Once bitten by the entrepreneurial bug, you cannot help but see business opportunities everywhere. In the beginning years, the serial entrepreneur seeks the never-ending new ways to exchange time for money. Eventually, he discovers that by working by the hour, income is limited, and so is freedom.
That motivates the entrepreneur to seek ways to generate revenue by selling products or leveraging other peoples’ time. With more income and freedom in mind, the business owner begins noticing business models all around him, and often considers how easy it would be to make money selling products.
How Hard Can it Be?
For example, she may see a product hawked online for $20.00, easily purchased in bulk for $6.00 each. $14.00 profit per unit. With that much markup, how hard can it be, right?
Not so fast. Here is where the inexperienced entrepreneur hits a roadblock and gives up, or learns the hard way, how the game really works.
When evaluating successful marketers, whether online, in catalogs, TV, or any other medium, what you see is not what’s really happening. If you try to copy the front-end, without understanding the back-end, you’ll crash and burn every time.
Here is the game: If product X sells for $20.00, and costs $6.00 to manufacture, that leaves $14.00 left for expenses and profit. What most beginning marketers miss is that it often costs far more than $20.00 just to acquire each new customer. Perhaps $30, $40, or $50 to make that $20 sale.
The Business Model
With this kind of math, how is it possible to make any money? The experienced entrepreneurs understand that it’s often necessary to go negative to acquire the customer on the front-end, to then make the profit on the back end—the part you don’t see.
Let’s say I’m in the ink jet printer business. The biggest swindle—or the best business model invented—depending on which side of the fence you’re on. The printer company runs a series of advertisements in catalogs, newspapers, and paid online search traffic.
In our hypothetical example, it costs the company an average of $200 in advertising for every printer that sells for $100. After selling millions of printers using the same advertising combination, the cost per sale becomes very predictable.
The printer company has also figured out that the average user will replace the print cartridge every three months at a cost of $20.00. At the end of 15 months, the customer will have purchased $100.00 in print cartridges, and with the original $100.00 printer cost, the company has finally broke even. Future cartridge sales then become profit for the company.
The printer is the front-end and the cartridges are the back-end. They are not in the printer business; they are in the ink business. The printer is part of their sales funnel. If you try to be in the printer business with these economics, you will lose.
With testing, every business needs to figure out the true cost per sale and then design a business model that makes it profitable. With the right formula it’s often necessary to go negative with the front-end sale, but not only is it necessary, many times it’s preferable.
Out Spend Your Competitors
The more you can afford to spend selling your front-end product, the more you can outsell your competitors, and the more you can sell on the back-end.
With this formula figured out, your problem is no longer about acquiring customers. Instead, the problem becomes an emotional one. It goes against intuition to sell at a loss.
If you can get past that mental block, the real problem is about financing. You need access to enough money to go negative long enough to make your economics profitable. Acquiring customers is no longer the real threat, but cash flow is.
Now when you see the next late night infomercial, or online ad, see if you can figure out what the back-end is. It might be worth buying one of those super knives for $9.99 that can cut through an aluminum can, just to see what the upscale is.
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