Wise Web Strategy

Normalization - Squeezing the Little Guys

I always say that when I started my business in 1999, a monkey could make money online.  All it took was to find a niche that was uncrowded with competitors--compared to today, almost everything was uncrowded.  You could throw up a quick site with FrontPage, buy a cheap shopping cart, and drop ship.  I started my first business for $2,000 and made quite a bit of money.

The question was how long it would last.  After all, somebody that knows nothing about business cannot reasonably expect to start a business for $2,000 offline and make a small fortune (sure it happens, but getting struck by lightning is more likely.)  How long would it take before online marketing started getting crowded with talented people and companies with deep pockets that would start dominating it and squeezing out the little guys?

In traditional business, you cannot expect to grow a business without tough competition and with free advertising.  You cannot expect to be a successful retailer without assuming inventory.  However, that was exactly what was happening online in the late 1990's.  I got all my traffic for free from easy SEO, and had little competition.

Of course, things changed quickly.  Within a few years, it became much more difficult to make money online, and today, I would say that it is as hard to make money online as offline.  This is a process I call normalization, and will always happen when new business opportunities arise.

An example of this was the gold rush in California in 1849.  Before everyone found out about the gold rush, a few lucky people had all of the rivers to themselves and could buy their supplies reasonably.  As word got out, the rivers started looking like Disney World and the stores were selling shovels for $100 each.  All of a sudden, it was a lot harder to make a fortune, and very few did.

In 2006, everyone is online.  SEO is becoming more and more difficult unless you have deep pockets, and online advertising is absolutely way overpriced across the board because merchants are willing to overpay. 

Yes, a website allows you to sell to the world rather than just your town.  It also forces you to compete with the world, and I do mean the world.  One of the biggest factors affecting sales inside the US is the skimming going on from India, where millions of bright people are playing in our economy. 

At Vitabase, our biggest affiliates are Indians.  They do not need much money to live, and have the time to build elaborate affiliate sites.  Most are not getting rich by our standards, but collectively, they are a force to be reckoned with, especially in SEO.

Can you still do well online?  You bet you can, but don't expect it to be easy.  Gone are the days where you can throw up a trashy website and have the world at your doorstep.  Traffic is more expensive to obtain than ever, and conversion rates are down.  If you are not creative, you can expect to lose money at the beginning as you build a base of customers.  That requires you to have deep pockets, which squeezes the little guys out.

When I got into internet marketing, I did not know much, and I was fortunate to have the chance to learn before the market normalized.  If I were just starting today with the marketing knowledge and money I had in 1999, I doubt I would be successful.

There is a silver lining in the cloud, and here is a nugget that you can take away and make a lot of money from.  There are huge opportunities in local internet marketing, and that area has not normalized.  I am talking about websites for local hardware stores or restaurants.  There is a lot of money to be made there, and little guys can do well.  I will discuss this more in a future article.

Competing with idiots (Part 2)

I just re-read my post from yesterday on competing with idiots, and I might have come across a bit harsh.  I do not mean to.  I have been very blessed in internet marketing, competing with idiots or not.  And to be honest, I have to admit that I am glad that I do not compete with geniuses because I would always be on the short end.

In general, I consider myself an average business person who has gotten lucky a few times. Hopefully, I am learning how to be a great business person in the future.  I tell everybody that works for us that what we do is not rocket science.  It does require discipline, work, risk, and most of all, creative thinking.

If you never stop learning, there is hope for you whether you are currently an Internet idiot or not.  I used to be an idiot, which leads me into today's topic--the second way to know you are competing with idiots.

When I first started selling online, I believed that the only way I could get orders was by selling products at ridiculously low prices.  The company that distributed the products had suggested retail prices that everyone online advertised at.  I decided to challenge the company and list the products at 15-20% under everyone else.

If you have been involved in marketing any products, you know how sensitive the pricing issue can be.  Manufacturers want their product sold at as high a price as possible, and use various methods to enforce their pricing and stop potential price wars that can eventually destroy the brand.

The company that distributed the products that I decided to sell tried to pressure me to raise my prices but I refused.  Eventually, they decided to leave me alone.  That was their mistake.

Soon, I became the dominant distributor for that product line online.  However, within a few months, competitors started matching my prices.  Within a year, essentially every competitor was matching my price.

Not long after that, competitors decided to teach me a lesson and started undercutting me.  One competitor gave away a $40 product for free with a $50 order just to acquire the customer.  Soon, he became the dominant distributor online.  Of course, he lost money for the next few years, and is quite possibly still not in the black.

