Monday, 26 September 2011

The Membership Model - Magazine Subscriptions and Your Business

Recently I was skimming a magazine when I landed on their Subscription Offer page. Now, I like marketing, and I like to save a penny (buck, cent, or whatever) wherever I can, so the percentages caught my eye. It also helped that they were in a big red font.

What interested me is there were three separate percentages. The first said 'up to 33%', the second said '25% off' and the last said something like 'save 15% off newsstand prices'.

Now, people have become used to getting a discount when they subscribe to a magazine, after all, it's guaranteed revenue, with only a postal delivery charge, etc. etc. but to have three separate savings bands seemed to be something of a novelty, so I dug deeper.

The 15% saving was for an order placed for delivery to the newsstand. The 25% saving was for an annual subscription, and the 33% saving was for a monthly subscription, paid quarterly, by Direct Debit.

(For those outside the UK, Direct Debit is a recurring instruction to the bank to make a payment to the recipient, at the value that the recipient determines. Like a Standing Order.)

It's that 33% level that interested me. The magazine publisher has made a decision to attract Direct Debit subscribers over those that choose to pay an annual subscription. Having just chosen not to re-subscribe to another magazine for 'value' reasons, I think I understand why.

The accepted wisdom is that the cost of acquisition is highest for the first customer. Put another way, the cost of getting the customer in the first place (i.e. the first sale) in many cases will obliterate the margins on that first sale.

The margin goes up each time they buy. So, repeat customers are valuable - which is why we go to extreme lengths to keep them happy. And also why the subscription model is so useful.

The Subscription Model

The trick is to increase individual customer value by subscription. This doesn't necessarily mean that the customer has to take out a subscription to a magazine - virtually everything, from cigars to wine, can be sold on a subscription basis.

Even if it's a free subscription - to a newsletter, for example - you get all the subscription benefits : regular contact, regular delivery, the possibility for back end sales, etc. Of course, you have to offer something of value. This remains true whether the content is free or paid for.

The paid subscription model is often considered to be more powerful in terms of customer value, because, having spent money with the business once, the customer is more likely to do so again. If they are free subscribers to a newsletter, it might take a larger investment (of time, if nothing else) before they will actually spend on a back-end purchase.

In Internet marketing terms,  the king of the subscription models is the Membership Site.

The Membership Site Model 

PayPal makes it easy (using recurring payments) to set up a membership site that generates direct income. The Internet makes it easy to deliver quality content; the simplest of all membership sites are just forums that customers have to pay to participate (fully) in.

The value comes from the subscriber base, with the site (business) owner often just steering the continuous stream of information to cover subjects that will be of use.

More sophisticated set-ups deliver blogs, videos, and other content through the membership site, in return for the, usually modest, monthly fee.

It's also a model that can be replicated in the bricks-and-clicks world too : offering an actual product, posted to the subscriber, alongside the online content. The two delivery methods can work hand in hand; mailing rebate coupons with the product, or providing rebate coupons in a free newsletter.

The opportunities for leveraging the subscription model are endless, and applicable to almost every start-up business, to build a solid repeat customer base.

Thursday, 1 September 2011

Earnings, Cookie Cutters, and Online Programmes

I was reading through some material from Yuwanda Black and it occurred to me that people often make a fundamental mistake when evaluating business opportunities and products claiming to enable them to make a serious income - be it online or off.

Now, let's get one thing clear from the outset : it is perfectly possible to follow a sequence of steps and build (replicate) a business. This is, after all, partly how franchises work, and a good part of why brands are so powerful. 

I recently received an email from Tiffany Dow, in which se quotes visionary Simon Sinek:

"If you sell what you do, you're a vendor. If you
sell why you do it, you're a brand."

What about "If you sell how you do it, you're a franchise." Or, in internet business parlance - cookie cutter. Admittedly, that phrase has some negative connotations, but it works for some people, some of the time. The trick is picking the right one - i.e. getting the balance of cost, income and available time right.

Part of why a lot of people don't have success with these programmes is that:
  • their expectations (income, effort, etc.) are unrealistic;
  • the resources required (time, money, etc.) become greater than the reward.
Which brings us to the point of this post - people often make a single, important, fundamental mistake when calculating the time/reward ratio. Some sales letters encourage this, by starting out with a perfectly reasonable figure, say 1,000 (dollars, Pounds, Yen, etc.) per month, and then working back to claim that this is possible with only a few hours work per day, which means you'll be earning over $80 per hour!

Who wouldn't want that? After all, $80 per hour, 5 days per week (7 hours per day), is over $130,000 per year. Wow!

In planning a start-up, people often make the same mistake - they forget that, even if they do charge $80-100 per hour, they will never, ever, be able to work 5 days per week, 7 hours per day, all year round. Work, in this case, means performing the tasks that directly earn income.

For a start, as an online entrepreneur, you will spend upwards of 30% of your time marketing, whether that be creating newsletters, contacting prospects, setting up advertising programmes, or just following up emails.
So, to work for 7 hours, you'll probably spend 2 more marketing. That's already a 9 hour day, which, as many entrepreneurs will tell you, is a luxury. Mostly it's 12 hours plus.

