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Every sector of every industry has its own model. And many individual businesses within a particular sector have their own peculiar formula for bringing on new customers. You can’t possibly expect your home-based business to succeed unless you have a very good idea how you are going to attract new customers efficiently. And you can’t do that unless you have working knowledge of how other, similar businesses have done so in the past.
When people I know insist on starting businesses outside of their knowledge base, I usually encourage them to get a job in the marketing department of a business like the one they want to enter. I would
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recommend this even if you have to volunteer your services. The knowledge you’ll gain—and particularly the knowledge you’ll gain about the three essential qualities of the business—will be worth much more than any financial compensation you could get.
It’s a long shot, but it is possible to decipher an acquisition model by reading books and interviewing people. If you insist on going that way, read only books written by people who have achieved their success by doing, not talking about it—and secure personal interviews with the same sort of experienced individuals. (You may be surprised at how much successful people are willing to tell you about how they became successful.)
A Substantial Profit Margin
Knowledge of how to acquire new customers efficiently is, as I said, the first and most important thing I look for when investing in a new business. But it’s not the only thing. I like to see a large gross profit, too.
By “gross profit,” I mean price minus cost of goods and refunds. A paperback book on building wealth, for example, that sells for $7.95 might have a $3.95 production cost. That’s a gross profit of $4.00 on $7.95—the cost of product (including refunds) being about 50 percent of sales. That’s a gross profit margin many businesses find acceptable, but it’s the kind of number that makes me nervous.
I like big profit margins—the bigger the better. That’s why I like information products. The paper and ink are cheap. And the initial cost—that pays for the intellectual product—can be amortized over the life of the product.
Take the aforementioned example of the wealth-building book. A 100 percent markup (from about $4 to about $8) doesn’t leave me a lot of room for marketing costs. But if I could put that same information into a different format and sell it as a home-study course, I might be able to charge $99, $199, or even $399 for it. My product and fulfillment costs would increase, but only marginally. Yet my gross profit margin would soar.
In the twenty-first century, there are many businesses that offer large margins. The obvious ones are information based, but entertainment and prestige products offer large margins, too.
The best thing about big margins from a start-up perspective is that
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they allow you plenty of room for error. As a general rule, the larger the gross margin, the more cash you can generate with each sale. And the more cash flow your business has when it begins, the better able you’ll be to keep the business going while you figure out the perfect customer acquisition model—the one that will allow your company to keep on growing.
A Considerable Back-End Potential
The third and final quality I look for in start-up businesses is the potential for back-end sales. By “back-end” sales, I mean more, better, and higher-priced products and services sold to the existing customer base.
I like businesses that have customers who keep on buying. I like the feeling that the work that is done to acquire a new customer will be the hardest work done. I like the thought that for every dollar I get bringing a new customer into my business, there will be 3 or 4 or even
10 more dollars down the road.
It’s much, much easier to make a second sale to an existing customer than it is to get that customer in the first place. Businesses that have this potential are natural moneymakers, because they allow the business to reinvest 100 percent or more of its front-end sales into acquiring more customers.
When you have an efficient marketing model, a good profit margin, and a substantial back end, you have everything you need to make your business grow exponentially. Your margin allows you to continuously build your active customer base, even accounting for those customers who expire or drift away.
As your customer base grows, your back end explodes—because a good back end stimulates itself. The more back-end products you have, the higher the response rate (and income yield) you’ll get from each existing customer. When you are dealing with small business development in industries with back-end characteristics, supply-side economics is a wonderful fact of life.
Rule No. 3: Make Sure There Is an Active Market
The most common fatal mistake would-be entrepreneurs make is the failure to find out whether there is an active market for their intended product.