Before we can talk about what the most profitable online businesses are we need a good working definition of what profit actually is. Previously I’ve written a blog article on online business profit margin which you can check out for a full discussion. For the purposes of today’s article though we just need a basic definition.
Profit is basically what is left when you take costs away from the price of the goods sold. Various accounting definitions exist (all of which different) but for the purpose of this article this is more than enough. As a quick example if I sell a product for £100 and it cost me £20 to deliver this product to the customer then my profit is £80. Boom, done.
Here’s the kicker.
Any business can be profitable as long as the costs are low and the price (revenue) is high. In fact some of the most “boring” business are in fact the most profitable! We just tend to get excited by businesses like Tesla and Apple and assume they are the most profitable because they are doing something “fancy”. In reality as long as costs are low and revenue is high you make a profit.
What we are interested in today though are the most profitable online businesses. These are the businesses with the lowest costs and highest prices (and revenues).
So what are the most profitable online businesses?
Consistently information based businesses are the most profitable online businesses.
An information business is one that is based upon your expertise and knowledge of a particular subject.
They fall roughly into two categories:
Service based information businesses tend to be consultancies or some form of “done for you” implementation.
Product-based information businesses tend to sell products like books, e-books, audio programs, and online courses.
In both of these types of businesses we are doing the same thing: we are taking our expertise and converting it in to a form of value that can be sold. This is the core of an information business.
What makes information businesses the most profitable online businesses?
The fantastic part about information businesses is that the margins are extremely high.
Once we’ve gone through the process of acquiring this information it costs very little to package the information into a service or a product.
And you’ve acquired this knowledge and expertise by, well, just living. Your education, your work, your day to day. It’s already done. The greatest “cost” to starting the business isn covered.
Combine this low initial starting cost with the ability to deliver these products and services online and you have a very high margin business.
Previously would have to use physical forms in order to get our information out into the world. For example in the Old World, I would need to publish a book through a traditional publisher which cost a lot of money in printing distribution and marketing.
Nowadays technologies like Amazon Kindle Direct Publishing allow anyone to become a publisher in a very short amount of time with a very low investment. We’ve recorded a free course on how to get your eBook written by the way.
The same goes for courses.
Previously I would have to run a seminar. Running a seminar would include high costs like renting a hotel room, providing accommodation for my staff and expensive A/V equipment. Nowadays, using relatively low cost pieces of technology like Camtasia and a standard laptop or desktop PC I can produce high-quality content to build and release a course to a much larger online audience than I could ever reach in the physical world.
As a side note information based businesses are great as an online business idea for beginners because of these low capital outlays.
Unlike a physical goods business or a business that uses a physical premises like a shop, the cost of starting up an information based business is very low.
Are products or services more profitable?
If you have decided you want to set up an information based business the main question now is whether it should be service or product-based online business?
Again, I’ve written more about this: Online Business Ideas – Product or Service?
A product-based information business allows you to sell a high volume but at a lower margin per unit sold. We price low to make sure we can sell a high volume.
A service based information business is different. We HAVE to price high.
When pricing a service you need to price in your time to deliver the value of the service. Generally a service is going to have to cost a lot more to the end customer.
For example your consulting fees might be in the hundreds or even thousands per hour in order to contract your services. This generally reduces the number of people who can buy from you. Normally, service businesses are low volume high margin.
So which is better? Should you be charging a lower amount and selling a lot of products?
Or should you be charging a very high price and selling a much lower volume via a service business like consultancy?
The answer to this question depends entirely on your market and on yourself and your preferences.
What does the market prefer?
Some industries and markets will work better with services whilst others will work better with products.
Example if you work in the superyacht industry you might find that low-cost entry-level products don’t make much of a dent in the market! This is because the superyacht industry customers are not price sensitive. Higher cost services will likely be a better fit in this market – each customer requires that personal touch. They aren’t ordering their superyacht helipad from the Argos catalogue are they?
However if you’re offering your expertise in the personal finance and money-saving industry you’ll find that low-cost products to a much larger market is probably the better idea for your business. This is because this market will naturally be more price sensitive than those people who are buying super yachts!
We need to combine what we know about the market and the industry that we operate in with our own preferences about how we build a business.
When building products we need to put in a lot of work and effort upfront in order to build something of value. Once we’ve created our product we can sell it again and again and again to our market without much additional work on our side. A crude term for this is “set and forget”.
If on the other hand we are selling a service we will need to continue to put in work over time in order to sell and deliver this service. Day in day out, year by year. Services are very much more hands-on whereas products are hands off.
Product or Service? Which suits you?
Which form a value delivery you prefer will depend entirely on your personality and how you prefer to work.
Some people love the experience of working hands-on with clients. Whereas others prefer to do the work upfront produce a product and then step away from the everyday business.
Me personally – I fall very much in the product camp. I prefer the sprint of work upfront. Get it done. Released. Next project.
Services are less interesting to me temperamentally.
But that’s just me! We’re all different!
You need to combine the realities of your market with your own natural preferences for how you prefer to work.
Why not both?
All this said: The best way is actually to combine both products and services in your information business. This is truly the way to reach the most profitable as you can.
Ideally we would combine lower cost high volume information products like online courses with lower volume high margin items like consulting.
When we have a full sales funnel in place this is possible.
We bring people into the beginning of the funnel using our low-cost products. Once they have consumed our products we offer higher cost consulting services of the backend of their initial product purchase.
You will see many online businesses working this way with lower cost higher volume sales of products at the front-end followed by higher cost lower volume sales of consulting events and done for you services at the backend.
Why start with products and follow with services?
There is a reason why many online businesses use this model. It follows a natural escalation of your customer. As your customer moved to the customer journey with you and you continue to deliver value at each stage you will build more and more trust. As trust begins to be built you are able to charge higher and higher prices for the value that you are providing to your customer.
Think about the flipside: if you simply went to the wider market with your high cost consultancy offer the vast majority of people are not going to take you up on the offer. You have simply not built up enough trust proving your market value yet.
Instead, by bringing people through a sales funnel starting with lower cost products and an escalating towards higher cost services we are moving people naturally along the customer journey and building up trust in organic and step-by-step fashion.
This works well for the customer themselves because they have more more trusting you. At the same time it works for your business because people are self-selecting into higher tiers of your service offering. People who truly value what it is that you are selling will naturally escalate along your sales funnel.
These people are gonna be easier to work with because they already know your value. You do not need to prove your value to them as this has been done earlier stages in their customer journey. This allows you to charge what you are worth at each stage of the sales funnel.
For too many people going into consultancy will undervalue their time and not charge enough. Instead if you have a solid basis of product sales you’ll have a healthy pipeline of people wanting your services. This demand means that you can choose what you charge because you know the market values you and your skills.
The most profitable online businesses are information businesses
We’ve now looked at what the most profitable online businesses are. The most profitable online businesses or information based businesses. Information based businesses can use products or services. If you really want the most profitable online business then use
both products and services in an escalating sales funnel.
Now that you know which type of businesses are the most profitable online the question is how do you set up information based business? Thankfully here on BBO.show we have put together a number of guides helping you to set up your online expert business. There are number of guides that we’ve put together including finding your niche, writing an e-book, and finally building an online course product that you can sell forever. Each of these guides walks you step-by-step how to put together your expert business online.