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The Cost of Doing Digital Business
Dom Goucher: Hello everybody and welcome to this week’s fantabulous episode of PreneurCast.
Pete Williams: Oh!
Dom: Yeah, did you like that one?
Dom: I just thought I’d try something different. With me, Dom Goucher, and him, Pete Williams.
Pete: Hello, hello, everybody! Welcome to another fantabulous show.
Dom: I think I’m going to stop doing that, it just sounds silly doing that thing. I sound like some kind of radio DJ from the ’80s. And I absolutely haven’t got the hair for that.
Pete: True. That is true.
Dom: I think we’ll leave that one there. Awesome, awesome. Great to hear your voice again and great to be back on track with the episodes. And I just want to get straight into this one, mate. We had a little brief chat before this call about something and literally, I just said, “That’s it, we’ve got to do this now! We have to record this now,” because I was so interested and excited about what it is that we’ve been talking about. I think it’s going to make a great episode, so…
Pete: Well, we touched on it last week, as well, really briefly in the show.
Dom: Exactly, exactly—so do you want to recap that for us and we’ll go from there?
Pete: Yeah, you’re sort of ranting a bit about the whole Apple taking 30% cut of magazines and apps, all that stuff that they allow people to sell through the iTunes Store. Apple takes their 30% cut, and I know this is a bit of an old story in that this is a huge conversation and debate, probably a couple of years ago now, actually, when all this happened, then it continually comes up regularly.
And it really is—there’s just a discussion around what is the true cost or the willing cost of doing business and being successful. And there are other examples that I want to talk about on the show today beyond just Apple, but I think that’s probably a good place to start because a lot of people are probably familiar with that perspective. Do you just want to set the context there and then I can give some relatively harsh examples of what this really is?
Dom: Yeah. The example that we brought up last week was that a lot of people in the press and in the industry (and I absolutely want to say this up front, by the way), the example that I’m going to talk about is an internet-based example. I’ll maybe give a couple of side examples around internet-based businesses, but this is about business. It’s brought to the fore by people working on the internet.
Because we’re on the internet, and so we get a lot of noise from the internet world than from the real world and from real-world business. But we deal with real-world businesses all the time, both ourselves in our own businesses and also with the people that we consult with. And this is not unique to this ironically tiny world of the internet marketing people on the internet marketing space. But there’s this concept out there which really did come to the fore with Apple because Apple’s such a big company.
It was this idea that if you list some thing for sale through the Apple platform, so through iTunes for music or through the App Store (which is a really popular thing in the internet space at the moment) or the really new platform which is this iBooks and the Newsstand, so digital publications. If you list anything on any one of those platforms, Apple will, across the board, take a 30% cut of the profit, okay?
Dom: And when the latest platform came out, this iBooks and the Newsstand, literally, people from the low to the high, so the ordinarily entrepreneurial people went looking for an opportunity (so let’s call them an opportunity seeker). The opportunity seeker, right the way up to the big magazine publishers said, “No, STFU, you are not,” and I quote, “taking 30% of my money.
You are not taking 30% of my money.” They literally refused to list their products on this platform. And that, in the words of our good friend, Ed Dale, is insanity. It’s totally looking at things in the wrong perspective, that people are taking your money. Actually, what they’re doing is offering you a massive, free marketing opportunity.
A massive, free infrastructure opportunity that in the main you can’t possibly compete with. And for this service, when you make a sale of your product, before you get your money, they take 30% off of whatever the list price was that you listed that product for. Which is a huge difference to their taking 30% of my money.
Pete: I completely agree. The argument I keep making is that—I want to talk of some other examples as well throughout the show; but in the Apple example, as an app developer or a magazine publisher going through the Newsstand platform, you’re a wholesaler. Apple’s a retailer.
Think about if you were selling your magazine on Newsstand, if you were producing shoes and selling them with The Athlete’s Foot, if you were manufacturing widgets and selling them in a widget shop, what happens? You create the core product, you then give an inventory level to a retail store or a number of retail stores, and then they sell it to the consumer.
