Most people when they think of creating a business online, they think of creating a product, selling the product, and hope to make enough profit to finance their next venture. This kind of thinking is short-term and doesn’t lend itself well to long term business success.
When you stop and think about a longer term business model, whether online, off-line, or a mix of the two, you really need to think about the bigger picture.
What’s really needed is a method to capture leads, convert those leads into small time customers and gradually grow them into customers who spend more with you in terms of frequency and monetary value.
In terms of frequency it is self evident that we want them to spend more money with our business on a more regular basis. In terms of monetary value we would like each transaction to be bigger than the last.
There’s also another quality that’s rarely discussed. We don’t necessarily care how they buy from us, just that they do buy from us.
However some channels of distribution are significantly cheaper than others. Ideally media or the method you used to bring in the sale becomes increasingly important. So how do you turn a single product to product mentality into a thriving long-term business? Well to begin with you need to have a viable business model and part of that business model must include the “marketing funnel.”
What Is A Marketing Funnel?
The marketing funnel is not a complicated process. It’s a tool or a process to separate your prospects and customers into different areas.
For example we want to know the difference between our leads, our customers that spend less than $10 a year with us, customers that spend more than $500 a year with us and everything in between.
This allows us to concentrate our efforts on the smallest group of customers that spend the most amount of money with us. In other words want to maximize our return on investment.
Because that’s going to drive our return on investment we need to separate those customers who spend the largest amount of money with us, those customers who spend the least and the freebie seekers and tire-kickers. Most marketers are missing at least one or two of these crucial steps and it is causing them to leave a lot of money on the table that could otherwise be in their pockets.
Long Term Business Model For Maximum Profits
A typical business model might focus on three areas for each transaction: Timeline, frequency and monetary value.
For example, let’s take a typical fast food outlet and use that as an example. There are primarily three ways to grow a business.
1. You can acquire more customers, which is which most businesses try to do.
2. You can get them to spend more with you per each transaction (monetary value).
3. And you can get them to buy from you more often (frequency).
So the goal becomes how do we do any of those three things? Ideally we would like to do all three.
That’s where your business plan should come into play.
When you think in terms of a product you’re talking about a single instance of something that can be leveraged into greater assets over the long run through the use of this rather simple model.
But back to the fast food model.
When we talk about a “cross sell” that’s similar to when you order a sandwich and they ask you, “Do you want fries with that?”
When we use the term “upsell” it’s similar to that fast food outlet asking you “Would you like the extra large?”
The real money to be made is on what we call the “back end.”
For example, if you order something from a catalogue perhaps even a small “impulse buy” item and they later send further information to get you to purchase a more expensive product that’s called “selling on the back-end.”
And that is where successful long term business is truly grown.
Many times a company will actually lose money on the front end sale so that they can recoup that profit on the back end.
That’s what is known as a “loss leader.”
It’s what separates the one off small time single product companies from the larger more market oriented organizations that are in it for the long term.
And if you have any long term ambitions for your business that’s the line of thinking you need to be taking.
Single one off sales rarely sustain a business for very long. Not only that the profits are much smaller in comparison to those companies who have a longer term vision.
Let’s take a closer look at why these methods are so successful and the type of customer you really want to focus on to drive your business forward.
The Product Pusher Versus The Real Business Builder
What separates the product pushers from the business builders?
A product pusher thinks about what’s hot in the short term and concentrates on selling a product to fill that hot but limited need.
A business builder thinks in longer terms and sells products and services that can be leveraged in the future as the situation arises.
A business builder thinks in terms of what will increase their wealth over a longer period of time.
That’s not to say that a business-builder will disregard what’s considered hot at the moment. Rather it means they capitalize on that trend, but also think about how it will transform into something else that they can be prepared to provide.
A product pusher has to constantly reinvent themselves in order to stay on top of a current trend. Also once the initial enthusiasm for the product pusher’s product has died down they experience a severe decline in profits until eventually the web traffic and sales eventually slow to a trickle.
On the other hand, a true business builder will always see a constant flow of sales and will look for ways to maximize revenue continuously.
The real business builder is in the business of creating and growing a long term company that will survive good times and bad.
The product pusher on the other hand will chase one hot offer after another until all ideas are exhausted.
It is true that it is certainly possible to do both.
That is you can be a product pusher under several pen names while at the same time maintain a solid business separately under your own name (or even another pen name).
It really comes down to what your goals are.
If you were to become a product pusher it’s going to require a constant pulse on your market, a lot more work than you think it might be, but the upside is you may occasionally obtain short term but sometimes large paydays.
