Fix over-expansion, pay, underpricing and a single product

1. Over-expansion

What it is. At bottom, over-expansion really just means being short of talent. It is a constraint on the supply side.

How it shows up. Picture a business with one location that opens a second, and then both locations drop. Your profit is now cut in half across the two, and the move that looks best next is a third location. It goes badly: three times the liability, and less profit than before.

Not a question of speed. None of this says you should not open locations. If the work is good, growth is the aim, and naturally you should grow. The trouble is not the pace of growth; it is that there was too little talent to hold up what you built. With one location, or one smaller operation, you have more of it covered yourself. Once the business spreads past what you can oversee, things start to slip through the cracks unless others there can make good decisions and have the ability and competence. So it is a people issue.

Why it can be hard to climb out of. This can be tough: with three locations and performance down, you tell yourself there is no money to hire anyone else.

The options. Two options are given:

1. Work yourself into the ground: bury yourself in the locations and put in overtime at them, trying to breathe life back into the business and get the cash flow back.
2. Accept that you made a mistake, and that you might need to forgo profit for some months while someone who can manage it comes in and, hopefully, turns it up.

A summary names these ways to solve it: cut your losses, overwork yourself, or bring someone in and take less profit while you do.

Flag: how many options. Two options are announced and described; the summary adds a further way out, cutting your losses. This page does not settle which reading is right.

Why owners are paid more. The view here is that owners earn more because they carry more risk, and collect when it works out.

If you do nothing. You stay where you are and in the end you burn out: you make no money, and you work every hour of the day for nothing. This is reported from one owner's own experience.

Treating a shortage of people as demand for employees, and weighing a hire against its cost, is SOP 200 — Treat a supply constraint as demand for talent. A case of an owner opening new locations who could not find a manager for one of them is in SOP 201, section 4.

2. Compensation: paying too little or too much

How often. This one sometimes happens. Of the seven, one would say it is the least common, but if your business sits in this group, it applies to you.

Too low. Take the trades problem where good people cannot be found, such as HVAC. The question is whether you have considered paying more. In one owner's experience, some of the best returns, by far, came from starting at the market rate for the roles that act as key levers in a business, then always paying toward the top of the range. The exact point is unclear: the top ten, the top eight and the fifteenth percentile are all named.

Talent as arbitrage. One owner still thinks talent, always, is where some of the best value arbitrage lies. A public case is offered: a technology founder paying signing bonuses of $100 million for people in AI. The claim, not shown, is that the return obviously is there, and that the founder has done this many times.

Too high. On the other side, you can pay people too much. A frozen-yogurt store cannot hand its front-desk staff a share of the profit; that will not work.

Paying a premium for someone already skilled: SOP 44 — Buy or build talent, section 3. When a job posting draws no one and the offer may have to rise: SOP 160 — Build advanced compensation plans, section 3. Raising prices so that pay can rise, with an HVAC case: SOP 201, section 6.3. How raises are set for the people you have: SOP 134 — Set pay increases.

3. Compensation: changing a pay structure

The fear. If you change the pay structure, you expect to lose people, and you might lose some talent. It is a rock-and-a-hard-place scenario.

The approach. The concept behind the price-raise letter can be applied to pay. The letter itself, its five parts and its rollout, are SOP 83 — Write the price-raise letter with a vanishing discount. In one example the employee was first promised 50% of the revenue they generated. What you say to them runs in this order:

• First, remind them of that original deal, and tell them you owe them an apology, and the reason for it.
• Recall the big vision you gave them: how they could grow their career in the business and have more opportunity.
• Explain that the present pay structure leaves too little capital for expansion, so the business cannot grow under it.
• Say that you owe it to them, and to everyone else in the business, to give the business and its customers a real chance, so that it can help more people.
• Tell them the decision has already been made: pay has to change, and what it will be.
• Grant that this is not what the two of you first agreed.
• Give them time to think it over: three months, or instead a week. Show them what their pay will be from then on.
• Last, tell them the change takes effect in 90 days.

Why the 90 days. They get a three-month runway. If they turn it down the next day, or two days on, the same three months give you time to hire someone cheaper in their place. Where it is done earlier, you can, if you choose, let them go sooner; or they might just accept the change.

What has been seen. In one owner's reported experience of doing this, not many people were really lost. Most, reportedly, say they more or less understand: they had thought the pay a little rich, a bit above market, and had kept quiet and taken the money, not knowing how long it would last.

Leaders paid a share of revenue. In a second example, leaders paid a monthly share of revenue gained from every rise in it while the owner carried the costs. The rebuild offered:

1. Write down each leader's on-target earnings for the year.
2. Rebuild that potential from two parts: a share of a profit-share pool for the leaders, and a cash bonus on each person's own metrics, paid quarterly or, if you prefer, monthly.
3. Fix the pool as a percentage of profit: 10 percent is the simplest answer given, maybe 5 or 20 instead.
4. Project each person's share for the year; if it falls short of what keeps them, add a supplement.
5. Keep the percentage fixed, so that new leaders dilute the pool and the others weigh new payroll the way an owner would.

The framing offered: good work gets you paid, and when the company does well, everyone gets paid.

Flag: whether to apologize. The script above opens by owing the person an apology. A second view says you cannot apologize or call the change bad, because it is right for the business: a leader who will not switch does not have the company's interests at heart. This page does not settle which reading is right.

These are practices given here. Employment law and contract terms are not covered on this page.

4. Underpriced

How many. One guess, about a group of business owners, was that at least 40% of them were underpriced.

