The 4-Hour Workweek (18 page)

Multiply this by 10 and we have $1673.80 in profit for 30 minutes of work. Doug is making $3,347.60 per hour and purchases no product in advance. His initial start-up costs were $1,200 for the webpage design, which he recouped in the first week. His PPC advertising costs approximately $700 per month and he pays Yahoo $99 per month for their hosting and shopping cart.

He works less than two hours a week, often pulls more than $10,000 per month, and there is no financial risk whatsoever.

Now Doug spends his time making music, traveling, and exploring new businesses for excitement. Prosoundeffects.com is not his end-all-be-all, but it has removed all financial concerns and freed his mind to focus on other things.

What would you do if you didn’t have to think about money? If you follow the advice in this chapter, you will soon have to answer this question.

It’s time to find your muse.

THERE ARE A million and one ways to make a million dollars. From franchising to freelance consulting, the list is endless. Fortunately, most of them are unsuited to our purpose. This chapter is not for people who want to run businesses but for those who want to own businesses and spend no time on them.

The response I get when I introduce this concept is more or less universal: Huh?

People can’t believe that most of the ultrasuccessful companies in the world do not manufacture their own products, answer their own phones, ship their own products, or service their own customers. There are hundreds of companies that exist to pretend to work for someone else and handle these functions, providing rentable infrastructure to anyone who knows where to find them.

Think Microsoft manufactures the Xbox 360 or that Kodak designs and distributes their digital cameras? Guess again. Flextronics, a Singapore-based engineering and manufacturing firm with locations in 30 countries and $15.3 billion in annual revenue, does both. Most popular brands of mountain bikes in the U.S. are all manufactured in the same three or four plants in China. Dozens of call centers press one button to answer calls for the JC Penneys of the world, another to answer calls for the Dell Computers of the world, and yet another to answer calls for the New Rich like me.

It’s all beautifully transparent and cheap.

Before we create this virtual architecture, however, we need a product to sell. If you own a service business, this section will help you convert expertise into a downloadable or shippable good to escape the limits of a per-hour-based model. If starting from scratch, ignore service businesses for now, as constant customer contact makes absence difficult.21

To narrow the field further, our target product can’t take more than $500 to test, it has to lend itself to automation within four weeks, and—when up and running—it can’t require more than one day per week of management.

Can a business be used to change the world, like The Body Shop or Patagonia? Yes, but that isn’t our goal here.

Can a business be used to cash out through an IPO or sale? Yes, but that isn’t our goal either.

Our goal is simple: to create an automated vehicle for generating cash without consuming time. That’s it.22 I will call this vehicle a “muse” whenever possible to separate it from the ambiguous term “business,” which can refer to a lemonade stand or a Fortune 10 oil conglomerate—our objective is more limited and thus requires a more precise label.

So first things first: cash flow and time. With these two currencies, all other things are possible. Without them, nothing is possible.

Why to Begin with the End in Mind: A Cautionary Tale

Sarah is excited.

It has been two weeks since her line of humorous T-shirts for golfers went online, and she is averaging 5 T-shirt sales per day at $15 each. Her cost per unit is $5, so she is grossing $50 in profit (minus 3% in credit card fees) per 24 hours, as she passes shipping and handling on to customers. She should soon recoup the cost of her initial order of 300 shirts (including plate charges, setup, etc.)—but wants to earn more.

It’s a nice reversal of fortune, considering the fate of her first product. She had spent $12,000 to develop, patent, and manufacture a high-tech stroller for new moms (she has never been a new mom), only to find that no one was interested.

The T-shirts, in contrast, were actually selling, but sales were beginning to slow.

It appears she has reached her online sales ceiling, as well-funded and uneducated competitors are now spending too much for advertising and driving up costs. Then it strikes her—retail!

Sarah approaches the manager of her local golf shop, Bill, who immediately expresses interest in carrying the shirts. She’s thrilled.

