The online gold rush

This chapter is about how to make money from an online business. You'll discover how the entrepreneurs I've interviewed made their money, the business models they chose, why they chose them, the merits of those models, how to source investors, what to look for in an investor and much more.

Few would disagree that we are in the midst of a social and technological revolution. We are living in uncharted territory, some likening it to the days of the gold rush when riches were to be found simply by digging a hole in the right place at the right time. In many ways, we're experiencing an online gold rush of sorts right now. What else can you call it when Mark Zuckerberg, a university dropout, can create a multi-billion dollar company in just eight years? Look at the host of associated industries that have been spawned as a result of Zuckerberg's creation and you can see that indeed a rising tide lifts all boats.

Let's take the gold rush analogy a bit further.

It's a little-known fact that in any gold rush, it's not just the pan-handlers mining for gold who get rich. It's the merchants who sell the miners the pans, the pick axes, the tents and the shovels who get extremely rich too, and certainly with less effort. While the miners braved the wind and cold, sifting through silt and soil on the off-chance of striking gold, the merchants had already struck it, counted it and banked it and were snuggled up nice and warm in their beds, dreaming about how much money they would make when the next round of speculators hit town.

Why were these merchants able to profit so effortlessly, while the miners struggled? They profited because they anticipated what the miners needed — food, drink, tools, guns — long before the miners knew they needed it themselves. The merchants' ‘depth of vision', their ability to see not what is, but what's possible, enabled them to position themselves favourably before the miners even arrived.

The miners speculated. The merchants anticipated. The difference? Preparation. Knowledge.

Can we as entrepreneurs not do the same? Can we prepare ourselves to be in the right place at the right time to take future advantage of the boom that's occurring right now? What knowledge can we access that will give us the edge to predict what the next wave of speculators will need?

To help you get a glimpse into what those likely trends might be, I asked my friend and colleague Morris Miselowski, a business and technology futurist, to identify what he considers to be some life-changing trends that will open up a world of opportunity to entrepreneurs with depth of vision.

What business model will you choose?

The question, ‘What is your business model?' is just a fancy way of asking ‘How will your business make money?'

We've already looked at how to research and test a business idea, so assuming you now have clarity on the industry, category or topic you're going to focus on, let's look at some of the ways you can make money from it.

Part and parcel of choosing your business model is deciding whether you'll sell online products or online services.

What's easier to sell: a tangible product or an intangible service?

I get asked this a lot, and it's a good question.

The truth is they both have their advantages and disadvantages. You see, it's not really about the product or service at all. It's about you. Specifically, about how you evaluate and explain value to your prospect. For example, some people are more comfortable selling a product they can touch, feel and experience, whereas others are more comfortable selling services they can sell via the story, the words and the images.

The easy answer is that no-one can answer this question for you. You have to go out and try it yourself. When you finally find the answer that's right for you, it will not come down to whether or not you're selling physical goods, but whether or not your experiences and biases will help you to identify and communicate the value proposition effectively.

Online products vs online services: what's easier to sell?

Online products and online services both have merit and I'll outline here my perspective on the respective merits of both.

Table 4.1 shows the pros and cons of selling products online (that is, tangible items such as books, clothing, toys, shoes and computers).

Table 4.2 shows the pros and cons of selling online services such as software, education programs and web design (that is, intangible items).

As you can see, for every pro there is also a con; you need to decide what you feel most comfortable selling.

How to turn any product or service into an information product

If you're a service provider such as a coach, a counsellor or an accountant, you may be thinking, ‘I'd like to learn how to convert my expert knowledge on this topic into an information product that I can sell online'.

Conversely, if you sell products such as clothing, computers or cars, you may also be thinking, ‘I'd like to learn how to convert my expert knowledge on this topic into an information product that I can sell online'.

As you can see, irrespective of whether you sell a service or a product, you can still create an information product to sell online.

Here's how.

If you want to make serious money online, build a bridge

If you've ever been to Sydney, you'll know you have to pay a toll to get from the north of Sydney into the city, and vice versa.