They find the consumer. They get the consumer to come into their retail store. They deal with the credit card charges. They deal with the refunds. They deal with speaking to a client. And then on 90-day terms or 60-day terms, you get paid against that inventory that you provided that reseller.
So if you’re a shoe manufacturer and you make your shoes, you send a bunch of inventory to a retail store, they then do all the marketing, all the customer service, all the credit-card transaction stuff; and then they pay you a chunk of cash, 60 days on 60-day terms. That’s how it works in the real-world and has for centuries. It’s no different to what Apple’s doing.
Pete: They’re the retailer, you’re the wholesaler. The only difference is the inventory is technically infinite because it’s digital material. The only difference is that it’s an infinite-type thing. And for whatever crazy reason, people think that’s ridiculous. It’s actually better for you. If you’re Nike, or if you’re a widget manufacturer or a light globe manufacturer, you have to pay for all this infrastructure to produce the globe.
Which you have to do with apps anyway, there’s a fair bit of cost in developing an app. That’s like building the factory and the system to build the light globe. But to actually have the light globe available for sale, you have to invest and produce thousands of light globes that have to get distributed to the retail store. So it’s even more expensive to do that.
Dom: Just before you do anything else, can I just say—let’s go with your example and let’s just give something absolute concrete here for comparison before we drill down into detail. How much profit margin would the retailer expect to put on your product, on average?
Pete: Margin, not mark-up.
Dom: Mark-up, whatever.
Pete: Let’s say margin. Let’s say, hypothetically, you sold that light globe for $10 as the retailer. So the retailer sells that at retail to the consumer for 10 bucks. They would be buying that for anywhere between five dollars and seven bucks, in general.
Dom: In general, there is a difference between what the wholesaler can sell it to the retailer for and what the retailer will sell it for from between 30% and 50%.
Pete: Yeah. The retailer will take generally between 30% and 50% of the retail price as their ‘cut,’ so to speak, for doing the marketing, doing the sales, and that’s how they make money.
Dom: And this is a universally accepted principle that as a supplier, as the wholesale supplier of the goods, you expect a certain amount for those goods that the retailer will buy it from you for, based upon how much scale they can give you and how many thousands they can order and things like that? They expect to put some level of mark-up on for the infrastructure that they bring for all that marketing and things and whatever, right?
Dom: Right. So that is exactly the perspective that is missing in this situation.
Pete: But it gets better! This is a crazy thing. The margin that Apple takes, 30%, is the same, if not better for the wholesaler than in retail perspectives, because retail can be, quite often, higher.
Dom: Absolutely, and this is where we want to drill down into, yeah.
Pete: But this is the killer bit—is it legal for a shoe manufacturer, a computer manufacturer, a globe manufacturer, any sort of manufacturer to tell the retailer what price point that has to sell at? It’s completely illegal. As a manufacturer, you cannot go to the retailer and set prices and say, “You have to sell this product at this price. You cannot discount it; you have to sell it at recommended retail.” That’s absolutely illegal. But with the Apple Store, who sets the price at retail?
Dom: Oh, that’s…
Pete: The manufacturer! You, as the developer of the app, get to tell the actual retailer, Apple, what to sell the thing for. I’m amazed that this is actually legal, technically, because, yes, there’s obviously ways to make it legal. The way that the agreement is—and Apple is just a distributor and not a retailer, and legally, it’s okay.
But in any other industry, any other thing where you produce the core—if you produce a book, if you product a magazine, the actual bookstore, the newsstand has the right to discount that magazine without your permission as the manufacturer or the publisher. Apple can’t do that.
Dom: By the way, I don’t want to get into the legalities because we talk to a worldwide audience and there may be somewhere in the world where this is not true. But to flip that on its head and make it slightly more from the perspective, certainly, that I’m coming from; so if you want to make X from your product, from the sale of your product, and Apple are going to take 30%—get your calculator out and change the price you want to sell it at to account for the fact that they’re going to take 30%.
