As the internet becomes increasingly embedded in how we live our lives, it also offers bountiful opportunities. It used to take hundreds of thousands of dollars to start your own company. Now, you can start an online business with just a few hundred bucks. For example, if your friends tell you that your cauliflower pizza crust is to die for, you can launch a website and develop an online following via Instagram before you’ve even figured out what the manufacturing process will look like.
That just leaves one question, though: What will your business model be? You may decide that a product, like the cauliflower pizza crust, is the best way to go. But that is not the only option. There are three basic business models available to you when you’re starting an online business:
- A physical product
- A service
- A digital product
Before you launch, take time to decide the best business model for your business. If you want to start a business online in the next 30 days but not sure of the exact steps to follow, then make sure to check out the One Funnel Away Challenge (click here to learn more).
Now, let’s talk about the 3 business models I’ve just mentioned.
A tangible product that your customer can hold in their hands is usually the first business model that comes to mind. You would be responsible for manufacturing a physical product, then having it delivered to your customers. It could be sold via an e-commerce store (Shopify), an auction site (eBay), a third-party site (Amazon), or a sales funnel (ClickFunnels).
There are quite a few benefits to selling your product online as opposed to in a brick and mortar. You don’t have the overhead, the employees, the stock, or the lease to pay.
In addition, your customers don’t have to travel to your store. They can see everything online, including reviews on your products, ingredient lists, and recipes for your cauliflower crust. They can watch videos of how other customers prepared the crust. In effect, the website does the selling for you.
However, it also means that you have to have something manufactured. Then you have to pay for it to be stored. And shipped. Cauliflower crusts, for example, can spoil after a while, and they have to be shipped in a refrigerated truck. The expenses can add up.
If a customer doesn’t like your product, they’ll return it – and you might even be stuck paying for return shipping. You have to know exactly how many of your product to make. Otherwise, you’ll either end up overstocked and losing money even if you’re selling a lot, or you’ll run out and lose out on potential sales.
There is another way to sell physical products online, which removes all the conundrums that creating your own product poses: dropshipping. With dropshipping, you partner with a wholesaler or distributor who has a product you think will sell well.
You become their chief marketer, setting up an e-commerce website, writing a blog to attract traffic, staying active on social media, setting up email campaigns, and planning other ways you can contact potential customers. Instead of spending all of your time worrying about the product, you get to tell customers about the products, using your selling skills to explain how the products will make their lives easier.
When you make a sale, the dropshipper does all the heavy lifting – literally. They have the inventory stocked in their warehouse. You forward the order to the dropshipper, paying the wholesale (read: discounted) price for each order. You can submit an order by email, online via their API, or through an Excel file; it all depends on what the dropshipper wants.
Then, they’ll pick the order from their shelves, pack it up, and ship it directly to your customer. It is sent in a blank box without pricing details or supplier information, so to the customer, it looks as if the package came straight from you.
Dropshipping companies usually charge a small additional fee for the service of shipping the product to the customer. While every company is different, this “handling” or “dropship” fee is usually $2-5 per order. That’s in addition to the price you paid for the product itself and the cost of shipping it to the customer.
Despite the thinner margins, you can still cut a big profit in the dropshipping business. You can raise your prices (if customers will still buy), you can sell more volume, and you can even negotiate with the dropshipper for a decrease in handling fees or a volume discount.
One of the best parts about dropshipping is that there is little to no risk for you. You’re not paying for the products to be manufactured; you only pay when you make a sale – and you already know what your profit margin will be for that order.
Services are uniquely ideal for making online sales, because there’s nothing you have to actually get into the customer’s hands. All you have to do is make sure they receive the service they want. There are two types of services sold online: either via physical delivery, or via online delivery.
For physically delivered services, your online presence can be a salesperson for you. Many businesses that work in customers’ homes or in offices use their website as a sales tool for in-person services. Instead of being a storefront, their website is designed to be something akin to an old-fashioned company brochure.
For example, you can search “carpenter” right now in Google, and it will display a half dozen results on a map that are a few miles from where you’re sitting. Then, you can look through them to find the best one. If you create an online presence like they have, it can be a great way to generate and qualify leads for your business.
The other type of services that are sold online are those that are also delivered online. The list is too long to give in full here, but those include copywriting, proofreading, online marketing, social media management, graphic design, and video editing. All of these are purchased from a customer’s computer, and created and delivered from a vendor’s computer.