Bill asks for the customary 40% minimum discount for wholesale pricing. This means her sell price is now $9 instead of $15 and her profit has dropped from $10 to $4. Sarah decides to give it a shot and does the same with three other stores in surrounding towns. The shirts begin to move off the shelves, but she soon realizes that her small profit is being eaten by extra hours she spends handling invoices and additional administration.

She decides to approach a distributor23 to alleviate this labor, a company that acts as a shipping warehouse and sells products from various manufacturers to golf stores nationwide. The distributor is interested and asks for its usual pricing—70% off of retail or $4.50—which would leave Sarah 50 cents in the hole on each unit. She declines.

To make matters worse, the four local stores have already started discounting her shirts to compete among one another and are killing their own profit margins. Two weeks later, reorders disappear. Sarah abandons retail and returns to her website demoralized. Sales online have dropped to almost nothing with new competition. She has not recouped her initial investment, and she still has 50 shirts in her garage.

Not good.

It all could have been prevented with proper testing and planning.

ED “MR. CREATINE” BYRD is no Sarah. He does not invest and hope for the best.

His San Francisco–based company, MRI, had the top-selling sports supplement in the U.S. from 2002–2005, NO2. It is still a top-seller despite dozens of imitators. He did it through smart testing, smart positioning, and brilliant distribution.

Prior to manufacturing, MRI first offered a low-priced book related to the product through ¼-page advertisements in men’s health magazines. Once the need had been confirmed with a mountain of book orders, NO2 was priced at an outrageous $79.95, positioned as the premium product on the market, and sold exclusively through GNC stores nationwide. No one else was permitted to sell it.

How can it make sense to turn away business? There are a few good reasons.

First, the more competing resellers there are, the faster your product goes extinct. This was one of Sarah’s mistakes.

It works like this: Reseller A sells the product for your recommended advertised price of $50, then reseller B sells it for $45 to compete with A, and then C sells it for $40 to compete with A and B. In no time at all, no one is making profit from selling your product and reorders disappear. Customers are now accustomed to the lower pricing and the process is irreversible. The product is dead and you need to create a new product. This is precisely the reason why so many companies need to create new product after new product month after month. It’s a headache.

I had one single supplement, BrainQUICKEN® (also sold as BodyQUICK®) for six years and maintained a consistent profit margin by limiting wholesale distribution, particularly online, to the top one or two largest resellers who could move serious quantities of product and who agreed to maintain a minimum advertised pricing.24 Otherwise, rogue discounters on eBay and mom-and-pop independents will drive you broke.

Second, if you offer someone exclusivity, which most manufacturers try to avoid, it can work in your favor. Since you are offering one company 100% of the distribution, it is possible to negotiate better profit margins (offering less of a discount off of retail price), better marketing support in-store, faster payment, and other preferential treatment.

It is critical that you decide how you will sell and distribute your product before you commit to a product in the first place. The more middlemen are involved, the higher your margins must be to maintain profitability for all the links in the chain.

Ed Byrd realized this and exemplifies how doing the opposite of what most do can reduce risk and increase profit. Choosing distribution before product is just one example.

Ed drives a Lamborghini down the California coast when not traveling or in the office with his small focused staff and his two Australian shepherds. This outcome is not accidental. His product-creation methods—and those of the New Rich in general—can be emulated.

Here’s how you do it in the fewest number of steps.

Step One: Pick an Affordably Reachable Niche Market

When I was younger … I [didn’t] want to be pigeonholed … Basically, now you want to be pigeonholed. It’s your niche.

—JOAN CHEN, actress; appeared in The Last Emperor and Twin Peaks

Creating demand is hard. Filling demand is much easier. Don’t create a product, then seek someone to sell it to. Find a market—define your customers—then find or develop a product for them.