Pete: The whole thing—this is the thing that I’ve always seen; when it comes to producing apps for the App Store, producing magcasts for the Newsstand, producing eBooks for the iBookstore, is—you are a publisher. And a publisher is a wholesaler. If you want to produce your own apps and sell it direct to retail on your own website outside the Apple infrastructure…
Now obviously, if you’re trying to do that for an iPad or iPhone app, it’s not possible. It’s a closed infrastructure. If you are going to do that for a general OS X like a Mac operating system app, you can absolutely do that. You can just sell it direct and people can buy the app and download it, and you’re good to go.
You can go from manufacturer to retail. But you know, EA Sports, who produce all the great games for the Xbox and PlayStation and Nintendo and stuff like that, these guys, traditionally, never had that ability. They never sold direct-to-market. They did that wholesaler or a publisher.
Dom: Well, so I want to drill down into this because I think there may be people out there who really, with the best will in the world and no fault on their own, are maybe not aware of how wholesale and retail works. Maybe they are entrepreneurs that they’ve come straight into a small business of their own, maybe they are looking at putting something online, maybe they’re not, but maybe they just don’t understand it.
There are two things here, to me, it’s the lack of understanding and the lack of perspective. I want to drill down into the examples we’ve given so far so that people are clear on why we get so excitable about this stuff. Some of it is because it’s a lack of understanding of the standard operating procedure and a lack of perspective of the opportunity.
And those are the two things I kind of want to focus on here before we move on and make a wider example of this. We started with the cost of doing business, and there’s a lot of examples other than the ones we’re talking about right now where this is applicable.
So starting out, standard operating procedure. Your example is perfect to this—if you are a manufacturer of goods, you have two choices. You can try and create a distribution, delivery, marketing, sales, order-processing and order-fulfillment infrastructure yourself, or you can tap into one that is already there.
Pete: You can produce something and approach Walmart and say, “Walmart, I want you to sell this in all your bazillion stores across America.”
Dom: For example. Now, it would never in a million years occur to anybody in any business, any real-world business, bricks and mortar, in the history of business, nobody would ever realistically expect that if you give your thing, if you manufacture a product and get it to the distributor, get it to the retailer, get it to whoever, you would not expect them to sell that product for the price that you sold it to them for.
Pete: No, God no.
Dom: Now, you may not understand why they need to sell it. You may only have this tiny little perspective that, well, obviously they need to make a product. But actually, it’s not that they need to make a profit—this is really important, folks. This is everybody. Stop jogging for a second, take a breath, let the dog have a run around a tree, whatever it is you’re doing.
It’s not that they need to make a profit, it’s that they have an infrastructure, just like you have to set up your machines, you have to pay your staff, you have to pay the electricity bill. These guys are doing a phenomenal amount of work to stock, market, sell, process the sales, deliver, fulfill—all those other jobs that are involved in getting a product into the hands of a consumer.
Pete: I’m going to say marketing, marketing, marketing. I know you said it, but I’m going to reinforce it because that’s what Walmart do.
Dom: Yeah. And by the way, yes, I will come back to marketing in a sec; but there’s that every one of those jobs cost money to get done. And to do it for one more product costs more. It’s not like they’re putting it into an existing infrastructure and, oh, well, it just gets absorbed. That’s not really a good way of looking at this, that’s a bit naïve.
Realistically, these people are going to take an incremental cost by taking up another product. It takes up shelf space, it takes training of the staff to get the product out and all the rest of that. And on top of that, let’s flip it on its head and let’s go back to your marketing example.
If it was just you on your own trying to market your product trying to just even raise awareness—let’s not worry about transactions and let’s not worry about processing credit cards, let’s not worry about delivery and support and all those other things. Let’s just talk about getting the word out about your product.
Would you rather, you, little Joe Widget Maker in the back of beyond, in your shed with your screwdrivers and your saw, making your product, would you like to try and market you product to a wide-enough audience that you can get enough— let’s talk about 7 Levers: that you can get enough traffic, that you can get enough opt-ins, that you can get enough conversions?
Or would you like to go to an existing infrastructure that has an existing marketing platform, that has an existing awareness, audience that has an awareness of their marketing materials, that has an existing list of people to talk to that they’ve probably sold to before that they can sell to again easily, and let them do all that for you? Do you want to spend that money, time, effort, doing that marketing?
