How does one make money and wealth via an entrepreneurial venture?

by sansastark9. Posted on Sep 10, 2020    0    12


Imagine I have an affordable product priced at say $8.99 and my cost is 2.99 that’s still just a 2.34x mark-up and only 6 per product. How is it even possible for a small business to generate profit? How are people doing it? Yes I’m aware it takes times to build revenue and generate profitability, but HOW are they doing it? Specially when in the world today expenses specially digital ads and influencers and other digital marketing costs are so high! How do small or big companies make profits despite incurring such high costs and high competition in practically every industry? (Not to mention so many other costs exist whether you sell online or offline - such as transaction fees, logistics, commissions, distribution fees, etc etc etc etc)

Not to mention so many other costs exist whether you sell online or offline - such as transaction fees, logistics, commissions, distribution fees, etc etc etc etc).

Most people say volume is the key but how do you generate volume if you don’t put in money into producing and marketing those higher quantities which then pushes back the timeline of profitability? Also when you spend so much money to achieve volumes, don’t you spend time just playing catch up instead of generating profits?


Comments

gigawhat1 1

That is a great profit margin.

  sansastark9 1

But it’s still only $7, when the cost of customer acquisition is exponentially higher!

NoBulletsLeft 1

Then you need to sell multiple items per customer. Find a way to keep them coming back to you.

gigawhat1 1

You need to sell in higher volumes. Or you need to give it time if your product is a disposable item and customers will replace it in the near future. What is the product by the way? Is this something that has been patented and is already in the market?

harrisonswales 1

You have a bad offer then. You need to either figure out how to drop cost per acquisition or raise your prices by raising perceived value. I sell a $22 products with a $17 margin. Average cost per acquisition is close to $14 so I only make $2 profit per sale after fees and other costs. But, when I sell 500 units per day, I'm pulling $1k profit.

effyochicken 2

I hate to say it, but this is a LOT to unpack.


It's like you're asking the question "How do businesses make money? I know they make money, but SPECIFICALLY HOW??"


I mean, it's simple... sell your product for more than it costs you to make and sell it. And then do it over and over and over. Maybe you're losing money at first, but eventually you find cheaper ways to do it and leverage already-existing investments you've made. Nobody here is going to be able to give a clean answer because it's just literally that simple. You need to allow yourself to understand it.

mpbowes 2

There’s this idea called the “J-Curve” that discusses and explains your concern.

The J-Curve is a chart comparing Net Profits over Time. The instant the company is formed, profits are $0, and they dip to the negatives for a while before mass market appeal is achieved, repeat customers are earned, and profits grow up and to the right linearly.

Essentially, you’re right - the business needs to invest a certain amount of money and time to create and promote products which eats into the investment and pushes back profitability.

As an example, Tesla was founded with $3B in cash reserves and lost money for basically two years after starting. They made a lot of money selling their cars, but spent even more hiring engineers and building factories etc etc. Now, they’re doing okay, and have grown that $3B cash reserve to about $8.5B.

Another example - Uber has been selling at least $6B in gross bookings since 2017, and has officially “lost” money ever since. They’ve shown negative cash flow since Q1 2018, but are sitting on a large amount of cash due to investment infusions.

WeWork was a similar story taken to the extreme - they raised a bunch of debt to purchase commercial real estate, spent more debt on renovating that real estate, and ostensibly slowly converted their debt to profit via rentals. It was a cash flow game - rent a square foot for more than your mortgage on it and hey presto, profit. That never happened - as soon as they came close, they just bought new debt/real estate. The company, despite never turning a profit, was valued at some mind boggling number and the founder jumped ship with a few billion in investor cash.

There is basically no way to avoid the J-Curve unless you walk out of some professional service role, like a marketing consultant at an agency or like... a renovation company, where you already have repeat customers and they call you to work with you specifically. $0 on marketing, $0 on product development, even a $10 gig is 100% profit.

There are ways to start a business without requiring a lot of debt, though, and that’s to simply bankroll things yourself (easy) or sell equity into a new business that has exclusive intellectual property rights over some new invention (hard), and that way you’d still have to pay incorporation fees.

sw4mp4ss 2

What you are describing is a problem of Economies of Scale. This is what allows McDonalds and the like to sell hamburgers for so cheap and still make so much money. It sounds like you need to evaluate your processes and determine ways you can scale your business in order to take advantage of the economy of scale instead of being beaten by it.

In terms of associated cost to scaling up your operations, without more detail, it's difficult to give more specific direction. There might be ways you make gains without incurring major costs, but you might also be at the end of your rope as far as optimization without investing a little more capital.

Here are some of the questions that I would ask to help try to determine the next steps:

Do you have production issues bottle-necking your offerings? Can you actually produce enough products to turn the kind of profit you are looking for (assuming we don't adjust the price for now)? If this is limiting the number of sales you're able to make, you'll need to evaluate how to improve that situation.

Do you have more product than you are able to move? If it's a matter of getting your product in front of people and getting them to make the purchase, it is likely that you will have to evaluate your strategies that you use to gain new customers.

The reality is that if your offering is only < $10, you're going to have to move a large number of products to turn a profit and you're going to have deal with the problem of getting those products in front of people. As u/harrisonswales suggests, maybe your offering isn't good enough to grab attention, maybe your offering just isn't getting in front of the right people or enough people.

Hopefully thinking about some of these questions will help you take advantage of economies of scale in a way that works best for you and your business and will help you determine what steps (or questions) come next.

DoctorDumay 2

Consumer products with low prices are all about volume. I am not sure what kind of product you have with that price and such a high margin. But if that is true, you just need to move a lot of product.

  sansastark9 1

Most people say volume is the key but how do you generate volume if you don’t put in money into producing and marketing those higher quantities which then pushes back the timeline of profitability? Also when you spend so much money to achieve volumes, don’t you spend time just playing catch up instead of generating profits?

DoctorDumay 2

That’s called running a business. Nothing is for free my friend. Someone’s gotta make the first move. If you don’t have the cash for that, you shouldn’t focus on physical products, unless you can produce them very fast (and get customers to pay before you create and deliver).

AnonJian 3

This question is talks about an important failure point: The one-shot sale. Online people are absolutely obsessed about selling one person, one product, one time. Your first sale to a customer is, in almost all businesses, the highest effort least profitable sale you ever make.

Most viable small businesses, and certainly the 'money makers' never throw away customers like that. They want to set up a stream of upsells, cross sells, repeat purchases over the lifetime of the customer.

And Lifetime Customer Value is a metric real companies track while online fantasy business post questions about making a million dollars in revenue and wondering why the parents need to help them with rent.

Everybody goes after prospects and yet, once they have a customer, they often ignore them.

Using price to replace thought. Marketing has been obliterated online, cut up between scammers and anti commerce types. With most lame startup wantrepreneurs figuring they will charge the lowest possible price. Rarely if ever the price of optimum profit. The most popular price online is zero. Zero price is a favorite of very rare actual money making success.

Offline, you give away the razor and sell high profit per unit razor blades over-and-over, year after year. Online they give away the razor, selling one blade, to one customer, one time. Then they fold.

They lose money on each sale but figure they'll make it up in volume. Um ... no.

In other words, the problem is using dotcom meltdown math and popular wantrepreneurial myth. Stop that.