All of us were idiots, and I was the biggest one.  I started a price war that I could not win and settled for margins that were too tight. 

As I have stated before, the blessing and curse of online marketing is that anyone can play.  No longer do large companies have the market to themselves.  Thanks to drop-shipping and affiliate programs, a guy can start a business online with a $100 investment and compete with the big boys.

The little guys will often decide to compete by undercutting the going price.  That makes them idiots.  I always say that the little guys are happy buying something for $10 and selling it for $11.  They don't have a clue about business.  That tactic may work for Wal-Mart, but not for the rest of us.  The rest of us just don't have the volume to make that kind of strategy profitable.

The fact is that you cannot win if your entire marketing strategy consists of undercutting your competition's prices.  Your competitors will not only drop their price to match you, but will eventually start undercutting you.  Before long, the margins will be shot, and you will be working for nothing.

There is only one way that price cutting will work for you, and that is if you by some chance are able to acquire your inventory at a lower price than the rest of your competition.  It is sometimes possible to do that, but you will normally need either money or creativity to accomplish that.

Today, if we are selling another company's brand, we set the price at where the rest of the market is. If we cannot sell the product when we are priced at market, we are not doing something right.  We have learned that we can differentiate from the competition in ways other than price and still keep our margins intact.

Because we own several brands, we are careful to protect our price and margins.  Sometimes, we sell product to an idiot who decides to undercut us on the retail market.  This would be the biggest idiot of all, because starting a pricing war with the very company that manufactures and controls the brand is obviously a tactic that is doomed to fail.  When idiots try that tactic, we cut them off.  Price cutting does not help the manufacturer.  It can destroy the brand entirely.

In the end of the day, price cutting will not work for you either.  Don't bother trying it.

Competing with idiots

If you are like me, you think you are pretty intelligent.  Few of us are blessed with the humility we should have.  Sometimes when we look at the competition in a new market we are considering, we are encouraged that they all seem to be idiots.

I am here to tell you that it is tough competing against idiots.  Give me sane competitors over idiots any day. 

I can remember the first time I learned this.  Back in those days, Yahoo had not purchased Overture and Overture was called GoTo.com.  The bidding process worked about the same except for the fact that if you bid $1.00, you paid $1.00 regardless of what your competition was bidding.  Also, there were no tools to automate bidding like there are today.

Anyway, I noticed one day when I changed my bids a few times that a major competitor immediately changed her bid.  After a while, I started raising my bid every minute or so and she raised her bid immediately after I did.  Within a few minutes, the bid was $1.25 for a keyword that I knew I could not bid over $0.25 for without losing money.

At that point, I picked up the phone and called her for a truce.  To me, sitting in front of GoTo.com changing bids all day was not an appealing way to live life.  My idea was that if she would agree to split the time in the top position with me, we could both bid a reasonable amount and both make money.

She answered the phone and immediately rejected my proposal, stating that she would bid up to any amount to keep me out of the top spot.  At that point, I realized that I was dealing with an idiot.  Idiots bid with no respect for their breakeven point.  In fact, idiots do not even know their breakeven point.

At Vitabase, we target thousands of potential keywords.  We actually only bid on a small fraction of them in PPCs because idiots bid too high for the rest of them, and we know that if we play, we will lose our shirts.  If we have to make a decision between sitting on the sideline or losing money, we choose to sit on the sideline.  As a result, we do not get a lot of traffic that I would like us to get. 

Perhaps these competitors have a better conversion rate than we do.  Perhaps their customer service is so good that their customers hang around a lot longer than ours do.  If either of those were true, our competitors could afford to pay more than we do for traffic.  However, at Vitabase, we spend a fortune on conversion testing and our customer service gets rave reviews.  If we cannot afford to bid that high, neither can our competition.

You might ask how those competitors stay in business if they are idiots.  That is a good question.  The easy answer is that they don't.  That is, unless they learn quickly.  Today's top bidders for most keywords will not be the top bidders next month.  Either today's bidders will wise up quickly and bid lower next month or they will go out of business.

The problem is as fast as idiots go out of business, new idiots jump in.  That is the blessing and curse of the Internet--the barrier of entry is nonexistent and cannot keep out idiots.

Some idiots hang around a long time.  Those are the ones that might have decent organic search engine rankings or some other way of generating business.  For some reason, they pour their profits into PPC idiocy.  I cannot fathom why companies choose to work so hard to make no money, but I can point to many companies larger than ours that cannot make money because they are wasting money on Overture as fast as they make it.  I could fix their problem with six words--STOP BIDDING ON PPC SEARCH ENGINES!