Or do you want somebody else to do it for you? Because if you wanted to do it, at some point, it would cost you some money, would it not? If you want to do marketing, if you want to do advertising, if you want to put an advert even in your local newspaper, you want to put an advert in there, it’s going to cost you money and you will have to pay that money out of your pocket.
Pete: And the thing is, to jump higher really quickly, in most cases if you’re going to try to build that channel, that path to the direct consumer yourself, it’s going to absorb more than 30% of the cost of your product.
Pete: Because you don’t have the economies of scale that the retailers do, the Amazons, the Apples, the Walmarts, even the strip mall store down the road. They still have some economies of scale.
Dom: Absolutely, and this is it. The thing is ironically, people see the 30% that Apple are taking from the sale price of the product as a cost. It’s not a cost. That’s their cost, they’re already spending that money, they’ve already (and I’ll come back to this in a second and just really hammer this one down) but it’s not a cost to you. It doesn’t come out of your pocket. It was never in your pocket.
Find a way to deal with it. But trust me, you’re never going to get it. It’s not making any difference to you, you’re not spending it. Whereas, if you run that advert in the local newspaper or you do Google Ads or you pay for a TV spot or you pay to have a video made to promote your product—notice I’m saying these words “pay,” because you will pay, it will cost you money.
Pete: Let’s look at the numbers really quick. If you say, the average product, I would say a smart entrepreneur would budget around a starting product of 20% of sale price, directly for cost of acquisition. So if you sell something for $100, you would start to budget at $20 for your cost of acquisition. You pay 20 bucks to make that $100 sale.
Let’s say you’ve got a 20% cost of acquisition at a minimum. Your AmEx or Visa fees are 2% to 3%, so you’re now at 23% cost. What is the cost for the actual staff to do the refunds and customer service and that sort of hassle, on average, 5%? If you amortize it across all your sales for a particular week or month?
So now you’re at 28% already, and you’re just in your little local strip mall, or you’re doing a little direct-mail campaign in your local newspaper or trade journal. Whereas, these platforms, they’ve got global reach. When people actually sit down and do the raw math, 30% is ridiculously cheap.
Dom: I just want to clarify something there. There were two things in there that I class as costs, and one of those things is not quite cost. If you were doing the marketing, you are going to pay, and you are going to pay first and get your money after the sale. If you have staff, you are going to pay first and get your money back after the sale. If you manufacture, you’re going to pay first and get your money back after the sale.
Dom: The one thing in there that’s slightly squidgy is the fee-processing of the cards, because that’s you taking money and you’re being charged for taking the money. So that’s no quite an actual money-out-of-your-pocket cost. But it is part of the overall amount that you need to allocate for every sale.
Pete: Yeah, so the 30% that Apple takes absorbs that 3% of transaction fee.
Dom: Absolutely. Let’s now go over to this infrastructure thing. Because all those things, let’s say you are at a local strip mall or you are in your shed in your back garden or are advertising in the local newspaper or whatever it is—all those thing, you have a limit to what you can do based upon how much money you have in your pocket, right?
And every time you get more money back in your business, you have to invest that money back into that marketing, back into that manufacturing infrastructure, back into that staffing, to scale up. And every time you scale up—and this is back to that fisherman story that I told, probably, the apocryphal story of the fisherman in the boat that I’ve told a couple of times. Do you remember that one?
Pete: Yep, vaguely.
Dom: It’s the old guy in a boat. An old guy in a boat and he’s fishing away and he’s been out there all day. And at the end of the day, he comes and sits in the bar and he’s got a bucketful of fish. A guy in a business suit, in the bar, sat next to him, supposedly on holiday but don’t know what he’s doing in a business suit, but it’s the story.
He looks at him and goes, “Whoa, you’ve been out there all day, you’ve caught a bucketful of fish. What’s that all about?” He says, “Ah, I just need enough to feed myself and my family.” I’m going to cut the story short; the business guy basically talks him through this entire story of scaling up his entire business.
