I originally started writing this article inside my Private Team Training site for my marketing team members as an introduction to how our particular business model works but decided it had value for others so here it is. I want to make sure everyone who is looking at starting an online business understands some important fundamentals around choosing a product to market and how it affects income potential.
Your Product Line is just one component of your online marketing business (the way I teach this stuff there is Traffic, Funnel, Filter, Follow Up, and Product Line) and I’m not going to go so far as to say that it’s the MOST important (such statements are usually asinine anyway), but it does have a unique place in the process of your business, for three reasons.
1. Your product is the multiplier that all other efforts are compounded by in computing your profit. You could say that the profitability of your online business equals (Traffic + Funnel + Filter + Follow Up) multiplied times the profitability of your chosen product line.
2. Assuming you’re a reseller, affiliate, consultant, etc. (ie not the manufacturer) it’s the one part of your business you don’t control and you are stuck with what another company gives you to work with, so you better be pretty confident in the company you’re relying on.
3. Your product line determines the other key factors…
Traffic – What type? How much? What will you pay?
Funnel – Who builds it? How much content? How much is revealed vs held back? How deep does it go? How long is it’s tail?
Filter – What is your Filter mechanism? Is it cost-based, skill-based, experience-based?
Follow Up – Who does it? How automated is it?
You can’t really answer any of these questions until you know what you’re marketing. So let’s get clear on the issues around choosing a Product Line so we can move on to other things.
Basic Product Types
There are lots of “either/or” ways to classify products. Physical vs Digital, Online vs Offline, Mom and Pop vs Big Brand, Staples vs non-essentials, etc.
But in discussing product line selection for building an online marketing business I want to divide the spectrum along a different line…
Whether you consider yourself a marketer or a salesman (two very different things), the product lines you may choose to sell or market will fit into one of two categories (or sometimes both as we’ll see). These two categories are what I call Retail Products and Opportunity Products.
Retail Products are things you “use” or “consume”. Cars, soap, cell phone minutes, and cookies are Retail Products. You buy them because whatever they were designed for is something you want to do, ie get to work, clean your skin, talk to people, eat dessert, etc.
On the other hand, Opportunity Products are something you buy (or perhaps “invest in” is the better word), because of the opportunity to achieve some result that is contained in the product. There are different-types of opportunity products but usually they fit into one of a few categories:
- Business Opportunites (franchises, network marketing distributorships, online marketing systems, etc.)
- Romance Opportunities (dating services, dating websites, etc.)
- Personal Growth Opportunities (seminars, weight loss pills/equipment, continuing education, etc.)
Some Opportunity Products are Retail Products with an optional “opportunity” attached to it (what I call ‘Hybrids’ – think Herbalife vitamins). With Hybrids you might not even know there is an opportunity attached (“It cured my tennis elbow… who knew I could have been making money for all the people I talked it up to?”)
On the other hand what I call Pure Opportunity Products would make no sense outside the opportunity they present. Think of owning a McDonald’s franchise (a franchise is technically a product)… nobody’s gonna pay a million dollars just to be able to have free Big Macs whenever they want. A McDonald’s franchise investment makes no sense outside of the opportunity it presents to make money.
Another example of a Pure Opportunity Product is a matchmaker service. It wouldn’t make sense to pay someone to send you profiles of eligible men or women were it not for the opportunity of romance.
Retail Product Pricing
One more important distinction between Retail Products and Opportunity Products is the way they are priced. This is very important to us as marketers because it affects our profit potential.
Retail Products are usually priced by a simple formula: (cost to produce + cost to distribute + profit margin = price).
It’s common sense… take what a product costs to make and distribute then tack on your profit and that’s what you can sell it for. A number of market factors, primarily competition from other companies with similar products, usually keep the profit that gets tacked on pretty thin. Companies that manufacture and distribute retail products can rarely just add a bunch of profit into the price without losing market share. But what they lack in pricing flexibility they often make up for in volume.
Companies that do a high volume of product sales win on two fronts… they can survive on less profit per item AND they can usually get better pricing on the materials and/or labor needed to produce or sell their product. Think Revlon (cosmetics manufacturer) and Wal-Mart (vendor of most everything). The little guy can’t compete.
Volume matters even on higher-priced retail products (cars, boats, houses) where you’d think the profit per item would be higher. Quite a few of these type of items have to be sold per month for a company to make much money, particularly because the distributorships for these products typically have high overhead (think car dealership). And the salesman (or affiliate or reseller) usually ends up with peanuts.
The reason all this matters to most of us reading this article is because it’s just as true on the Internet as it is off.
For online and offline marketers – most Retail Products have a low value per item.
Opportunity Product Pricing
Opportunity Products are priced according to a different formula from Retail Products.
Something more like this: (cost to produce + cost to distribute + IP + desire)
Let me explain.
The first two factors are the same… cost to produce and cost to distribute. The good news with most Opportunity Products is they tend to be much easier (and less costly) to physically produce and distribute. This gives us an immediate pricing advantage over Retail Products that are rooted to their “hard cost” in setting the price (and profit margin).