On the other hand, when working out expected income from any plan, it pays to factor in the marketing time required, and certainly when establishing a price for services, that cost (along with any travel, research time, etc.) also needs to become a component of what you charge.

The conclusion? Don't forget that working and working are two different things. Only one earns money, and the other needs to become part of the charging cycle, or at least you have to remember that if a piece of work takes two hours, and earns $100, there has been a cost involved in getting that work, and so you've not really made $50 per hour.

Until the next time : earn and learn!

Wednesday, 3 August 2011

How Much is my Business (Idea) Worth, and How to I Get Out?

Serial entrepreneurs often start up companies thinking about one thing, and one thing only : what is my exit strategy?

Put another way – how are they going to get out of the company when they either get bored, or have realized enough value that it becomes more worthwhile to sell it on (or shut it down and dispose of the assets accrued) than keep it ticking over.

The most clinical approach is to build the exit into the business plan, and use that as a way to see (indeed, test) whether the whole venture is actually viable. If the exit strategy is to sell the whole company on as a going concern for a value of 1 million pounds (Euros, dollars, etc.) in five years time, it becomes relatively easy to work backwards through the numbers to test for feasibility.

Other exit strategies also include going public (selling shares on a stock exchange) or selling the company purely on the basis of its value to a competitor or related business – think of Google’s acquisition of YouTube, or Twitter buying TweetDeck, for example – where the classic measures of revenue, profitability, etc. don’t really apply.

However, these are subject to specialist knowledge, market awareness and probably a healthy dollop of good luck, so to provide an empirical example, we shall assume that the business valuation is designed to provide value to an investor – be it 100% (disposal) or some fraction thereof (to garner investment, or when going public.)

This kind of valuation is usually based on current performance. Examples of companies valued on potential performance (the most famous being PayPal) can also be found, but these are relatively special cases : for those that manage a PayPal, there are many, many, successful serial entrepreneurs who never see that level of IPO success.

On the other hand, many start-up investors will also be looking at potential. However, given that it has to be grounded in the figures that reflect believable performance, the discussions about exit strategies also apply here.

There are many, many approaches to valuing a company:

Some reasonable, simple, valuations use trading figures and investor returns on equity to prepare a business plan that will provide targets that can be realized, and also help in the preparation of documentation for potential investors, from banks to angels.

A common measure is to take three to five times profit, and use that as a nominal value to establish targets for exit or investment. From the other side of the table, so to speak, if an entrepreneur needs 10,000 pounds (dollars, Euros, etc.) investment, for a 20% stake in their company, the investor will be expecting to be able to see at least 50,000 pounds worth of company value, as well as a return of 5-10% (using a better than bank rate) on their investment.

Using these techniques, it should be relatively easy for budding entrepreneurs to appropriately value their business idea, and potential of their start-up company.

Monday, 1 August 2011

Is My Business Idea Any Good?

Working out whether a business idea is any good is a tricky proposition. There’s the tried and tested ‘overnight test’ where the entrepreneur can leave the idea overnight and come back to it at a later date to see if it still holds water (and if they still want to do it!) However, as regular Dragon’s Den viewers will attest to, there are three key questions that often crop up.

Firstly, many investors, banks and Dragons included, will want to know the ‘margin’. This is the difference between the price of the product (usually wholesale) and the cost of manufacture; in the case of services, it is the difference between the cost or provision and price placed upon the service. In both cases, it is often quoted as a percentage, but it’s useful to know the actual numbers as well.

This becomes evident when the second question pops up : is the business idea scalable? In other words, are the processes, knowledge, and business activities replicable to the point that a decent return can be had, in terms of the margin? Does the business scale such that the return increases, at least in line, and preferably better than proportionally to the units sold?

A scalable business is attractive because it elevates the business from something that could make a living for one person working out of their own home to a profitable business that could make money for investors, employ staff, and perhaps go on to become a household brand. For example, if all the skill required to produce the product is non-transferable, it isn’t scalable, and therefore isn’t really an investable business.

Whether that matters or not will depend on the needs of the business owner – but even a scalable business needs to react to one final question : how big is the market? One person with a talent and a hungry market can make a living, but it needs a hungry market and a repeatable income generation process to become an investable business.

So, investors need all three to line up – the margin has to be interesting, the business scalable, and the market has to be big enough for it to scale into at those margins. Of course, there’s flexibility in there : higher margin products (houses) need a smaller market to generate the same amount of money as, say, biscuits.

Individuals such as human cannonballs who have a talent that is in demand, can only satisfy a finite market, and so are not examples of scalable businesses, even if they manage to build a profitable income for themselves. To become scalable, they would have to find a way to transfer that talent (stage schools take a similar approach) to others, and build a business that way.

If a business satisfies the margin, scalability and market criteria, and would be attractive to an investor, then it’s half-way to being a good idea, and certainly worth some additional thought!