About buying more boats, about getting more people to fish for him, of having offices all over the world, having a distribution network, having this, that, and the other. And at the end of the day, he says, “And when you’ve done all that,” then the guy says, “When I’ve done all that, so what?” The guy says, “Well, you’ll be able to retire?”
The old guy said, “Retire and do what?” Then the guy said, “Well, you can sit in your boat and fish if you want.” But this is the thing; every time that you want to scale up, if you are paying for this infrastructure, you’ve got to sell more to pay more, then you pay more to sell more, and you’re in this loop.
Doing it efficiently and keeping your eyes on the numbers, you can make it win for you. But in terms of being entrepreneurial and making the most of the resources available to you, rather than continually scaling up what you pay to scale up what you get back, why would you not tap into a resource like Apple or like Amazon or like Walmart? By the way, Walmart is a difficult one to get into.
Pete: And they’re going to take more than 30%…
Dom: And they’re going to take more than 30%. But if you look at these digital delivery platforms, which is the ultimate of this example, once you’re created your product, you have Amazon and Apple who are out there with some of the world’s biggest, most-effective marketing machines that they are paying for on your behalf that they are constantly marketing to their customers.
Anybody that visits Amazon or Apple has pretty much one thing in common and that is that after the very first visit, they’ve already given their credit card details. They are now within the realms of a repeat customer, their details are already stored on file, their purchases are one click away. They’re proven purchasers, they’re proven to be people that are buying.
They wouldn’t be on a store like Amazon or Apple if they weren’t looking for something to buy, they are focused on something, they are focused on a solution to a problem, on an answer to a question—they’re looking to spend money. Who would not want that group of people, being presented with their product? I would.
I’m there all day and twice on Sundays. And you don’t pay a penny. You couldn’t possibly compete with these infrastructures if you wanted to, even if you were one of these magazine guys. One of the magazine publishers, they all turned around and said, “No, you’re not having 30%.”
Okay, if you want to be like that, how much do you give up to the retailers that retail your magazines? How much does it cost you to print, publish, and distribute your magazines versus sending an electronic file to one of these suppliers and then sit back, there you go, off you go.
Pete: You’re absolutely right, and this is something that I had to bump heads with consistently when I was a consultant with Bartercard, one of the trade exchanges here in Australia. I know we’ve done this episode way back in the archive, which I think people should go back to if you’re a new listener—welcome to the show.
But also, go back and listen to some of the archives, which is available at PreneurMedia.tv, and one of the episodes is all about The Mirror Economy. I won’t go too much in depth about what the mirror economy is, but trade exchanges such as Bartercard sort of operate in this space. And one of the things that Bartercard do is they charge you roughly 30% for every dollar that comes through your account in this trade exchange.
So when you actually sell something inside the trade exchange for $100, they’ll take roughly a 15% commission for generating that sale. And when you spend that 85% of dollars, they’ll take another 15% off the top. Fundamentally, it ends up being you get 70% back in your account at the end of the day because they take their commissions on both sides.
It was a continued struggle for these trade coordinators, the people inside the Bartercard world, their job is to actually go out and find new business inside the trade exchange for the members and help them spend their money and stuff like that. To this day, I’m sure they do. I’ve consulted and worked with Bartercard for a number of years now, but I’m sure this same sort of argument comes up.
It’s, “Ah, you’re charging me 30%, that’s ridiculous. Visa only charges me 3%.” On the very face value, that makes sense. It’s like, well, this is an exchange-type transaction where you get a little card, you can spend and make money, and Visa won’t charge you that. But when you do the numbers and look at it, okay, Visa might charge you 3%.
So let’s take 3% off the top of Bartercard, too, that leaves you with 27%. But does Visa go out there and actually market your business in their magazines, in their equivalent version Yellow Pages? Well, no, they don’t have a magazine. No they don’t have a Yellow Pages just for Visa card people. They don’t really have a concierge unless you’re actually paying high fees anyway and a huge annual fee; you get a concierge to help you spend you money.
