $25K: A rational pricing strategy

by kareemabukhadra4 min read21st Dec 202021 comments

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3 months ago, I started a company that helps people land jobs in exchange for a cut of their income once they land a job.

Since then, I've closed 5 customers worth about ~$25K. I strongly attribute my ability to close deals to how I price. I strongly attribute how I price to ideas I've developed reading Lesswrong (especially concepts from Economics like Shut up and Multiply).
 

Word for word, here's how I walk customers through pricing on sales calls:
 

  • There are 52 weeks in a year.
  • Each week makes up about 2% of a year.
  • That means the opportunity cost of you not working is 2% of your potential post tax salary per week
  • Does that make sense?
  • Remind, me, what role are you trying to get?
  • Great, x make about $YK per year (.75% to get post tax) which is $ZK per year post tax so on a weekly basis you're losing $XK.
  • On a monthly basis, that's about $XK.
  • Does that make sense?
  • Base case: The average job seeker spends 5 months or about 22 weeks in unemployment & that's during non-covid times.
  • I can help you get a job in less than half that time, 2.5 months or the equivalent of 10 weeks. I just did it for my first customer in 6 weeks.
  • That’s 12 more weeks of you working or a little over 23% of a years’ worth of income.
  • So to be clear, in this case, working with me would help you save 23% of a years' worth of income or potentially x$K dollars.
  • Do you understand how I got to that number?
  • Great, so the way I go about this is I split that value of 23% halfway. In other words, I give half the savings to you, and then take the other half for myself, leaving us both with 11.5%.
  • Does that make sense?
  • Naturally, you may be thinking, "what happens if we're not successful?" Here's a few possible scenarios:
    • If you land a role in the 22nd week (which is the average amount a job seeker looks for a job) or any point after, I don't get any cut.
    • If you land a role after the 10 week mark, the percentage cut I get drops incrementally each following week, up until the average case of 22 weeks. For example, if you start a role on the 16th week which is 6 weeks quicker than you would have originally gotten it assuming the average case, then we would be splitting (6 / 52) or 11.4% of the value.
    • As a final point, if you have not landed 10 or more interviews by the 10 week mark, you reserve the right to end our contract. This means you will not pay anything for my service. This decision to end our contract needs to be made between the 10th and 11th week. Otherwise, the assumption is that we'll continue to work together under the conditions outlined in the clause above.
    • The above happens if you have no interview that leads to job offer.
  • Does that make sense?
  • And just to be clear, in either case, I'm not factoring in any of the following:
    • 1) Benefits which can make up to an additional 30% of value of the salary.
    • 2) Higher compensation that you'll get from the job when you work with me cause you'll have better offers and because I help with negotiation.
    • 3) More fulfilment that you'll get from the job when you work with me cause we're gonna get a bunch of interviews.
    • 4) I'm betting on you as a person to put in the work with me to get the job. If you don't, I get screwed not you. I lose my money & time. So it's really important to me that you're serious about this before we go forward.
    • 5) I don't charge anything additional for the tools we use which cost hundreds a month.
    • 6) You're learning how to get a new job in 2 months. Ever been in a poor work environment? Imagine being able to leave that quick. Now you'll know how to.
    • 7) Don’t capture any bonuses or raises you get during the first year.
    • 8) Don't capture any equity or other forms of compensation you get in a role.

At this point, I'll usually walk them through a few other caveats (unmentioned here for simplicity & brevity's sake) then close up the call.

 

Feel free to critique this pricing model or share ways rationality has helped you model decisions and/or bets.

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21 comments, sorted by Highlighting new comments since Today at 11:44 AM
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My initial reaction is "22 weeks is an average, but you probably don't deal with a random sample". If you only take on the clients that are promising enough to land a job within 10 weeks on their own (I realize that evaluating it accurately enough is a skill that can make or break a business like yours), then you basically skim free money off the top.

That was my first thought too. 

Although there's also the possibility of adverse selection, if the people who start looking around for someone to help them find a job are disproportionally those who have already discovered by harsh experience that they aren't getting that done quickly on their own.

Great thoughts. Yep. The people I'm working with rn struggled for 6 or more months. One of them had been at it for a year, so the maths makes sense (and may be generous) for the parties I'm working with.

Even with a random sample, 22 weeks on average would mean more than 22 weeks for some people and less than 22 weeks for other people. So even if you don't do anything (or just the bare minimum, to show that you did something), the latter would pay you.

It's like making a deal with someone that you will help them predict the winning lottery numbers. If they win, they will pay you X% of the money; if they don't, the advice was free.

(I don't think this is exactly what the author is doing, I suppose there is actual help provided, but the calculation of the provided value seems misleading.)

I'd a love a little more detail here. What makes you think I'm not providing help? 

Oh no, I assume you do help! At least I have no reason to suspect you.

My objection is that the pricing strategy "you only pay if it takes you less than average time" sounds like a proof of something, when actually it's not. That is, hypothetically, if you did nothing -- which I don't think is your actual plan -- and only took money if the time is below the average... you would still be making money. Of course, if your help works, you make more money.

I am not accusing you of anything, but there are people out there who make money the way I described: promise to improve a probabilistic outcome, do nothing, collect money only in the lucky case. (One case I read about in newspapers, another one I heard rumors of.)

