Sunday, 11th May 2014 - 0 Comments
In this article I want to discuss the rationale for my favoured business model, which is based around high-margin, high-probability, e-commerce single item or subscription payments in education and information.
Let's describe exactly what the business model is and why it works well. Selling information products online has an extremely high-margin. This means that a significant portion of the direct revenue from sales translates into profit. In my e-commerce businesses I am typically running with a 95% margin (gross of taxation). This means that after accounting for all expenses (excluding taxation) needed to sell items in an ongoing fashion, I recoup 95% of the revenue. This is extremely high when compared to traditional "bricks and mortor" businesses.
Selling educational products is also what I consider a high-probability business model. What do I mean by this? Perhaps the best way to describe such a business is to consider an opposing model. In the technology sector it is common to fund a business with equity often via angel finance or venture finance. The basic approach is to create a situation of extremely rapid growth in order to attract later stages of venture finance with rising business valuations in the hope of a liquidity event such as an Initial Public Offering (IPO), which is a listing of private shares on publically traded markets or a corporate acquisition by a larger firm, which provides a mixture of liquidity and/or employment to founders and a return to investors. Such a business model comes under the banner of high-risk, high-reward capital gains investing. This generally has a low-probability of return, as shown by lots of data on these sorts of businesses.
Conversely, selling information products is high-probability in that a relatively predictable stream of revenue can be estimated by virtue of determined market size, conversion rates and "average basket sizes" of products. Such values do not change too much and a relatively homogeneous among e-commerce verticals. This ensures that with sufficient traffic generation, a relatively consistent revenue stream can be generated. In the capital gains scenario described above, a lot more comes down to picking a market that ensures high growth and being able to leverage that growth via investor relationship management.
Despite the low probability aspect of high-risk capital gains investing, it still attracts a large amount of people, possibly due to a mixture of observation bias ("everybody can make a million") and enjoyment of the lifestyle that comes along with such business development. I personally prefer the high-probability model as there is little risk (in the sense of uncertainty) involved, albeit at a far lower return.
The latter part of the business model involves e-commerce and single item or subscription payments. I personally find e-commerce an extremely worthwhile area to be involved with because you are able to sell products to a global audience. Unlike a "brick and mortar" (B&M) business, where you are fully reliant on a mixture of footfall and local advertising to attract customers, an e-commerce business can potentially reach anybody in the world who possesses an internet connection. Not to mention the fact that a B&M business will likely have a huge set of overheads, such as business rates, lease fees, utility bills, staff costs etc. This comes back to the point about high margins.
The final component of my business model is selling educational products. Why do I think education is a good market? Consider that people will spend significant sums of money on becoming educated or at least to be PERCEIVED as well educated. This can be seen when looking at university tuition fees in the US and UK. Certain courses, such as those related to finance, can charge in excess of 60,000 USD per year. Thus people are clearly willing to pay for a (good) education. The other reason that education products make sense is that they are very difficult to commoditise and hence not often directly interchangeable. Consider the following institutions: Cambridge, Oxford, Imperial College, Harvard, MIT etc. These universities have a brand value that is highly difficult to dislodge. The same is true of quality educational information. Thus one can produce a moat around the products that often ensure their continued relevance.
Such businesses are referred to (often pejoratively) as lifestyle businesses, which signals the fact that they have been set up solely to provide an income to fund their founders' respective lifestyles. This is contrast to the capital gains model described above where the business tends to become the lifestyle, either by accident or by design. The ecommerce businesses I run fall directly into this former category. I very much enjoy teaching and helping people learn, but I also enjoy working on deep technical projects with other colleagues that I respect. Running a set of businesses geared towards education allows me not only to be in direct control of my personal finances, but also to collaborate with others in areas of my choosing, rather than out of necessity for income.
Hence if you wish to gain financial independence with a minimal amount of long-term stress you should consider the high-margin, high-probability, e-commerce approach.