Next time, I will discuss another reason that idiot marketers make it so difficult for the rest of us to make money.

Three online marketing techniques that will NOT make you rich.

I am going to tell you three ways NOT to start an online business. Before I get into this, I admit it. There are exceptions to the rules.

Somebody is going to be quick to tell me about their friend's friend's nephew who made seven figures on Ebay. That may be true. But that doesn't mean the odds are in your favor.

I also admit that I have done these things. In fact, we still do these things. However, they are on auto-pilot and are not a major part of our business.

The tricky thing about this is these three things are easy to get into with low barriers of entry and low startup costs. If you have no money and no online expertise, they are better than nothing.

So, the three ways to sell online that you should avoid unless you cannot do anything else and have no money and no online expertise are...

1) Ebay. I know that your local book store is full of books claiming that you can make a living on ebay. I have read (or skimmed) almost all of them. After all, ebay has a lot of traffic and I would love to find a way to sell to that traffic. The problem is that it rarely works. In fact, by the time I recently read a book that had been published only last year, I was unable to find any of its heroes still peddling on ebay. They were all out of business.

Don't get me wrong. I love ebay. I just happen to love buying there, not selling there. Ebay is a buyer's market, not a seller's market. There are simply more things for people to sell than people to buy them, and as a rule the margins are thin or non-existent.

On ebay, you find people that are happy to buy something for $10 and sell it for $11. Of course, they forget about such things as fees. Ebay has fees coming and going, and they really eat into your margins.

I could go on for a while, but most of you will not believe me until you try it so I will save my breath. There are two ways you can make money on ebay.

a) You have exclusive rights to sell a particular item on ebay or control distribution yourself for that item. I recently bought a Denon receiver on ebay. It was B-Stock, which means re-manufactured. The company I bought from was the only company authorized to sell Denon on ebay, and they actually got MORE money for their receivers on ebay than they did at their website. Good luck getting an exclusive, but it can be done.

b) Buy in quantities that get you a price better than all your competitors. The problem with ebay is the low barrier of entry. Someone can sell a lot of stuff without ever shelling out any real money. If you are willing to shell out $50,000 and take some risk, go buy a container of goods directly from the manufacturer. Go to China. You can quite possibly reduce your price to a level where you can make decent margins. You will get better margins on a normal website though in almost every case.

2) Affiliate Programs. Affiliate programs sound good. You get money for marketing somebody else's stuff but you do not have to carry inventory, charge credit cards or provide customer service. It sounds good, but again, it is normally just too crowded, and the margins are not good enough to really make much money.

At Vitabase, we have an affiliate program. I am not against affiliate programs, but I will be honest--we do not have many affiliates making good money. Our partners that make good money tend to take advantage of our wholesale program and have their own inventory.

Affiliate programs have little risk. On the other hand, you have little control either. The companies you partner with can go out of business tomorrow or just eliminate their affiliate program. More likely, they will just change the payouts on a whim, and not in your favor either.

If you want to do affiliate programs, do a lot of them at once, and build unique content-rich sites to promote them. Be professional and try to hide the fact that you are an affiliate. I have seen great sites where I would have never guessed that they were promoting affiliate programs.

3) Drop ship programs. A drop ship program allows you to take orders online and use a different company to stock inventory for you and ship for you. You gross profit consists of the difference between what you charge your customer and what the the drop ship company charges you.

The problem with drop ship programs is going to sound familar. There is too low a barrier of entry, and too many idiots will be competing against you. These will be folks that think it is great business to buy something, mark it up a dollar and resell it. You will have to compete in price with them and you will not make any real money.

When you are considering using a drop ship company, they will send you a price list with your price as well as a suggested retail price. You will see the margin between the two prices and your mouth will start to water.

Don't get excited--go out on the web and see how much those products are actually selling for. You will almost always find that people are selling the product BELOW your "wholesale" price. And no, those are not misprints. Those competitors are probably stocking inventory and get a price far below what you will have to pay your drop ship company.

Remember that a drop ship company is an extra layer that has to make a profit too. You will always get better deals by buying direct and carrying inventory.

I feel a little guilty. Vitabase has a drop ship program just like we have an affiliate program. However, two things... First, we always tell our partners up front that they can make the most profit by buying from us wholesale and carrying inventory. Secondly, we actively police our partners to make sure they are not undercutting the price. As a result, our price list reflects the true price that our partners are selling our products at. So, our partners can make a legitimate 35% gross margin when they use us as a drop ship company.

If you are going to use a drop ship company, research carefully, and try to sell products where the advertised prices online are enforced. Many manufacturers do at least attempt to control the prices that their products are advertised at.