Now think of all the traffic that crosses the bridge in any day. That's a lot of cars. So it's fair to say that whoever collects the toll is making a pretty penny. Did they build the bridge? No. Do they own the cars? No. So what do they own? Nothing! But they own the rights to that bridge so no matter who crosses it, they get a clip of the ticket.

Great business model, hey? Just as long as they maintain the bridge, and make sure that the traffic flows nicely and that there are no accidents or hold-ups on the bridge, everyone is happy.

So how does this relate to making money online? Using the bridge analogy, have a think about how you could connect buyers and sellers of some product or service and take a ‘clip' of the ‘ticket' each time they go through. You don't need to sell, buy or stock anything; you just need to introduce people who need something from each other.

Here are some examples of very famous, very successful ‘bridge-builder' sites (or brokerages):

• www.freelancer.com
• www.odesk.com
• www.elance.com
• www.etsy.com
• www.ebay.com
• www.gumtree.com.au
• www.wotif.com
• www.carsales.com.au

There's also a similar but different style of site, called a ‘price comparison' site, which lists all the various competitors in a sector, say in the energy, health insurance or telco world. They make all the products, prices and features available for viewing and then take a cut of whichever products or services are purchased from the site. Again, they don't own the products or services; they just connect the buyer with the seller.

Spoiler alert! To make a business like this work, you need extremely deep pockets to promote it. Its success rests on generating traffic and that costs money. Big money. And the model is very susceptible to competition because the barriers to entry are low. Anyone, given enough money and access to the right players, could set up an alternative ‘bridge'. What if they build one right next to yours?

Matt Barrie is one of the most successful ‘bridge builders' Australia has produced and is the founder of Freelancer, one of the world's largest outsourcing marketplaces.

Pricing for profit

Generally speaking, price is a function of everything it costs to make a product, plus a mark-up on top to generate a profit, and that's it.

Or is it?

Consider the luxury-goods industry, a triumph of capitalism over common sense.

• Jewellery. Ounce for ounce, does a Tiffany gold necklace cost more to produce than a gold necklace made by Pandora? No.
• Christian Louboutin shoes. Using the exact same materials, stitching and craftsmanship, does it cost more to produce a Louboutin shoe than one made by Nine West? No.
• Ralph Lauren. Using the exact same materials, stitching and craftsmanship, does it cost more to produce a Polo shirt than one made by Bonds? No.

What these luxury brands do so brilliantly is use their logo to elevate the product above all others in the market, and then use an inflated price to anchor that perception of quality in the mind of the consumer. Without the red soles, would anyone really know the shoes were from Louboutin? Without the little polo-player icon, would anyone really know the shirt was from Ralph Lauren?

The answer is almost certainly no.

It's these identifiable symbols that give the product its luxury status, but the price is a key element in that.

Here's proof. You see a Tiffany necklace on eBay for $99. Your first thought is: ‘It must be a fake' or ‘Her marriage busted up and she's liquidating her assets'. For the sisterhood, let's hope it's the former.

The same goes for any other luxury or high-value service: if it's priced too cheaply and is not congruent with our perception of what the price should be, we instantly think it must be fake, second-hand or damaged. Imagine if Warren Buffett or Tony Robbins priced their one-to-one mentoring services at $60 per hour? What if Harvard University offered a three-year degree for $5000 per year? We'd instantly be thinking, ‘What's the catch?'

And it's interesting to note that luxury brands rarely have sales or end-of-season clearances. To do so would not just discount their profit margins but their image also.

So what does this have to do with online marketing? Well, everything.

Here's the thing. In the absence of being able to touch, sense and experience your online product, and without a luxury logo to anchor its prestige in our minds, we have to use other techniques to reinforce the product's quality: the website, the graphics, the copy, the reputation of the owner of the site, and of course, pricing.

Measure twice, cut once

There were few topics about which all the entrepreneurs agreed, but there was one about which everyone did, and that was the need to measure everything, and I mean everything.

As H. James Harrington famously said, ‘if you can't measure it, you can't manage it.'