My point is: returning money if the result is not above average is not a guarantee of successful intervention. (Shminux said it's because your sample is probably better than average. I said it works even for an average sample.) You asked to "critique this pricing model", this is the kind of nitpicking you got. From the perspective of average customer, I suppose your pricing model sounds great.

Got it - makes sense. I set up contingencies where the client can terminate the contract (and vice versa) to solve against this.

Not a perfect solution though.

Really appreciate the thoughts here! It's helpful.

Do you have a special case for someone who already has a job and is searching for a better paying one? That person's opportunity cost would not be 

(future pay per week x number of additional weeks spent searching) 

but 

((future pay per week - current pay per week)  x  number of additional weeks spent searching)

Getting a new job takes a lot of time, so I don't usually take on clients in this position. It'd also be hard for me to justify spending time on a client like this given that unemployed people would gain more from my service.

Does that make sense?

I could see rationality informing any of the following:

  1. Inventing the complex pricing structure
  2. Choosing to justify the pricing structure, rather than just present it
  3. Clarity of presentation

Which of these was rationality most helpful in accomplishing? To what extent do you think your approach to these aspects of your pitch differs from your competitors?

Honestly, all 3. Generally, I think the best sales people do not sell. 

They simply explain pricing in a calm way and ask questions to make sure the other person is a good fit.

Also, can't speak to competitors, but my understanding of how many people price is they experiment with different numbers to see what customers are willing to pay (which I fundamentally disagree with as a pricing strategy).

Makes sense to me! Well, good on you for finding a way to create value for yourself and your customers, while doing your part to keep the economy humming along :)

This pricing makes sense if your only competition is your client just going at it by themselves, in which case you clearly demonstrate that you offer a superior deal. But job seekers have a lot of consultants/agencies/headhunters they can turn to and I'd imagine your price mostly depends on the competition. In the worst case, you not only lose good clients to cheaper competition, but get an adverse selection of clients who would really struggle to find a job in 22 weeks and so your services are cheap/free for them.

One interesting feature of the OP's pitch is that he's offering not to help the client find more/better options, but to accelerate them finding any job. It's not clear to me what happens if the client rejects the offers OP finds, but that seems critically important.

I'd have to assume that as you say, these are clients who aren't in-demand enough to go through recruitment agencies or headhunters, or to find a job themselves.

If he's made $25,000 from 5 clients, then assuming he got 11.5% of each of their salaries, his clients are on average starting at around $25,000/5/.115 = $43,000/year, or around $22/hour.

Jacobian, what is the alternative to a service like the OP's for someone in this income bracket? My sense is a temp agency, but that they're typically placing people into jobs paying roughly minimum wage.

Those are good points. I think competition (real and potential) is always at least worth considering in any question of business, and I was surprised the OP didn't even mention it. But yes, I can imagine situations where you operate with no relevant competition.

But this again would make me think that pricing and the story you tell a client is strictly secondary to finding these potential clients in the first place. If they were the sort of people who go out seeking help you'd have competition, so that means you have to find people who don't advertise their need. That seems to be the main thing the author doing and the value they're providing: finding people who need recruitment help and don't realize it.

I think there's a relevant question of ethics here.

If I learn that these competitors offer a product / service equal to mine or better, I'd feel obligated to change the business model or innovate my product / service in some way.

Still exploring that question.

I don’t think you’re obligated to negotiate against yourself. Your pricing is already far more transparent than most industries. You’re offering a quality service for a justified price, and it seems plausible that you’re finding value where few have found it before. That’s a service worth a reward, and you’re claiming it.

I don’t see an obvious ethical issue here, personally.

I'm proposing that if I find out that there are other products in the market that offer the same value for free, I might feel like it's an ethical issue. I don't have strong evidence that suggests that there are products which offer the same value for free (There's a lot of issues with recruiters e.g. incentive misalignment issues, they cater to specific people, etc.). Still learning though.

But job seekers have a lot of consultants/agencies/headhunters they can turn to and I'd imagine your price mostly depends on the competition

This is true, but also often overrated, especially when it comes to individual customers. If you're selling to businesses, do consider that they'd be willing to shop around and optimize to some extent, so differences from your competitors matter a lot. Individual customers however really hate having to search around, compare options, and risk choice overload; if they've found OP as a provider of this service, they'd really prefer to be able to choose them. At this point, OP is not in equal footing with the rest of the competition, and thinking so would lose them income.

I run a similar kind of business to OP, and what I've learnt over the years is that unless your prices are outrageously higher (as in an order of magnitude or more), pricing higher than your competition doesn't significantly affect your business, and often results in higher earnings (i.e. what you lose in raw customer numbers, you more than earn back with the larger individual revenues).

RE Jacobian's point: This is fair, though it works on the assumption that the competitors offer an equally good service (i.e. they get the job seeker the highest paid, the most fulfilling job for them, etc.). This is open to debate because a) these competitors serve their network of businesses not job seekers so they're selecting from a smaller pool and/or b) incentives aren't as strongly aligned with the candidate. I'm still exploring the space though so I can't speak to what side of the argument is stronger.

RE digital_carver: What biz do you run?