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Business fundamentals - deciding what to sell

Discussion in 'Making Money' started by Unreliable Witness, Mar 14, 2017.

  1. Unreliable Witness

    Unreliable Witness Regular Member

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    There are a lot of posts on this forum asking about how to make money online.

    Many of the answers seem to miss the basic fundamentals of starting and scaling any sort of business – online or offline. Answers are too quick to relate to SEO or social media and not to business in general.

    The Internet is simply a different way of accessing customers and providing services. If you’re going to make it online, you need to be able to make it anywhere.

    That is what I want to address here and maybe in subsequent posts if this one is well received.

    I’m going to start at the beginning – considering what to sell.

    In many of the guides here, keyword research is the first step of building an online business.

    Keyword research is competitive analysis. It looks for a demand that enough people have (as indicated by search volume) that isn’t being fulfilled (as indicated by an ease of ranking score or analysis).

    if you’re looking at a business you also need to consider two other things: are people willing to pay for the solution; and can you persuade them to buy from you.

    Reading journeys, those other two things are often overlooked when people carry out keyword research. You find an uncompetitive keyword without considering whether there is a profit in it and whether you can find a way of parting people from their money.

    In simple terms, the amount of money you will make can be expressed as an equation:

    total demand x your market share x your conversion rate x your profit margin

    There is no point in going into a business where all four of these factors are low – it won’t be worth your time (which you should cost into your profit margin).

    If any of these are low, then the others have to be higher to compensate.

    Good businesses are those where one of these factors is high and the others are reasonable or high.

    Perhaps you are selling plastic surgery in Texas. There aren’t many people looking for it, so it has been overlooked by others as a niche to compete in, but the commission rates a particular surgeon will pay you are high. Conversion rates are reasonable because the call to action is to call the surgeon, who is good at converting leads.

    Or perhaps you’re selling consumable household goods, where the profit margin is low, but demand is high. If you can take a large enough market share and have a particularly good offer that converts, there will be money to be made.

    You can increase your market share by using more channels. SEO might only get you to a number 5 ranking, but using social media, or PPC or e-mail marketing, you might be able to reach a greater share of the market – those people that don’t search for a solution using Google.

    Total demand is difficult to increase. However, you can diversify into selling different products and services.

    Conversion rate is about how attractive your offer is. You may not be able to compete on price, but you may be able to raise your rate over that of your competitors by increasing trust (e.g. by using social proof such as reviews), or by giving a better offer (e.g. by bundling or unbundling), or by giving a better service (e.g. faster delivery through Amazon’s fulfilled by programme).

    The last thing to think about is your profit.

    If you are selling on commission, you start at a disadvantage to the merchant because your profit margin is much lower. If the margin on selling a good is 10% and it sells for $10, then the merchant can afford to spend up to $1 for each product sold on marketing. If your commission rate is 5%, then you can only afford to spend up to $0.50.

    That means that the other factors have to compensate. You need to be able to gain more market share by selling through other channels, or have a diversified business selling other things, or be better at converting.

    If there are big initial costs to getting market share (e.g. you need to invest in PBNs to rank) and you’re selling on commission, you’ll need cash to invest upfront, and you’ll need to play a long term game. Churn and burn is less likely to work.

    If you are churning and burning, your market share is likely to be limited by time. Search volume might be 1,000,000 a year, but if you’re only at number 5 for 2 months, your total share of the market could be much lower - e.g. 1,666 searches. So you need a high value product or service to sell and your conversion rate should be good.

    If you’re selling your own product (such as software), then you are probably more likely to be able to control prices and therefore profit margin. You’ll need to make sure that total demand is large enough and that you can maximise your market share.

    In summary, before you dive into a journey, you need to consider where your strengths are with respect to the equation above. Don’t just find a low competition keyword and expect to build a profitable business from it. Consider the other factors as well.
     
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