I have been a student and an athlete, so I developed products for those markets, focusing on the male demographic whenever possible. The audiobook I created for college guidance counselors failed because I have never been a guidance counselor. I developed the subsequent speed-reading seminar after realizing that I had free access to students, and the business succeeded because—being a student myself—I understood their needs and spending habits. Be a member of your target market and don’t speculate what others need or will be willing to buy.

Start Small, Think Big

Some people are just into lavish dwarf entertainment.

–DANNY BLACK (42″), part-owner of Shortdwarf.com25

Danny Black rents dwarfs as entertainment for $149 per hour. How is that for a niche market?

It is said that if everyone is your customer, then no one is your customer. If you start off aiming to sell a product to dog- or car-lovers, stop. It’s expensive to advertise to such a broad market, and you are competing with too many products and too much free information. If you focus on how to train German shepherds or a restoration product for antique Fords, on the other hand, the market and competition shrink, making it less expensive to reach your customers and easier to charge premium pricing.

BrainQUICKEN was initially designed for students, but the market proved too scattered and difficult to reach. Based on positive feedback from student-athletes, I relaunched the product as BodyQUICK and tested advertising in magazines specific to martial artists and powerlifters. These are minuscule markets compared to the massive student market, but not small. Low media cost and lack of competition enabled me to dominate with the first “neural accelerator”26 in these niches. It is more profitable to be a big fish in a small pond than a small undefined fish in a big pond. How do you know if it’s big enough to meet your TMI? For a detailed real-life example of how I determined the market size of a recent product, see “Muse Math” on this book’s companion site.

Ask yourself the following questions to find profitable niches.

1. Which social, industry, and professional groups do you belong to, have you belonged to, or do you understand, whether dentists, engineers, rock climbers, recreational cyclists, car restoration aficionados, dancers, or other?

Look creatively at your resume, work experience, physical habits, and hobbies and compile a list of all the groups, past and present, that you can associate yourself with. Look at products and books you own, include online and offline subscriptions, and ask yourself, “What groups of people purchase the same?” Which magazines, websites, and newsletters do you read on a regular basis?

2. Which of the groups you identified have their own magazines?

Visit a large bookstore such as Barnes & Noble and browse the magazine rack for smaller specialty magazines to brainstorm additional niches. There are literally thousands of occupation- and interest/hobby-specific magazines to choose from. Use Writer’s Market to identify magazine options outside the bookstores. Narrow the groups from question 1 above to those that are reachable through one or two small magazines. It’s not important that these groups all have a lot of money (e.g., golfers)—only that they spend money (amateur athletes, bass fishermen, etc.) on products of some type. Call these magazines, speak to the advertising directors, and tell them that you are considering advertising; ask them to e-mail their current advertising rate card and include both readership numbers and magazine back-issue samples. Search the back issues for repeat advertisers who sell direct-to-consumer via 800 numbers or websites—the more repeat advertisers, and the more frequent their ads, the more profitable a magazine is for them … and will be for us.

Step Two: Brainstorm (Do Not Invest In) Products

Genius is only a superior power of seeing.

—JOHN RUSKIN, famed art and social critic

Pick the two markets that you are most familiar with that have their own magazines with full-page advertising that costs less than $5,000. There should be no fewer than 15,000 readers.

This is the fun part. Now we get to brainstorm or find products with these two markets in mind.

The goal is come up with well-formed product ideas and spend nothing; in Step 3, we will create advertising for them and test responses from real customers before investing in manufacturing. There are several criteria that ensure the end product will fit into an automated architecture.

The Main Benefit Should Be Encapsulated in One Sentence.

People can dislike you—and you often sell more by offending some—but they should never misunderstand you.

The main benefit of your product should be explainable in one sentence or phrase. How is it different and why should I buy it? ONE sentence or phrase, folks. Apple did an excellent job of this with the iPod. Instead of using the usual industry jargon with GB, bandwidth, and so forth, they simply said, “1,000 songs in your pocket.” Done deal. Keep it simple and do not move ahead with a product until you can do this without confusing people.