You don’t have a concierge to help you bring your business, they don’t have marketing consultants at Visa to help you make more sales with Visa necessarily. So, in terms of Bartercard, you don’t have to do anything else. You do whatever you’re doing in your real-world to market your business; and Bartercard, as an entity, as an organization, as a team of a global network of staff, they’re out there promoting and pimping your business to get you new business, to get you new customers, to get you new sales.
They’re also there as a concierge. If you want to spend your trade dollars inside that trade exchange community, they’ll actually go out and help you, and source that purchase for you. Now, what does that really cost in the real world? Well, as we said before, you’ve got 3% or 4% fees for your AmEx or Visa anyway. You’ve got 20% cost of acquisition to make the sale anyway, so you’re at that 25%, give or take a little bit, right now.
And then you’ve got a concierge helping you spend your money for 5%. Realistically, that’s again, market value if not below market value when you compare apples to apples. Some people don’t really do that actual analysis, and that’s something I wanted to touch on, too. If you’re in that Bartercard world or that trade-exchange world or interested in it, go back and listen to The Mirror Economy episode of PreneurCast. Again, it’s a cost of doing business.
You have that cost, anyway. Just how it’s wrapped up and presented doesn’t change what’s included in the wrapper or inside the box. So the fees are there and you’re paying those costs in one way or the other right now in your business. It’s just how it’s wrapped up is different. People don’t want to look through the wrapper, they judge the book by its cover almost.
Dom: How about this for a perspective. The way that I’ve mapped this out; we’ve both come at this, you’ve given out your examples and I’ve given mine. And in mine, where you’re the guy in the garden shed or the strip-mall guy or whatever, you are literally paying for the marketing and these things, and it’s an absolute flat cost. No arguments, yeah?
Dom: You’re paying for the staff, you’re paying for the fulfillment, you’re paying for every step of the way. The other side of it, if we look at Bartercard or we look at Amazon or we look at Apple—they are doing it for you and you’re literally not paying, and it’s that simple. To me, it is that simple. It is, again, back to this understanding. It’s an understanding and awareness of what actually happens, what is standard operating procedure and what it actually means—but really, more importantly, is that awareness.
Now, we talk about this in the 7 Levers, we start off, one of the core concepts of the 7 Levers of Business is to measure, to monitor and measure; and people don’t do that, people don’t have that idea. I know you are not looking at notes, I know that off the top of your head, you have these figures of you allocate 20% to market the product.
And you know what the breakdown is, you know roughly what Visa will take, offer you for a transaction. You know what it costs to do certain things because you measure everything. You monitor it so you’re aware of it. But I don’t think a lot of people do, and I think this is where this stuff comes from. This not being aware of standard operating procedure and not really understanding or being aware of what is actually happening in their business or in other people’s business and what the opportunity is.
They just see it as money out of their pocket when it really, really, really isn’t. And it’s a perspective thing. I love my perspectives, I love changing perspectives, I love looking at things from a different perspective just to see if there’s any opportunity there. And this is kind of a critical one, really. By the way, we started this episode with the cost of business.
Ironically, this is not about the cost of doing business. We could talk about the cost of doing business. We could talk about the fact that it is really important that when you look at spending money in your business, you evaluate it against the return that it’s going to give you and you need to be prepared to spend that money. But ironically, that’s not really what we’re actually saying here.
What we’re actually saying here is that you could spend that money and you could look at it as money that you’ve got to spend. Or you could look at these opportunities out there like bringing it back to the real world, like paying sales commission. Paying sales commission, in any industry, is an age-old thing.
You get somebody, a sales person or a sales organization to market and sell your product, whether it’s that they call people up or they use their existing network or people, whatever it might be. And in return for that, you give them a share of the profit. It’s called ‘sales commission.’ In the internet-marketing space, it’s called ‘being an affiliate.’
You can sell a product on behalf of somebody else because you might believe that you can market it better than them or that you have a unique way to market it that will make some sales. And in return for that, you’ll get a level of the profit. You’ll get a percentage of the sales price.