Price follows skill. Take it to the natural extreme. In a long-established service business that has prospered, where people deliver the work, price and the provider's experience and skill line up pretty much on a straight line. So what you charge is how people can tell how much skill you have.

The dollar thought experiment. Now take the other extreme. If you charged a dollar for all of your work, hopefully a lot of people would accept. Carry on that way and you would become supply-constrained again and again, until you reached the point of equilibrium. That point is not where the business makes the most profit. Ideally, demand keeps rising and you can go on lifting the price.

The loop. That is where the brand loop goes on turning: you do a good job, and people tell other people. So keep pushing price up at all times: a price that keeps rising shows the work is good, and signals that quality has held at each step up in the value you create. That is why pricing matters so much for most of that group.

The real problem may be further back. Sometimes the way to solve a problem sits several steps behind the problem you feel, and you have to reverse-engineer your way to it. In one example, an owner was fully booked but could not afford a second provider. Working back: the price was too low, because the sales process was too weak to carry a higher one. The fix: add friction to the sales process, so the price can rise without more selling skill, and the extra margin pays for the hire. Changes that probably have to happen: ads aimed at buyers of the larger work, a video before the visit with plenty of proof and a rough idea of price, a questionnaire before the sale, and options that are all premium. More locations wait until the first is fixed.

A powerful lever. The pricing models, and the rules for when and how far to raise: SOP 82. Raising prices on the customers you already have: SOP 83. Finding the price by testing, a step at a time: SOP 128 — Test price with a step size and a cadence. The cycle a higher price sets running for clients and for the business: SOP 2 — Set a price from the value gap, not from competitors, section 3.

5. A single product

What it is. Lifetime value is too low, yet you will not add an upsell or any other thing to sell. Meanwhile margins keep compressing, over and over. So lifetime value has to rise, because the cost of leads only ever moves in one direction: up.

Why acquisition cost only rises. It shows up in content and in ads:

• Content. When you are an early creator, the first people who come into your world are the ones most interested in the subject. Your content is still weak and the algorithm has barely begun to show your material, yet they bought in.
• Ads. At the start, a platform puts your ads in front of the people most likely to buy, since at that level of spend that is all it can do. The higher your spend climbs, the colder the audiences and the fewer of them buy.

So you can only reach tremendous scale on paid spend with a money model strong enough to earn well from a far wider, colder base, or with a brand whose huge warm audience has already had value from you. Either grow your warm audience or find a better way to make money from a cold one. In either case, what typically happens is that margins keep compressing, and you keep hoping to get back to your old acquisition cost. You cannot. Acquisition cost only rises.

The best deal is now. The best deals you will ever get on winning customers are the ones you get now, unless you have some major issue in how you acquire them.

Build the upsell. If you sell only one thing, sometimes the moment has come to make the upsell.

A rule of thumb for its price. One practice typically goes to five times the price for its upsells. The reason: typically 20% of customers will buy something priced five times higher, since customers tend to be fractal: the 80-20 pattern. So the claim runs: if 20% of buyers can and will pay fivefold, each further upsell or service you add along the line doubles revenue.

The worked case.

Step	Who takes it	Price	Revenue
The core offer	100 people	$100	$10,000
An upsell	20%, so twenty people	Five times the price	Not stated
A further offer	20% expected, so four people	$2,500	Not stated
In all	—	—	$30,000

The result is called tripling the business. The revenue is then said to come from serving one hundred customers, and next from serving 124, because all that happens is the twenty and the four are added.

Flag: doubling with each upsell. The rule says each added upsell doubles revenue. On this page's arithmetic, twenty people at five times $100 add $10,000 and four at $2,500 add another $10,000, so the second step takes revenue to three times the start where doubling twice would give four times. This page does not settle which reading is right.

Price to what they will pay. One practice sets price this way: you reverse-engineer from what the avatar you have is willing to pay, rather than from what the thing cost you. The view here is that cost plus a margin is the wrong method.

The same fivefold back-end rule, with a worked case of its own: SOP 152, section 3. What to sell next, and the classic upsell: SOP 66 — Run the classic upsell and choose the moment. When in the customer relationship to make the offer: SOP 162, the ascension-path page. Cost plus set against value-based pricing: SOP 82, section 2.

6. Where this sits

Named where used above: SOP 202, 200, 83, 82, 128 and 152.

7. What this page does not decide for you

• The exact percentile for key roles. Not established on this page.
• How many ways out of over-expansion; whether each upsell doubles revenue; whether to apologize for a pay change. Sections 1, 5 and 3 flag them.

8. The checklist

Step	What to do
1	Over-expansion: read a drop after a new location as a shortage of talent, not of speed
2	Choose a way out: overwork yourself, bring someone in and take less profit for some months, or, in the summary, cut your losses
3	Pay too low: ask whether paying more would bring the talent; one practice is to pay toward the top of the market for key lever roles
4	Pay too high: the example given is a profit share for front-desk staff in a frozen-yogurt store
5	To change pay, in one example: apologize, give the reason, say the decision is made, give time to think, and set the change 90 days out (a second view: never apologize)
5a	Leaders paid on revenue: rebuild their earnings as a profit-share pool plus a bonus on their own metrics
6	Underpriced: keep pushing the price up; a rising price is read as a sign the work is good
7	Single product: sometimes the moment has come to add an upsell; a rule of thumb prices it at typically five times
8	One method: price from the avatar's willingness to pay, not from your cost

9. What this page does not cover

Employment law and contract terms are not covered on this page. Recruiting methods are on SOP 201. Ad targeting is on SOP 213 — Fix ad targeting and bid for return, not cheap leads.