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If You're Broke, Sell to Wealthy People...
Selling cheap stuff is hard. Period.
906 Words | 3 Min 46 Sec Read
Welcome to another issue of Passionate Income.
Today we’ll be discussing the importance of building a business that's focused on providing products or services to wealthy people your first time around.
Let’s dive in.
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A while back I heard a guru say:
"If you're broke, sell to rich people. If you're rich, sell to broke people."
Sounds like a cliche marketing slogan. But if you dig a bit deeper, it's actually a very profound statement.
See, there are two factors beginning entrepreneurs fail to wrap their heads around when starting a business:
#1 - Profit Margins
#2 - The sheer volume of leads needed to make one sale
As an example, let's say you start a bracelet company that charges $10 for bracelets that cost $3 to make.
On the surface, you might think you're looking at 70% profit margins ($10 - $3).
What you're not considering are:
How much you'll have to spend on ads to make one sale
How much you'll have to spend on staff to pack orders, process refunds, handle customer support, etc.
How much corporate taxes will eat into your profits
Etc.
In fact, after all your expenses, it's possible you earn $1 - $2 on each sale (assuming you earn any profit at all, which is in no way guaranteed).
Further, running the math, at $2 in pre-tax profit per bracelet, you have to make 5,000 sales to earn $10,000 in pre-tax income per month.
Meaning, if you have to spend $5 on ads to make one sale, you'll need to float $25,000 per month on credit cards (given you pay for the ads first before you get the website traffic and start making sales).
Are you in a cash position where you can float $25K on a credit card?
And can you survive if sales slump or ad costs go up?
Yes, it's "possible" to build this kind of business.
If it weren't, e-commerce as an industry wouldn't exist.
But you know what's exponentially easier?
Doing cold outreach on Twitter/IG for free
Selling a successful business a $5,000 service
Fulfilling on the service yourself (with $100 max in software costs)
Boom
You just netted $4,900 in profit off of ONE sale.
Further, you don't have to sell services.
Because instead of selling $10 bracelets, you could sell $1,000 custom jacuzzi covers you make in your backyard with some crafty handy man work.
While the ad cost to sell a custom jacuzzi cover would be higher than what you'd spent to sell a bracelet, it wouldn't be 100x higher.
Further, your staffing needs would be dramatically lower if you only needed to make and ship 1x cover Monday - Friday.
So at 50% margins, you could earn $10K making 20 sales per month.
And you wouldn't have to float $25K on your credit card to do so.
Admittedly, this is a dumbed down example. So let's go deeper.
See, selling expensive products/services to people who are financially successful is for the most part a People Business.
From the Tech Billionaire's Private Jet Broker, to the plastic surgeon's wealth manager, selling expensive products and services is (for the most part) dependent on relationships, status, trust and positioning.
Further, unless you're the company producing the yachts, Gucci bags or diamond jewelry, there's very little manufacturing involved in (most) high-end products/services.
On the flip side, look at most anything that costs under $10.
Ignoring digital products (which carry their own set of challenges), most anything "low cost" has to be manufactured at scale.
From Doritos to socks to Red Bull, selling low cost products can require 6-7 figures in manufacturing costs just to test a prototype. And most physical goods require multiple iterations of prototypes before they get it right.
Admittedly, you can still sell low cost services online with very few startup costs. Fiverr is a great example of this.
But when you're only charging $100 or $500 to provide a service (which means you're providing services to broke B2B startup entrepreneurs), you need to land dozens (if not 100+ clients) to even dream of hitting $10K per month.
On the flip side, you can hit $10K/mo by charging two successful businesses $5K per month each.
But here's the caveat: Broke businesses can't pay $5,000 per month.
Which brings us back to the thesis of this post:
Unless you have extensive business experience and serious startup capital, you’re almost always better off starting a business that provides products or services to financially successful individuals / companies.
💡 Takeaway: Because of the marketing, sales and labor costs, it can take dramatically more work and capital investment to scale a business selling low cost products and services. So if you're just starting, focus on selling high-priced products or services to wealthy individuals / business owners.
🎁 Resources:
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