That, again, is an accepted thing—although some people are very strange about affiliate commissions as well. Some people are very strange about sales commissions because they’re not—I don’t think they have the right perspective. I know of people out there; a classic example, again, the internet space is an easy one to use examples from.
But this maps to the real world as well. Some people really complain about how much commission they should be paying to an affiliate, to somebody marketing and selling their product on their behalf. Now, bear in mind that on the internet, the cost of doing business is significantly less for the person. Let’s call them the publisher.
That’s one thing to take into account. But secondarily, it takes time and effort to build a list of potential customers or leads, to market to them, to nurture them as leads and turn them from leads into conversions, to convert them into a sale and maybe sell to them again, etc. That time has to be paid for somehow, whether you pay staff to do it or whatever. Now, one of the most successful affiliate stories I know of in recent history… Is it the guy [Mike Geary] who does [The Truth About] Six Pack Abs?
Pete: Okay, yep.
Dom: Now, he started off—and there are a number of accepted levels of affiliate commission that you can provide, in the flat-out, almost one-to-one marketing sense, on sites like ClickBank which are places that collect these opportunities together. If you go to a big retailer like Amazon, by the way, they will happily pay you a very small commission for selling their products or taking them.
But if you go to a site like ClickBank, there are individual people listing electronic products for sale that you can market and sell for them and get a reasonable commission. You might get 25%. You might get 50% of the value of every sale you make on their behalf. But the Six Pack Abs guy really did stand back and look at it from a different perspective.
And that was that he’s created his electronic product, his information product, and he’s made a reasonable amount of money selling it himself and marketing it himself. But it was getting to be hard work. He looked at the situation and was aware that the more affiliate commission he provides, the more people will be willing to sell it on his behalf.
So while the industry was out there maybe offering 25% or even 50% of the sale value as an affiliate commission, he pushed his to 75%. We’ve started this show talking about people complaining that in order to be part of an international marketplace full of people looking for sales, looking for purchases, looking for something to buy, where your products are constantly able to be promoted and delivered—then all those other costs are gone.
That is a 30% margin that that supplier wants to put on your product. But this guy was willing to give 75% of the list price of his product away… Now, that is a real shift in perspective. And it takes a bit of thinking about; but if you realize it, he no longer does anything to sell or market his product, literally.
He does a lot to support his affiliates because what these guys do is they spend their every waking hour, out there, all over the world, all over the internet, doing their absolute level best to market and sell his product for him. And he has an army of these people out there, hundreds, thousands, possibly of people, possibly even more than thousands, all doing that work for him.
And because it doesn’t matter to him, he’s not doing any more or any less work to support any more or any less of these people. He’s not doing anything more or less to deliver or fulfill on or anything like that. I imagine he’s very happy giving away 75% of the overall value, of the overall list price.
Pete: A lot of people start then going, “Yeah, but it’s digital, he can do that. He hasn’t got any costs against it.” Yes, that is true. You couldn’t go giving away 75% to a retailer if you’re manufacturing shoes or you’re manufacturing garden sheds or things like that. There is obviously industry metrics that you have to take into play. But if you’re going back to the root of the show, Apple sells digital stuff.
Pete: There you go. That’s my argument—I have laid it out there, that is all I have to give tonight.
Dom: But, just to wrap up, I mean, we kind of need an action point, kind of a wrap-up point. My wrap-up point is this: whenever there is an opportunity to do something like this, you need to look at it from all sides. Looking at this, and to me, this is a conversation about perspective as well as opportunity. So, we’re making an extreme example. We’re talking about a digital product on a digital delivery company like Apple.
But all the things we’re talking about are applicable to real-world businesses. We always want to make it clear, we understand that the majority of people out there have real-world businesses, because the majority of the people out there are, well, the majority. The internet space is still relatively tiny. If you’re in it, it seems like there’s lots of people in it; but if you’re not in it, it seems insignificant.
But this applies to both. There are opportunities out there, there are opportunities to get other people to do things for you, to use other people’s infrastructures and everything costs something. But you just have to look at it as, is that money coming out of your actual pocket? Is it like paying for an advert? Is it like paying for staff? I don’t think I need to, but maybe we do need to talk to people about being prepared to pay that money.
