Building an Online Business: How to Choose a Right Business Model
First off, to be in a business, you’ve got to bring “value” to your customer base. Your customers exchange “value” with price that they pay you. Now, business model is about creation, delivery and capture of that perceived “value”. As an example, your business creates value when you solve a problem in the form of product or service benefits for your customer base. This value creation requires your business to deeply connect with your customers that you work out in the form of segments. Your business delivers value by way of product or service features, something that your customers consume by way of using your product or service. This value delivery requires that you work with partners, suppliers or some form of distribution channels (“online” is one of them). Now, finally, value capture is about how your business makes money or profit. The concept of value capture requires you to understand your cost structure, revenue streams, and figure out your growth strategy.
Now, I am sure you have already witnessed various forms of online business models as part of your use of the Internet itself. Amazon.com and ebay.com are great examples of online businesses where customer acquisition lifecycle is completely carried out online. In the online world, there are three core assets that you can bring to bear when choosing your business model. Those assets are content, traffic and trust. Content is pretty much where it all starts, that’s how a business engages with their customer base. It can be in various forms, such as video, audio, text such as email or blog posts what have you. Once your target audience finds and consumes your content, you have steady traffic or what’s known as eye balls. Now, once you inspire trust and connect deeply with your audience, you are able to monetize. Your customers can consume your offering in the form of a product, a service or a platform.
Now, how do you choose a right business model? Well, it depends on You and your appetite for Risk.
To understand the concept of risk in online businesses, let me break it further down into three critical areas.
1. Initial capital requirement
For most of us, more threshold capital to start a business would equate to more risk.
2. Typical profit margin
Remember, when running a business, what matters most is what you keep i.e. your profit $ after all costs are taken out. Digital products offer some of the highest margins. In a typical online business based on digital products, after reaching scale, you should still be able to command about 75-80% profit margin. For physical products, your margins will vary all over the place due to complex structure involved, but you should not expect to take more than 25-50% after all costs of sale are accounted for.
3. Domain(s) of knowledge required
Before you choose a business model, you need to figure out what are the domains of knowledge that are required for you to be successful. I’d put Amazon FBA right up there in terms of complexity, because in order to be successful, you must possess not only knowledge of buying and selling, but also supplier qualification, inventory management, and quality control among other things.
Now, let’s dive into each business model.
1. Digital Products or Services
Digital products or services are one of the most popular online business models. Why? Because they offer some of the lowest initial capital requirements whereas the highest profit margin potential. They are pretty much best of the both world.
Examples of Digital products and services include eBooks, online learning courses and research reports targeting a specific niche. There are some obvious gotchas involved in selling digital products, such as piracy and product relevance over time.
Online content monetization can happen in a number of ways, primarily by way of affiliate marketing. Once you have traffic and trust, you can monetize them using affiliate products or services. Affiliate offer the lowest amount of risk since those are not your products. They also offer very high profit margins since all affiliate income is profit. The biggest downside of affiliate marketing is lack of control, since you are selling (or promoting) someone’s products.
Examples of affiliate platforms are Amazon Affiliates, Google AdSense and affiliate platforms such as Clickbank or JVZoo.
3. Physical Products
In the era of Amazon, you will not be selling physical products using your website. Amazon FBA is an excellent way to get started. There are two ways to get involved with physical products, one where you buy and sell products (price arbitrage or using your private label brand which is what I always recommend), or where you build, buy and sell your products. Latter, involves working with suppliers to build product to your specs and then selling them on Amazon with strong sustainable differentiation.
Now, successfully physical products with Amazon FBA is not for the faint hearted due to many reasons. It requires upfront capital, carries complex cost structure, offers some of the lowest margins out there (consider yourself lucky if you can take home 25-30% margins!) and necessitate knowledge in multiple domains. As mentioned above, you need to know supplier qualification, inventory management, and quality control among other things. I’d say selling physical products using Amazon is not entirely a passive income stream and something that you should tread carefully. Beyond Amazon, you can also tap into Etsy, eBay or Walmart marketplaces.
In conclusion, once you have threshold amount of traffic and trust with your target audience, it is time to monetize them with a business model that you find yourself comfortable with.
Who am I?
I run multiple highly profitable six-figure online businesses. Last but not least, I discuss this topic and techniques in detail within my Online Business Mastery Course. You’re definitely missing it out, if you have not checked it out already. For a Limited-time, Module 1 of this course is available free of cost. Signup now to claim your instant access!
Feel free to drop your comments or questions below, I will be responding to them over the next few days and weeks.