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Paying to Play Puts More Skin in the Game

Paying to Play Puts More Skin in the Game
Image credit: Pixabay
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I don’t know about you, but I’m tired, worn out and frustrated. So, effective immediately, I’m retiring and I encourage you to do the same. I’m not suggesting you retire from your business, just one aspect of it: the business of dispensing free advice.

If you’re a business leader, the odds are your friends and colleagues ask you for advice fairly frequently. If you’re anything like me, you’re frustrated that your good advice is often wasted on the people you give it to.

Related: The Quickest Way to Make Customers Like Your Food: Raise Your Prices.

Frequently, one of my neighbors would ask if he can “pick my brain about his business for a couple minutes.” Then when he approached me the next time and I asked how things went, the common theme is often that he never followed through on my advice. I’ve explained to him and all my friends that for their own good (and mine) I’ve “retired” from dispensing free advice. It’s the best thing you can do for yourself, those around you and your respective businesses too.

Please don’t get me wrong, it’s not about the money. I do just fine so giving free advice won’t break my bank, but just like it won’t break me, it also won’t help the recipient. If you genuinely love helping people as much as I do, the best way you can help them is to have them pay for your advice. If they’re not paying, they’re not paying attention. It’s called having a “skin in the game.”

The concept of having a financial “skin in the game” originated with Sigmund Freud and has become popularized by Warren Buffett. Buffett defines it as meaning “the people who invest his money must have some of their own money at risk as well.” He’s actually made this a requirement of his people who manage his investments.

Back to Freud -- here’s why it works. Freud insisted on charging patients for psychotherapy because it empowered the client. They would invest more energy and commitment into their progress in therapy if they had a financial as well as emotional investment in improving their situation. He also found that by doing so clients were able to demonstrate to him that they valued receiving his help and as a result felt better about themselves.

The folks who approach you for advice are no different. If you really want to help them improve their business or feel better about themselves and value your expertise and insight, have them make a financial investment. That one action changes the dynamics of everything.

Freud was on to something big. This intimate relationship between your heartstrings and your purse strings is a concept called the sunk cost fallacy. This is the belief that your decisions are dictated by the financial and emotional investment you’ve made (or not made). The more you invest in something the harder it is to quit, and neglect has consequences.

Related: What Great Brands Know: Don't Chase Customers

Sunk cost is one of the reasons why Facebook’s game Farmville was so addictive. If you didn’t keep playing, what you invested in died and then you wasted your time, money and energy. When you stand to lose something you know it’s going to hurt, so as a result you’re motivated to try to mitigate that loss. This is why free advice is worth its price. Paying for advice or anything else enhances value and attention to detail.

A lot of motivational speakers and self-help experts profess that our attitudes determine our actions. In reality the formula often works in reverse: our actions determine our attitudes. Financial commitment is a powerful action and a great motivator. To see this we need to look no further than two studies in the food industry.

In what’s known as “The McDonalds Effect,” a group of Carnegie Mellon researchers distributed pamphlets (free advice) to McDonald’s patrons on how many calories they should consume as they entered the restaurant. They found that not only did calorie consumption not drop, it actually increased. A compelling example of free advice backfiring big time.

Whether it’s advice, a product, or service, there is a clear relationship between price and value. In a study conducted by Stanford professor Baba Shiv, consumers who received a discounted price for an energy drink that professed to improve mental acuity were able to solve 30 percent fewer puzzles than the subset who paid full price for the exact same drink. A compelling example of why having more skin in the game enhances results.

The lesson for entrepreneurs from these studies is that price doesn’t just change people’s perception of a brand -- it changes their actual experience with it. You’re a brand too and when you give free advice it devalues your brand. You may think you’re doing a prospective client or friend a favor giving them the figurative discount, but when you do so, the evidence shows your advice gets discounted, literally.

If they’re not paying, they’re not paying attention.

Related: Why You Can Raise Prices Now