As with creating a physical product, selling either type of service online comes with a few benefits. It can be far less expensive to convert leads into customers via a well-designed and marketed website than it is through traditional marketing methods. Potential customers can read as much information about your service as they want to without taking up your time.
Selling a service online, however, can also be more expensive. Specific keywords and service types have extremely high competition, especially in big cities. Just type in “lawyer New York City,” and see how many results you get! This means you will have to establish an aggressive, likely expensive marketing plan or you can have a high converting sales funnel in place.
A Digital Product
Then, there is the business model of choice – the holy grail – for so-called “lifestyle entrepreneurs”: making money by selling an information product. When you sell a physical product or a service, there are so many different bottlenecks that can develop, or caps on the limit you can make. Business owners almost always hit a level of sales that they cannot get beyond without making drastic changes or laying out large amounts of cash.
That’s just not the case with information products. You don’t have the hassles of inventory and employees and overhead and a physical location and many more… Instead, products are usually delivered online, automatically. All the payment details are automatically handled by your shopping cart service, so you never have to think about billing a customer. Theoretically, you could scale infinitely.
Here are the two categories that most information product sales fall into:
- Downloads: One of the most popular types of downloads to sell is an e-book. They can be anywhere from $0.99 to more than $50. Other downloadable material you can create and sell online includes audio, such as music; videos, such as teaching courses; and worksheets. You could even make a living selling downloadable bingo cards online! Because all of these products are delivered in a digital format, your profit margin is almost 100%.
- Membership sites: Membership sites range from simple access to a digital media firm, such as the New York Times, to sprawling training sites with audio, video and forums or private Facebook groups that are all locked away behind a membership gateway. The most lucrative of these sites bill customers monthly, and are set to give new content to each new member over a specific period of time. This method is effective at keeping new subscribers from being overwhelmed, while also keeping them locked into the subscription. Having a successful membership site is a great way to achieve a stable, recurring source of revenue.
Most of the services you can use to bill customers offer the option to bill on a recurring basis. If you use monthly or annual billing, not only will you need far fewer customers to be successful, but you can also predict your revenue far into the future.
Once you have created an actual product and have a pipeline of new customers, this business model takes very little time to maintain. And because it’s scalable, you don’t hit the same bottleneck that you might in a product or a service business.
It’s not all peachy, though. It is difficult to convey how much value there is in your material to prospective customers. And with an abundance of free information available online, it can be hard to convince them to part from their dollars – especially every month. If you create especially good content, you’ll also have to worry about people stealing your content and sharing it illegally.
People are not willing to shell out for information that’s just as easily Googled. If anything, they are paying for a comprehensive course which save them time from searching.
What These Three Models Have in Common
There is one simple key to being successful in selling using any of these models online: the ability to find your target customers and show them why they must buy from you. If you master no other skill, the one you need to learn is sales and marketing. That alone can make you successful in selling any type of product online. Remember this, people don’t buy a product, service, or idea; they buy the story that’s attached to it.
It doesn’t matter which business model you choose; you will need a content marketing strategy. Most customers need to be educated about your product to make an informed purchase. If you don’t have solid content, they probably will not end up buying from you.
Let’s get back to pizza. Now that you understand how the three basic business models work, you can easily take this metaphor and understand the different types of businesses you could create:
- A physical product – You could make 10,000 boxes of your cauliflower pizza crust, then have them packaged, warehoused, and shipped to anywhere in the United States. You can make different variations and flavors, and explore making crusts with other vegetables.
To pull it off, though, you will either need to set up a factory on your own, or outsource the manufacturing to someone else. The startup costs for either option will be quite high.
- A service – You could make cauliflower pizza crusts for hipster weddings. An informative website could provide testimonials from other happy couples, allergen information, and a place to ask for a wedding proposal.
The time to create and the cost to invest would likely be less than if you went the physical product route. In addition, it would be a lot easier to differentiate your product offering from everything else on the market.
- A digital product: This is likely the least stressful, complicated, and costly option. You could create a simple, step-by-step e-book with full color pictures that shows people how to make your delectable recipe on their own. You could even take it a step further and turn it into a full-on membership site for cooks, replete with videos of you cooking in your kitchen and a forum for members.
Or who’s to stop you? You could do all three business models at once, with an in-store cauliflower crust, a catering business, and an online recipe network. You can never have too much pizza.
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