Managing Profit Margins in an Online / Offline World

Written by Zac Johnson
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Today I received my latest copy of Inc. Magazine today, and on the cover it features one of my favorite companies. The spotlight was on Threadless.com, whom I purchase plenty of t-shirts from. The headline read “The Most Innovative Small Company in America: Don’t laugh. It makes T-Shirts. $30 million in sales, 30% profit margins“. Another amazing feature of the company is that Threadless.com generates $30 million in sales with no advertising, no professional designers, no sales force and no retail distribution.

Ever since I was very young, I always thought about profit margins and what type of numbers a company has to generate before they actually start showing a profit. I was also out at a family run Italian restaurant tonight, and as usual I thought, how much of a profit does this business actually make… and how far into the month do they have to conduct business before generating a profit and pay off their rent and staff. Imagine in the costs involved in running this type of business vs. an online venture.

It’s easy to make comparisons between the business of running a brick and mortar store vs. our methods of online marketing. Once you start generating some serious business online you start to think, how can anyone be successful in the retail / brick and mortar business. There is a reason why most businesses fail within the first few years, and that’s because of poor management and high operating costs. Taking the leap to make money online is much less risky (depending on your current situation and business plan) than trying to create your own offline business and having to maintain a staff and pay off a rent each month. This can easily be justified by setting up a low end pay per click campaign that pulls a 10-50% profit margin within the first month. It is very unlikely to see this type of performance with an offline business.

In an upcoming post, I will focus on many key points of why most businesses fail (online and offline). What type of offline and online business experiences have you had over the years? If you had $100,000 to start a business, would you focus your efforts in an online business, or offline?

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12 Replies to “Managing Profit Margins in an Online / Offline World”

  1. I’d say online. I’ve run businesses both online and offline and I prefer the online ones because they’re easier to run, easier and faster to expand, and you don’t have to deal with as many incompetent employees and associates. If you were to invest $100k right off the bat into an online business there’s a good chance it would take off extremely fast assuming you knew how to manage your funds and didn’t just blow all the money on useless advertising and such. Looking forward to those future posts.

  2. With $100,000 to start a business, I would definitely go the online option. Who needs all the hassle of paying rent and staff.

  3. Well, I think that in spite of launching an online business you'd need an office and computers if you have some employees. If you are alone and work at home you dont have those bills to pay.

  4. If I had 100k to start a business with you'd better believe that the majority of it would be spent setting up the online footprint… then again I do all that stuff myself so i'd be paying me… which is always a good thing :p

    Seriously – even a brick and mortar store can increase profits by selling affiliate products along with their own. I'd recommend someone pick a subject they know and are passionate about and then start taking names.

  5. I am going to say the internet (its a no brainer.) Simply because online business doesn't cost as much as it does to run a brick-and-mortar business. Not to mention that when your business is online, your accessible worldwide… try and do that with a brick-and-mortar business.

    Not to mention, if you run a small business out of your home, I'm not trying to toot any horns, but can you say "tax deductions" (minus the headache to prepare those taxes, unless your smart and get a accountant.)

  6. Online is of course interesting. But you should not underestimate the possibility of offline-business. The italian restaurant you mentioned has about 10% costs for flour, tomatoes and other stuff. They dont need many pizzas to pay the employees as well. And then their real business begins with very interesting margins.

  7. Hi Zac, I have a doubt about conversion rates and now we are talking about online business I think I could ask it.

    Which range of conversion rate do you think is an standar conversion rate range? I know there is lots of points we have to take into account (bids, earns by each conversion…) but I mean “standar range”.

    Low limit of 1% could not be affordable, and high limit of 10% could not be real in the long term.

    Cheers!

    PD: I started my first campaign yesterday 😀

    1. Conversion rates in general is just too broad of a question. Lead generation, sales, free memberships vs. paid memberships… all will have their own conversion areas. For general sales/products I would say 1-4% might be standard.

  8. With 100k I will start online business that can reach a worldwide audience 24/7/365 a year through the Internet.

  9. Definitely I choose online. Why should I bother my self with employee and building cost…

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