A true business building model by comparison allows you the freedom to run your business as you see fit, producing true constant income streams and it doesn’t always require you to think of that next best hottest thing.
The 80/20 Rule
The 80/20 Rule or Pareto Principle simply means that in any situation a few (20 percent) are vital, and many (80 percent) are trivial.
Put another way, the 80/20 rule states that the relationship between input and output is rarely, if ever balanced
In fact 20 percent of your staff and colleagues probably give you 80 percent of all the support you need. Don’t take them for granted, because true advocates like them are rare. You probably read trade journals and books, and I’ll bet 20 percent of them supply 80 percent of your knowledge in those subjects.
And what about those jobs around the house that you’ve been meaning to get around to doing? The 80/20 Rule means that that if you have a list of ten items to do, two of those items will turn out to be worth as much or more than the other eight items put together.
The 80/20 Rule can be harnessed in many ways for your business. And when I say 80/20, that’s really an approximation. Sometimes it might be 70/30, sometimes 85/15, you get the idea. The crux of the concept is that a small amount of something is responsible for the vast majority of results.
So how does the 80/20 Rule apply to the marketing funnel? And what is this funnel anyway?
First, the 80/20 Rule. You’re probably aware that 80 percent of your income is determined by 20 percent of your customers. If that’s not the case, then you are likely missing out on a lot of profitable opportunities. Let me explain.
If your customers contribute to your profits on a one-to-one ratio (1:1), then that means your business model is set up so that once a customer buys from you, you never sell to them again. One opportunity. One sale. End of the line. Time to move on to the next customer…
But if you continue to sell to them again and again, you’ll ultimately discover that there are certain customers who will buy more often and spend more money with you over the long haul than others. Some will still buy once, and you’ll never hear from them again. That’s fine. It’s going to happen no matter what system you have in place.
But your system will play a major role in determining what those top “20 percenters” will ultimately spend with you.
And whether you have a top 20 percent to begin with.
These folks are your “A” clients, your “A” customers. They’re the ones you want to treat like royalty. Just like the 20 percent of your staff and colleagues who are true advocates for you, your “A” customers are true advocates for your company. And they show their loyalty by purchasing from you, and by referring your business to others.
Let me give you an example that illustrates just how powerful referrals can be.
What Is The Marketing Funnel?
Large corporations often use what’s called the “open house,” or brand-building, model of advertising, which is expensive, time-consuming, and requires a lot of brand equity and trust over time before people make decisions to buy from them.
With the “marketing funnel” model, a person makes a small purchase (yes, supplying an email or physical mailing address is considered a payment of sorts), and over time you “funnel” your customers towards more and more high-end products and services, step by step, by selling them to the next level.
The two are entirely different business models, and they both work in their own ways. For most entrepreneurs, however, the brand-building model is too cost-prohibitive and time-consuming to use by itself, involving many resources that simply aren’t practical. That doesn’t mean you shouldn’t use it within your means. In fact, you’ll soon see how to incorporate both the open house and marketing funnel models in your system (for starters…we’re just getting warmed up!).
So by “funneling” (others call it “backending” or “up-selling”—Dan Kennedy calls it “gathering the herd”) your prospects into paying customers, you’re setting the stage to provide tremendous value to them. So much value, in fact, that your customers begin to look forward to receiving content from you. And with that value comes the opportunity to take your customer to the next level, where you can sell higher-end goods to them.
And this isn’t a one-sided benefit. Both you and your customer benefit by this relationship. Your customer benefits when he gets even more value…something he really wants. You’re helping him in that regard. And of course you benefit as well by slowly graduating your customer to your “A” list, where you can provide even more value.
I once knew a salesman from a large workforce management company. This company sold expensive computer systems that helped call centers forecast their incoming call volume, determine how many customer service people they needed to handle those calls, and even generate the most efficient schedules for those reps in order to maintain a desired level of service.
This guy was an old pro when it came to managing his leads. When a potential client company would issue a request for proposal to him (basically an opportunity for his company to provide a quote based on the issuing company’s needs), he would keep track of all the people involved in the decision-making process, plus any supporting personnel. Basically anyone’s info he could get his hands on.
Now when he learned that a key person moved from one company to another (which was fairly common), and that new company was in the market for his product, he would personally contact his “lead” from the old company (now working for the new one) and continue his funnelling efforts there, while still maintaining the funnel at the old company.
