Hi {{first_name | there}},
When I partnered up with other owners inside Fitness Together, the first thing I did every single time was run our numbers. More often than not, that ended with me raising our prices.
One of the other owners told me that if I wasn’t priced the highest, it was an ego thing. I understand why it looked that way. The reality is I was the only one at the table looking at what we charged and asking whether that price would actually create a sustainable business.
Nobody teaches you this. Nobody sits you down and says you need to understand your margins before you set a price. You just go out and charge money. And in a service business, the money usually shows up early. A client buys 3, 6 or 12 months of service and pays for it in month one.
That feels great. It looks like you’re making a lot of money. It’s also where the trouble starts.
What I call phantom revenue
Phantom revenue is cash in your account for work you haven’t delivered yet. Your accountant calls it unearned revenue, and it isn’t income yet. You still owe that work.
Here’s how it plays out. Say you sell 6 months of training for $3,000, which works out to $500 a month. You collected $3,000 this month, so it feels like a $3,000 month.
Now say it costs you $400 a month to actually deliver that training. That leaves you $100 a month. Over the whole six months, that $3,000 sale leaves you $600.
Not $3,000. $600.
The inadvertent Ponzi scheme
Because $3,000 hit the account, you feel like you have more money than you do. And far too often, service business owners take out more than that $600, whether it’s paying themselves, covering something personal, or whatever the case may be.
Run it forward. Say you pull $1,500 out because the bank looks healthy. That leaves $1,500 to cover six months of delivery that costs $2,400. You’re $900 short before that client is finished, and the only place that $900 can come from is the next client’s money.
That’s the inadvertent Ponzi scheme. You have to sell the next guy in order to fulfill on the current guy.
You don’t know you’re doing it. It just shows up as pressure. Marketing has to work harder. Sales has to close more. A slow month feels like a crisis because it is one. The business isn’t short on revenue. It’s short on money that’s actually yours.
Your move this week
List every client who has prepaid. Next to each one, write the months of service you still owe and what one month costs you to deliver. Multiply and add it up.
That total is money in your account that’s already spoken for. Subtract it from your bank balance before your next owner draw, and before you set your next price.
That’s why I raised our prices. Not ego. Math.
Steve