I am sorry to burst bubbles, but I promised when I started this blog to be honest, and I am. In general, you will not make much money unless you assume risk. For most of us, that means assuming inventory and running a real business.

The E-Myth

As I have shared before, a critical time in the life of my business was 2001. Up until that time, I had made good money on a handful of websites and other Internet ventures. However, I was unsure of how to grow a business. I knew how to make money, but I did not know how to build something bigger than myself that would still be generating cashflow in 5 years.

Building cashflow is relatively easy, but is normally short-term. Products have life cycles that are normally fairly short. Fad products come and go. Building a business is much harder, but the result is stability and the ability to own something of real value.

When you generate cashflow, you get paid as the cash comes in. When the market dries up, so does the cashflow.

When you build a business, you get paid twice. You get paid on the cashflow the business generates, but you also get paid as the value of the business increases. At some point, you can sell the business and collect a bigger payoff.

In 2001, I began moving from a cashflow mindset to a business mindset. The book that was most influential in getting my mindset changed was The E-Myth Revisited by Michael Gerber.

The main takeaway from The E-Myth is that as a business owner, you choose to either work in your business or on your business.

Working in your business means you focus on the day-to-day operations. In my case, that would include taking orders by phone, shipping, solving customer problems, etc.

Working on your business means you focus on the systems and strategy for the business. In my case, that would mean developing ways (systems) for other people to do shipping, order-taking, and customer service so that I can focus on the overall strategic direction for the business.

Choosing to work on rather that in the business can be expensive in terms of time and money. However, the expense is up front, and the long term benefits can be astounding.

Reading The E-Myth changed my life. One the of the first things I did after reading the book was to go and buy an expensive grand piano. I don't remember what it was, but some thought from that book convinced me to do it. If you knew how tight I typically am, you would understand how this was such a big step for me.

Besides the piano, The E-Myth convinced me to change my outlook on business, and the results have been dramatic. It is always amazing to me how far my business has come from the tiny bedroom where I first started in 1999. It has been a great ride, and while there have been several factors that have influenced our success, this book has been one of the largest ones.

My Story

I started to tell my story in my last post, but quickly got derailed on a diatribe about gurus. Now, I am going to try again.

When I left college in 1994, I worked for several years for EDS and then Delta as a software programmer. In 1999, a friend of mine recommended that I try a health supplement and mentioned to me that I should try to sell it on the Internet.

The health supplement was Herbal Fiberblend, which was distributed by a MLM company called AIM International. I bought the domain www.healthwisdom.com and built a website that sold the AIM line of products. I can still remember getting my first order a few weeks later from a woman named Nicole Jewell. From there, sales quickly rose.

At first, I was determined to build HealthWisdom into a large business. I got involved in the MLM aspects of it and in general, wasted a lot of time for a few years. I did not understand two rules about business and Internet Marketing that I now know and follow:

RULE 1: Demand for products is almost always generated offline. It is extremely unlikely that you will be able to generate demand for the products you sell online. As a result, your online sales will always be proportionate to the number of people online looking for that product. In other words, if you are selling a company's product and there are only ten people each day searching for that product in search engines, you are never going to get a lot of sales for that product. The demand has not been created offline to make you successful online.

RULE 2: If you have a profitable system that cannot be scaled because of demand limitations, duplicate it with other product lines.

In my situation, there were simply not enough people looking for AIM products online to allow my business to grow. I had a profitable system, but the demand for AIM products limited its potential. I should have realized that and added more product lines faster. That mistake cost me dearly, though those were still very profitable days.

In 2001, my eyes began to open to the fact that if I could sell AIM products, I could start other websites selling other lines of products. We also had the idea of putting several lines of products on Vitabase. Unfortunately, we were still stuck on selling MLM products, which was a bad idea. Online retailing is hard enough without having to give up a good share of your margins to six levels of upline sponsors.

While our initial ideas for Vitabase failed, we were unknowingly moving toward the eventual strategy that we would adopt for Vitabase. In 2002, we started a separate company for Vitabase and began moving away from MLM product lines.

During this time, we also started a business where we bought big blocks of advertising inventory from major search engines, broke it apart, and sold it to small online retailers. We quickly realized that while we were seeing huge profits, our small clients were making very large profits with the advertising we were selling them. As a result, we started carrying the product lines they were selling and keeping the advertising opportunities for ourselves.

By 2003, we had a large number of niche sites in addition to Vitabase selling various product lines. However, we were uncomfortable with the fact that the products we were selling tended to have short life cycles. Just to break even, we had to constantly add new products as sales for our older products dried up. To add stability to the company and its sales, we launched the Vitabase brand in 2004. That has been one of the best moves that we have ever made, and is currently our primary focus.