Being prepared to allocate those 20% that you talked about in your example, because that will give you a return. That absolutely will, and it’s a vital part of any business. You’ve got to be realistic. You’ve got to reinvest or be willing to allocate a level of funding to the marketing and sales and delivery and fulfillment of your product or your service.
But these things like people wanting to be a joint venture partner, people wanting to be a retail delivery arm of your product or even these online delivery platforms, they are opportunities for you to actually not spend money, not pay out. Yes, they want a part of the overall list price, but that’s not the same as the money coming out of your pocket to pay for it.
Pete: The way I want to wrap this up is that this is just another perfect example. This is my case, your honor, that core business success principles have not changed, will not change, do not change. Just because Apple has come along and made iTunes, blowing up and made a lot of people a lot of money—it’s nothing really new. It’s just wholesale and retail. It hasn’t changed.
This is something that we keep talking about here on the PreneurCast and in the Preneur Community. It is Preneur style of marketing or business development that we continue to talk about is that Twitter, Facebook, Pinterest—all this stuff that gets a lot of oomph behind it these days in all our talk, it’s just another new tactic, a new tool. The core business principles or the core things that make a business successful have not, will not, ever change. So it’s just wholesale versus retail.
When you really break it down, that’s all iTunes is. That’s all Apple is. It’s wholesale versus retail. But by listening to shows like this and reading stuff like this that we share and other people share as well, it really helps you stay on the right track and helps you not get confused and excited about the next big thing and distracted, and believe the hype. Because the hype is there as marketing. And if you’re marketing stuff, you have to build the hype. Again, that’s a principle of marketing and growing your business.
But when you’re actually on the other side, on the receiving end, you’ve got to make sure you have your Preneur glasses on and really think about it from an entrepreneurial perspective and go, “Okay, what is this, really? What is this, actually, when it comes down to business principles?” In this case, wholesale, retail—no different. Costs are the same, breakdown’s the same, path to market’s the same. Principles, rules, the government are the same.
Dom: Absolutely. I totally agree. I think that’s a great wrap-up, actually, that it is that. People look at these new shiny objects and they do get distracted by the glossiness of it all and think that it is something new, and it’s not. It is wholesale versus retail, and these principles are out there and have been out there for many years. I think the action point really is to look at whatever business you’re in and look, find out more about how these principles work.
Find out more about what the standard operating procedure is, whether you are a digital product manufacturer but you really are in a wholesale-versus-retail environment, or you’re looking to move into one. Find out more about how it works. Find out how, in the real world, those costs are split so that you have an understanding of what you should be expecting to pay out or what you should be expecting to give from the overall retail value.
So when you look at this opportunity, and then also, you look at what you would get back for that, you’re aware of what it costs to do your own marketing versus somebody else do it, so when you look at an opportunity, you really can evaluate it. I guess we’re back to a framework again, aren’t we?
Pete: Yep. It all comes back to frameworks.
Dom: Yeah, when you look at something, look at it—and I love that; look at it through the Preneur glasses. That’s a great phrase, because it’s true. Look at these opportunities through your Preneur glasses. You can look at the Apple thing and go, “They’re taking 30% off me.”
Or you can look at it as, “Crikey! All that for only 30%?” Alright, mate, we are right on the time here. I really enjoyed that one, I really enjoy talking about that. I think that’s a great, again, perspective shift for people, and I hope everybody got some value out of that one.
Pete: Sounds good. Well, next week, as always, PreneurCast is back. It lives forever on PreneurMedia.tv. All the back episodes, the archives, the transcripts, the show notes, the links—all that cool stuff is available over there to get all that history.
Dom: Absolutely. And if you visit PreneurMedia.tv, do leave us a comment on any episode that you feel you’d like to chat with us about. We love your feedback on PreneurMedia.tv, or on the iTunes Store in your local country, or via email at firstname.lastname@example.org.
Pete: Cool! Talk to you guys next week!
These previous episodes were talked about in today’s show. If you missed them, go back and listen:
PreneurCast Episode 19 – The Mirror Economy
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