Maximising profit is being able to know what works in your business and what doesn't. By applying sophisticated tracking tools and measurements to virtually every aspect of the business, anyone can learn to amplify the factors that increase it and eliminate the factors that don't.

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We measure everything.

Matt Barrie

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Some would say that it's this democratisation of data and analytics that has enabled the smaller, nimble players to outfox the bigger, more well-resourced players, because when you know where every marketing dollar goes and whether it's working or not, you can achieve incredible results on a very small budget.

Prior to Google Analytics, it was virtually impossible to accurately track buyer behaviour or determine how or why someone bought from your site. Now, everything is measurable and this measurability has been a game-changer. Google Analytics is the tool of choice for most of the entrepreneurs, and irrespective of whether they sell products or services they all use this free tool, or something similar to it.

Matt Barrie (co-founder of Freelancer) is meticulous with analytics.

We measure everything. We measure the success of these things with revenue. It's all about growth. We have thousands of graphs that we monitor in real time on our site because everything has a funnel. Every funnel has conversion ratios all the way through and ultimately it leads to revenue or sign-ups or some other key driver in the business. And for us the key drivers are revenue, users and projects.

If you receive a book from Tony Nash's Booktopia and it's crushed or dented, Tony's tracking systems can tell you who packed the book, on what day and at what time.

Jodie Fox wishes she'd started measuring earlier.

In hindsight, we should have been more sophisticated with our reporting because it gives us so much information that better informs our decisions. It's about understanding the funnels, which are of critical importance, but you should also be looking at the metrics across the entire business.

What would Jodie have measured differently if she was starting over?

I would have focused more heavily on customer acquisition costs, conversion rates, the lifetime value of customers, basket size, our burn rate (how much cash the business has) and revenue versus growth.

I was curious as to what Stephanie Alexander measured.

I look at my sales figures every day and that tells me where the sales are being generated, which is overwhelmingly in Australia. I also keep an eye on the response to social media when we put a post on my Facebook business page or an Instagram image. Sometimes you can see that there is a great response to that particular theme and I take note of that. I am not sure what it is actually telling me except that a lot of people liked it.

John Winning, founder of Appliances Online, could reel off his units of measurements without blinking.

The top-level KPIs I look for would be revenue, profit, gross margin, and obviously, cash flow. From a marketing perspective, there's the cost per acquisition, what channels you are getting your traffic from, what is your word of mouth, your ‘Net Promoter Scores' and customer experience.

But wait, John's got more.

If it's for the warehouse, then you'd be looking at how many movements you are doing between receiving and delivery and trying to become as efficient as possible. Technology-wise, I'd be looking for how many bugs are popping up versus how many jobs you are able to complete and in what type of time frames. There's a million KPIs.

ProBlogger's Darren Rowse measures other factors.

We also look at comment levels and how many people are sharing content. We also look out for questions we get via email about a particular new product or a new trend in photography. We just constantly listen for that type of thing and we also watch what other people are doing and how well their promotions seem to be going on their products.

Brad Smith was the 2010 Young Australian of the Year for Tasmania. He's a champion Superlite MX motocross rider and founder of the very successful braaap motorcycle and accessories retail outlet he calls ‘the motocross equivalent of a surf shop'.

He's packed a lot into his short life and one of the reasons he believes he's been successful is because he's been able to measure what works and what doesn't.

I know I have at least eight ‘points of contact' with a prospect before they'll buy something from me. We track those contact points and can pinpoint with laser accuracy when the prospect will buy.

He has also developed a range of activities and marketing initiatives to maximise those contact points, so instead of having his sales team ringing prospects just to ‘see how they're going', he offered them something he knows will drive sales. For example, he created a motorcycle riding school because he knows that once a prospect has personally experienced the thrill of a great ride — with top instructors, powerful bikes and first-class equipment — they'll want to buy the bike, or at least take some lessons (and the lessons are just another ‘contact point'), moving them another step along the road to a purchase. Genius.

Working with investors

If you've got world domination in your sights, you'll want to know how to find, work with and get the most out of investors.

Online entrepreneurs take on investment partners for all sorts of different reasons. Sometimes it works brilliantly, other times it can take you off track.