This has been a quick summary of my journey in Internet Marketing, and there have been numerous great stories and lessons along the way that I will go into in future posts. Here are some of the best tips I can pass along from my experiences:

1) Learn from your mistakes. I have left an enormous amount of money on the table because I didn't know everything a few years ago that I know now. Hindsight is 20-20, and I could spend a lot of time kicking myself for past mistakes. However, I would be doing myself a bigger favor by learning from them, and so would you.

2) Remember that scalability is necessary for real success in Internet Marketing. Focus on ideas that are scalable and duplicatable. Once something works, find a way to multiply the success.

3) Focus on the business aspects of your business. It takes more than an idea to be successful. It takes an idea along with the infrastructure to support it. Primarily, it takes great people and good systems.

4) Taking the cheap way and least risky way is usually a mistake. I am not worried about sharing much of what I know about Internet Marketing because I know most people are not capable of being successful entrepreneurs. They are risk adverse and unwilling to make the necessary investment to be successful. I will tell stories later on about times where I made this mistake myself.

About Internet "Gurus"

I was thinking today that I need to tell my story about Internet Marketing. Here's why...

I am tired of watching so-called Internet Marketing experts tease their readers with information for the purpose of selling them crap. I have done that myself, but I am not necessarily proud of it. I have different reasons for this blog.

Right up front, I am going to say unequivocably that I am not trying to sell anything. I am just going to tell a story because:

1) I think it is a good story and will entertain people.
2) My story can definitely help Internet Marketers.
3) I already have enough money, but I would like to be more famous.
4) OK, I admit it. Even if I am not selling anything on this blog, it can still help my business.

Anyway, you can read on without any fears of being pressured into buying a "sure-fire plan for Internet riches with 17 bonus with a combined value of $1779 all for $79.95 if you buy today." Frankly, I have never read any of those that are worth my time much less the money, but I do buy them from time to time. They are good for laughs if nothing else.

It is easy to be cynical, and I will openly say I am there in regards to Internet Marketing gurus. I want to tell you these facts about Internet Marketing gurus, and there are few if any exceptions to these rules.

1) Many gurus are not gurus. They have a moderately successful web site selling some weird herb panacea and all of a sudden, they think they are gurus. I remember about five years ago, we brokered some Google advertising to a woman who was selling coral calcium. She used the advertising to sell $60,000 worth of coral calcium in one month. Voila! She became a guru immediately and began doing consulting. She hired about 10 employees based on the success of that one month and started spending money. It was about that time that Google changed their advertising policies and I was no longer able to broker the ads to her. Within short order, she owed everyone in town including me, and my last contact with her was when she called to inform me she was filing bankruptcy and I was never going to collect from her. Some guru... Unfortunately, I see this happen again and again.

2) The gurus that are successful are successful because of the product they are selling. I can assure you that you can make a ton of money on the Internet, and in some cases, the money comes easier and faster than you can imagine. If you had the ability to do that, would you sell your wisdom to your future competitors for $79.95? No guru ever made real money online before they started marketing their book or course. If they can sell their course and make a good living, they may be good marketers (or liars), but don't assume that they can help you with your business.

3) You will never make money piggybacking off guru products. Forget about selling repackaged guru products or affiliate programs for gurus products. They will tell you that you can do it, but they are lying. If you are going to sell information, develop it yourself about something you know a lot about. I bought an ebook about how to teach my children to ride a bike. It was some of the best money I ever spent.  Write an ebook about something like that, and you might have half a chance to make some money.

4) Gurus are usually remarkably unsophisticated in business. Make no mistake about it--Internet Marketing is a business, and if you are going to be successful, you are going to need to run your online efforts like a real business. That means employees, inventory, accounting, and the whole 9 yards. It was not always that way. Back in the late 1990's, a monkey could make money online, and a lot of it. No more--you make money online today by either being very smart or working very hard. A guru may get you some ideas, but it will only be the tip of the iceberg for what you need if you want to be very successful.

I suppose I should define my idea of success. If you are looking to make a few hundred or a few thousand dollars per month online, perhaps you can try the guru thing. If you want to build a real business, make real money, and sell your business someday for millions, forget the gurus. Find real experts in the business and pay them well. We still do that to this day and always will.

Don't get the wrong idea. I love Internet Marketing. I love owning a business. I love going to work practically every weekday. But the reason I love it is because it is a great challenge. If you want a challenge, be an online entrepreneur. It won't be easy, but it is a great life.