Now imagine he was doing this for all of his leads, wherever they ended up. He had funnels in place everywhere. Do you think he had skinny kids?
Personally I think every sale he made was well earned. Anyone who can keep track of all those funnels and people hopping companies deserves to earn a profit.
Figures 2-1 and 2-2 show the typical marketing funnel. Figure 2-1 shows an offline version of the funnel model, and figure 2-2 shows the online equivalent. Note that the only differences are at the top of the funnel, signifying the manner in which you obtain your leads. Online they visit your website before they supply their information and become a lead. In the offline world, they would receive your offer in some other manner.
A truer representation might represent your target market as suspects, who become prospects only after raising their hands (i.e. they become your prospects when they become your leads), but however you view them, the goal is to obtain leads, where you will then attempt to convert them into paying customers.
Notice how the width of the funnel gets smaller towards the bottom? The width represents the number of customers at that height, or stage, of the funnel. However, the smaller the width, the more money they are spending with you.
In fact, the amount of money they spend with you can be thought of as being inversely proportionate to the width of the funnel (more or less). So the 20 percent responsible for 80 percent of your profits are at the bottom of the funnel. The other 80 percent that give you 20 percent of your profits are towards the top. This distribution is a general observation and not a mathematical absolute. As I mentioned earlier, it might be 70/30 or 90/10 or somewhere in between.
This is no accident. Your “A” customers, your biggest advocates, are in the smallest segment of your customer base…the bottom of the funnel (but the top in terms of the value you deliver to them).
The Marketing Funnel (Offline)
The Marketing Funnel (Online)
Let’s walk through each step of the funnel to gain a clearer understanding of how the funnel works.
1. Your prospect enters the funnel by responding to your incentive or “ethical bribe” to raise their hand and give you their contact information. He is now a lead on your mailing list.
2. You continue to provide value to him, but you want him to make the transition from a non-paying lead to a paying customer. As a result, you give him a front-end, or entry-level, offer on a product or service directly related to the value he received when opting to join your list. You may make the offer at a break even or even an initial loss, because you know you will more than make up for it on back-end sales.
3. If he doesn’t purchase your front-end product, you continue to sell him on the same offer or different front-end offers—ideally both, because he just may not be in the market for your initial offer at this time, but may be later.
4. When he purchases your front-end product, he is now a customer. You are now “warming him up” to doing further business with your company. Once he sees that you over deliver on your promise of value, he’ll feel more comfortable buying from you again.
5. You want to graduate him to the next price level, so you make him an offer on a higher-end product or service related to the entry-level one he already bought. If he doesn’t buy, you follow a similar approach as step 3 above. That is, you continue to make him offers, but this time on the mid-level product.
6. Once he purchases your mid-level product, you move onto the high-end product. He is now conditioned to buy from you with confidence and without worry, because he knows what an outstanding value you’ve been giving him. He’s seen the results of your products first hand, so his buyer’s resistance is reduced. He is now on his way to becoming one of your “A” clients, the 20 percent responsible for 80 percent of your profits.
7. You continue to sell him higher ticket items and provide even greater value to him.
The steps I have listed are a very simplified approach. You’ll soon see that there is much more to it if you truly want to be successful in the long run, but it’s not rocket science by a long shot.
After he buys, you’ll want to ask him for referrals, a testimonial, and do everything in your power to make sure he is satisfied. You want him to be satisfied so he’ll buy again of course, but you want also want to reduce your refund rate and gain his endorsement. You want him to tell all of his friends and colleagues about his positive experience with your company.
You probably know when someone has a bad experience with a company they’re more likely to tell others about it than when they have a pleasant experience. You want to encourage them to tell all about their pleasant experience.
And then you’ll want to develop some kind of residual income, where they pay you so much a month or year forever until they cancel. Not everyone will do that, of course, but your “A” customers probably will. And you can create different residual levels, just like you have different product levels, all at different price points.
This report only illustrates the types of transactions you should be thinking about for your business. In the long run, you’re going to need a plan that will sustain your business for a longer stretch of time, rather than a week-to-week, month-to-month approach.
That’s the real secret to building a long-term business building success.
Exercises like asking yourself where you’d like to see your business two years from now or five years from now or 10 years from now can really make a difference in whether your business will be a short-term overnight success that will fizzle quickly, or whether it will sustain the test of time and provide a lifetime value for you and your family.
Ideally you like to plan for the latter. And this report has barely scratched the surface.
But it does give you something to think about, because most entrepreneurs focus on the short term rather than looking at the bigger picture that will last them a lifetime.