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Online Business Profitability

» Managing the Risk vs. Reward Equation

Despite the plethora of e-books on how to make a million dollars on the Internet (usually overnight), building and launching a successful online enterprise is a risk, rewards don’t happen overnight and the odds are against your success. About 94% of all online businesses fail to achieve profitability, in large measure because these entrepreneurs didn’t manage the risk versus reward equation.

If you’re planning to invest in an online commerce site, read on. There’s a lot more to e-success than you imagined.

Risk Assessment
If you plan to invest a lot of money in an online business, it’s best to assess the possibility of losing that money. What are the risks associated with your particular business model?

For example, too much competition or competition that’s too well established put your investment at risk. If you can’t gain market penetration because you’re competing against nationally known brand names, you’re business won’t thrive without finding a different hook to draw in visitors.

Site development cost is another obvious risk factor. Not only will you pay for site design, copywriting, web hosting and search engine optimization, you’ll also need a number of pricey software programs to provide a secure check-out for buyers, to measure and assess site activity and to track orders, shipments and other back office chores.

Now, if you know something about site design and SEO, you won’t have to spend as much, but you’ll still have to spend something. When you calculate the rough numbers for site development, launch and marketing (SEO) ask yourself if you could afford to lose all of that investment. If you can’t, you need to better manage your risk. Here’s how.

Product Availability
Are your products readily available? Do your suppliers drop ship, that is, handle the shipping for a fee? Are your suppliers reliable and well-established? Are there alternative sources for the same product?

This is an area often overlooked by new site owners planning on that quick million. They hook up with distributors only to discover that the providers are barely getting by themselves. They fold and the owner scrambles to find other, comparable products.

Also, determine price stability. If wholesale prices are creeping up that’s going to cut into your margins and, ultimately, your business’ profitability — its margins.

Product Pricing
The world wide web has been a boon for buyers, creating a highly competitive marketplace. Great for buyers, not so great for new site owners. If you’re selling an exercise treadmill for $499 and your competition has the same product at $399, buyers aren’t going to pay that extra $100 just because you have a more attractive web site.

Your site must be competitive, either beating the competition on price or matching it and delivering additional freebies, as well, e.g. free shipping, a coupon for savings on future purchases or 24/7 customer support — all add-ons that should be a part of your business plan from day 1.

And it’s simple enough to do the research on the prices the market will bear. Just Google the competition to see what they’re selling widgets A, B and C for. If you can’t beat the competition on price, if your margins are just too thin, you’ve encountered a stumbling block — one you must overcome before investing in your online business.

Marketing Costs
If you launch your e-venture but don’t market (advertise) it, how will buyers find you? If your site shows up on page 213 of Google’s search engine results pages (SERPs), you won’t see any SE-driven site traffic. Search engine users rarely look beyond the first page or two of SERPs. Think about it. Do you?

That means you’re going to have to develop other means to drive traffic to your site. And there are lots of ways to do just that.

You can get some exposure for no or low costs through the proliferation of blogs and other personal sites like myspace.com. You can create an online presence and get some links to your site for little or no investment, but the chances of that traffic actually generating enough revenue for business success are slim and zip. It’s not going to happen, though social sites are useful in increasing the number of visitors to your site.

So, plan on marketing costs. You’ll have them. For example, Google’s Adsense program places contextual links on appropriate sites. You’ve seen them. They say “Ads By Goooogle.” Well, those links cost money and every time someone clicks on one, Google takes some of that business owner’s money. These PPC (pay-per-click) programs can cost anywhere from a nickel a click to several dollars a click depending on the keywords you obtain through bidding.

Order Fulfillment Costs
If you handle your own order fulfillment it won’t cost you anything but time because buyers expect to pay for shipping and handling. That’s not a problem. However, packing up 135 orders everyday takes a lot of time when you do it yourself. So, in your risk versus reward equation, factor in order fulfillment costs.

Many manufacturers have drop shipping programs wherein you capture the order through your site, pass it on to the manufacturer who then actually packs up the order and ships it out with your company logo on the bill of sale.

There are also fulfillment houses — businesses that fill orders on a per unit basis. Do the math to determine if outsourcing order fulfillment works with your business model or if it’s something you’ll have to do — at least for a while.

Tweaking Your Way to Success
No one makes it to profitability right out of the blocks. There’s always some site tweaking and SEO tweaking that takes place after the site’s launch. This tweaking is based on the development of site metrics — numbers that provide information on your site’s performance, or lack thereof.

For example, imagine a site that gets lots of traffic but few sales (a low conversion rate). The problem isn’t SEO because visitors are finding the site just find. However, once they do find the site they don’t make a purchase. It could be anything from the look and feel of the homepage to a lack of visitor confidence in the security of the checkout to difficulties in accessing the right product.

Metrics software will help you determine what’s successful and what isn’t on your site, what’s selling and what isn’t, how most visitors find your site (search engine, site links, paid adverts, etc.), what keywords people are using to find you and so on.

Here’s the essence of managing risk versus reward before you invest in an online business: do as much pre-planning as possible before you launch. And, if you don’t know how to assess your investment risk and/or your competition, hire someone who does. It’s that important.

Factor all costs into your business plan — site design, monthly hosting fees, etc. Then, allow for tweaking time before your site starts showing a profit. Again, it won’t happen overnight despite what all of those “Make a Million on the Net” e-books say. It’s hype.

You won’t be able to eliminate all risks associated with starting an online business but you can tip the risk versus reward equation in your favor with some planning and foresight.

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