When Andre Eikmeier, co-founder of the online wine retailer Vinomofo, found himself courted by an investment ‘suitor', he discovered it was a bit of both.

Bernadette: How did your investment partnership journey begin?

Andre: About 20 months after launching Vinomofo we came on the radar of a big retail operator and the big traditional distributors in the supply chain model. They didn't like the idea of an independent player that was doing things aggressively with price. They said we were ‘disrupting the supply chain model'.

Bernadette: What did they do to you?

Andre: They straight away started putting pressure on suppliers on what they should do with us, and we realised that this could wind up our business very quickly.

Bernadette: What did you do?

Andre: We needed to get investors in so that we could scale up and get some big buying power quickly. We were only ordering 20 cases of wine at a time so we were a small player by comparison, and our suppliers were taking a big risk with their larger distributors by placing our order of 20 cases.

Bernadette: What happened then?

Andre: We spoke to a large media player about investment, but in the end we got approached by Catch of the Day, a big online retail group, an agile, aggressive company who have done extraordinary things.

We went with them because they had proven that they could be category leaders in a few businesses that they had launched. So we sold a majority stake of the company to them and we joined their group but we operated quite independently.

Bernadette: What were the advantages in doing that?

Andre: We tapped into their audience and their media, so transactions suddenly boomed and we really grew quite aggressively. And it gave us the buying power that we needed and that surprised all those serious players. As a result, our suppliers started kicking back on pressure from the retail giants.

Bernadette: How did that change things for you?

Andre: Well, now we could put in an order of 2000 cases instead of 20 cases. We also had really good payment terms that weren't the norm in the industry. But then we ended up buying that stake back a little while later. I think we really found that the industry and our customers and everybody thought we are an underdog and we needed to follow that journey, which is why we bought the company back.

Bernadette: What were the drawbacks of going out on your own again without the support of a major online retailer like that?

Andre: Venturing with a big partner like Catch of the Day enabled us to have an effectively limitless bank account so there was a safety net, which is good and bad. It's good because it allows you to make more aggressive decisions if you need to buy large volumes of stock. But it also frustrated us a little bit about the business because it became a bit about ‘the Tuesday mornings sales report' and being part of that bigger structure did take away that sort of connection we had with our audience.

Bernadette: Was it hard starting over?

Andre: On the first day of our new arrangement, without their backup, we had zero in the bank account. But then at 12:01 am the first sale came through and that was good because we had seven days to pay! So it was really visceral again and it really, really charged us up.

Bernadette: Having seen it from both sides, what would you prefer? Having the security of a big player supporting you or being able to run fast and free?

Andre: The challenge was to get profitable quickly again because there was no safety net, but I think we liked it because it focused our decisions and it allowed us to think bigger picture in the longer term, knowing we weren't headed towards an exit or an IPO or any other artificial agenda. It enabled us to make pure business decisions.

Jodie Fox, co-founder of the online design-your-own-shoes shop Shoes of Prey, has an eight-step strategy for sourcing investors.

Simple!

Jodie also recommends keeping these seven tips in mind when seeking investors.

Making money from your business is the reason you're in business, so be sure to look ahead to the future, see what the trends are going to be and get yourself set up to take advantage of the next wave of industry disruption.

Maximising profit is the name of the game in business, so this chapter should have given you some ideas on how to choose the right business model for you. There's enormous opportunity to make money in the marketplace for anyone with a niche product or service and an equally niche audience. You just have to work out how you're going to make money from it.

We've covered a range of different business models and the various merits of each. All work brilliantly, but you have to be mindful of the investment required to bring them to life. This all comes back to the original question: What do you want? So if you still haven't clarified that, it will be hard to pinpoint the right model for you.

Working with investors can be a brilliant launch pad to world domination, or it can severely restrict your style and vision.

Get clear on what you want from investors before you seek them out, and be very clear about what you'll give up in order to get them.

What's next?

In chapter 5, we'll cover one of the most important factors for any online entrepreneur wanting to build a business that works: trust. What it is, why it matters, how to get it and how it can have a massive impact on your profit.