Many Opportunity Products are service-based and have little to no “production” or “distribution” cost at all. Think dating services, plastic surgery, education, or a franchise concept (which is basically just an operations manual and a set of legal agreements). While other Opportunity Products are able to spread their production cost across several customers at once (think seminars and education).
Now let’s look at the last 2 factors in Opportunity Product pricing. This is where it gets exciting for marketers.
IP and Desire
IP is short for Intellectual Property. Defined loosely… IP means what makes your product special or difficult to duplicate. IP is something that the product creator knows that others don’t (eHarmony’s “matching” algorithm), or is willing to do that others aren’t (Apples’ attention to design), or that competitors are unable to use because of a patent or other protection (most prescription drugs).
Most importantly for us as marketers IP can be charged for. If your product is difficult to duplicate then people have to buy it from you. If they have to buy it from you then you control pricing (because you have less competition) and can (and in most cases should) price your product higher accordingly.
Finally you have Desire. How badly to people want what you sell? The most unique and impossible to duplicate system in the world for teaching azaleas to read Russian is not likely to sell for much. No one has any desire for that. But figure out a non-duplicatable way to prevent male-pattern baldness, or augment female breasts without surgery, and you’ve got yourself an Opportunity Product you can charge out the wazoo for!
Obviously Retail Products also have a ‘Desire’ component, but it is much harder to upcharge for it since these products have more costs of production and distribution and more competition, though there are some exceptions we can learn a lot from. Companies like Apple Computers and Mercedes-Benz clearly are charging for consumers’ Desire for their products and some sort of proprietary “uniqueness” (IP) but I would argue that that part of their pricing is actually more like ‘Opportunity’ Pricing and perhaps their products are actually Hybrids.
Remember Opportunity doesn’t always mean making money… I’m suggesting that someone buying an iPhone is paying for the “opportunity” to appear a certain way and perhaps even attract others who appear that way. You don’t pay an extra $200 for a phone because of the touchscreen or the app store.
Ditto driving a Mercedes… just about everything that makes Mercedes a great car can be found in some other car with a lower price tag.
But it’s not a Mercedes.
In fact you could even say that if you do have your heart set on creating a Retail Product and trying to compete with the big boys then you better create a brand with an ‘Opportunity’ built into it to differentiate it (and charge more for). Something like Under Armor comes to mind – a guy figured out that if he gave his stretchy t-shirts to athletes then others would pay a lot more for the ‘Opportunity’ to dress like an athlete.
Interesting concept that warrants another article I suppose. But back on track…
Obviously the higher the IP and Desire components of our product line the higher it can be priced relative to the hard cost of creating it.
So what does this mean for us?
There’s a lot more that could be said about the difference between Opportunity Products and Retail Products but for now let’s just say that Retail Products tend to be a tough way to make a living online. You have to do so much volume and the competition is so stiff that there’s hardly any margin to pay affiliates (which is what you are unless you have your own product).
Hybrid Products are what we would expect… Better for marketers because of the pricing flexibility that comes from the Opportunity component, however still with the hard costs and competitive factors of retail products.
Leaving aside the idea of creating your own Retail Product (with an ‘Opportunity’ brand you can charge extra for) Opportunity Products are where the money is online… And if you look at the tens of thousands of people around the world who are earning a good living online over 99% of them (by my unscientific estimate) are doing so with Opportunity Products – the purer the better!
Now let’s be honest, some people like to take shots at Opportunity Products… and the companies that make or sell them. Some people scoff at the idea of paying $2500 for an Apple Computer. Others think the drug companies are all crooks. And the whole concept of franchising was put under legal review in the first half of the 20th century.
Myself I just scratch my head at the Gucci store. Why pay 10 times more for the Opportunity to have a large G on your apparel?
Loyalists of Opportunity Products usually respond that those people “don’t get it”. For those who wish to explore this topic further let me suggest Simon Sinek’s book Start With Why.
But get them or not, Opportunity Products are a marketer’s dream. And the best type of Opportunity Product is one with minimal production cost and little to no carrying cost.
Exactly like the product line I market on the tail end of my business.
It makes sense… why do people go searching online? They go online looking for love, looking to lose weight, looking to earn extra money. In other words looking for things that they can’t find on the shelves at Wal-Mart and that they may not even want to ask their friends or family for advice on.
See “Opportunities” aren’t always something we feel good about advertising our desire for. Many of us don’t want our friends to know we are starting our own business, or looking for love, or trying to drop 20 pounds. When people in our circle know these things then we are embarrassed if we fall short, or we open ourselves up to their criticism or ridicule.
These are deep-seated insecurities we all feel, so it is no wonder that Opportunity Products thrive in the anonymity of the Internet.
And there the savvy marketer waits, with high-IP, highly desired Opportunities priced accordingly. Trust me when I say from experience, with the right Opportunity for the right person, you only need one sale a month to earn a comfortable living. Sell 10 a month and you are earning 10 comfortable livings.
To learn more about what the heck I’m talking about… opt-in on this site. And if you’re already on the team, here’s to Opportunity!