There’s an old saying that goes “The Best things in life are truly free”.
In this post we’ll explore why trying to get as close to free is not only the best for increasing profit margins but also how pricing in relation to product/service quality actually works.
How “Free stuff” Increases Profit Margins
let’s say you make websites for a living & for each client you need to use an image. Images aren’t free, but let’s say a good quality image for websites costs about $30. If your client is paying you $100 to make a website, your profit margin is 70%. but if you could get a similar image for free, then you increase your profits to 100%.
While the example I gave above is very basic math without accounting for real life costs as well as non monetary costs, it’s always important to look for things that reduce your costs, even if they seem unorthodox or uncommon because people are only willing to pay a certain amount for a product or service.
Diminishing Returns In Relation To Pricing & Product Quality
I remember a while ago I was shopping around for archery bows & I asked my friend which he though I should buy & how much I should spend on a high quality archery bow. While my friend was explaining to me how to buy the best bow on a budget, he was introducing me to the concept of diminishing returns. There is up to a certain point where product quality in relation to price begins to increase much less & less (in exponential amounts). In other words the value that you get for each dollar after a certain point can even be less than 50%, almost as though you’re losing value on your dollars.
Another way to explain it is with the following example: The game FIFA has soccer players with statistics & rankings. let’s say you’re one of these characters in the new FIFA 2017 game & you have zero points because you have never practiced/played soccer. To get to be a player of 50 ranking points you have to play soccer for 300 hours per year. currently the yearly value (or ROI) you’re getting is .167. But let’s say you want to become one of the top players in FIFA which would be a rank 96. To get to rank 96, you would need to practice 1,400 hours per year. Your return on investment is 0.0069. That is 24 times less of a ROI on your time if you woul’ve just been a “good player”.
How does this relate to costs needed to generate profits?
after a certain point, you over pay for something that does an equally good job. That’s why it’s good to research or ask people who know about certain subject to find what is the “Optimum value”.
I’m currently & will always be a strong believer in “free” stuff & encourage others to adopt the same mind set. There’s no point in spending lots of money for something marketed as “high quality” when you can spend close to nothing for something that does a “more than a good enough job”.
Like a friend explained to me, it’s not the guitar or the special effects that makes great music, it’s the person playing the instrument that makes the difference. Jimi Hendrix will still sound like Jimi Hendrix whether he plays using a brand name guitar or if he was using a guitar made out of cheap plywood.