This post is a little exploration of the magic of numbers and an understanding of how the idea of Products that are Bought map to desired revenue targets.
First, the revenue target. Let’s say for the sake of example that we want to run a $5M a year gross revenue business (that’s just top-line, not including the cost of goods, overhead, taxes, etc.).
There are lots of ways we can make $5M in a year, if we’re selling products (remember, we don’t want to sell services if we want to be a four-hour-a-weeker):
|$5M a year product business
|Number of products sold
Now, this might seem like a trivial, brain-dead exercise. So, what am I proving, that I know how to multiply? Well, I think the insight is a bit more profound than that.
First, we can achieve $5M a number of ways, but some might be easier than others. Selling one thing for $5M will get us there fast, but just how much work will it take and how much will that $5M item cost? If it’s a physical item, there might not be much margin left after all is said and done. If it’s a service being provided, forget it, you’re talking 35% margins at best.
On the flip side, selling 5,000,000 things at $1 each also doesn’t make sense. First, to actually sell 5 million of anything you need to reach a much larger audience, which means significant marketing and distribution costs, not to mention the cost of fulfillment. $1 items are sold retail and probably in mass markets. That means that the distributors take their cut, not to mention the cost of the product, so you’re also down near 35% margins at the end of the day.
For product based companies that have products that are sold, not bought, I think the sweet spot is in the green zone above.
Anywhere from selling 1,000 products at $5,000 a pop to 100,000 products at $50 a pop seems to be the best area to target. Although at the edges (in yellow) are a bit tougher. It’s harder to develop bought-products that sell for $5k than it is $1k. I can think of plasma/LCD TVs that are in this range.
But I think for our purposes, finding products in the $100-$500 range that are bought seems to be sweeter. In fact, selling 10,000 of something at $500 a pop seems pretty realistic. And there might be products that have low cost of goods and low cost of delivery and distribution that can keep us in the 50% margin or better area.
So, I am going to focus my efforts on building a business where I can sell 10,000-50,000 of something for $100-$500 a pop. And do it as a “bought” not sold business focusing the efforts on marketing and low-cost distribution.
It gets even better… monthly revenue.
Where the dollar analysis gets better is if we think of the $5m figure as an annual figure divided by month. What if instead of selling individual products for $100-$500 a pop we instead sold a monthly subscription for those products. Then, instead of selling 50,000 $100 items, one can instead sell 50,000 $9-a-month subscriptions. Do the math. It actually is even better than $5M. Or, 10,000 $42-a-month subscriptions. Or somewhere in between, like 25,000 $19-a-month subscriptions.
What makes subscriptions or monthly revenue better is that it’s continuous and predictable. That means sales can be self-sustaining as long as the products continue to provide value.
The key now to figure is what market has a reachable audience of around 100,000-500,000 so that achieving a 10% penetration with bought-products that sell for $100-$500, whether one at a time or on a monthly basis. Then, come up with a compelling product for that market and an effective means to market and distribute to that market, and the $5m business is not that far away…. all for four hours a week.