On Scaling And ROI
If you’re reading this then you’re probably involved in online business. One thing that gets online business people excited and leads them astray in equal measure is the idea of scaling.
I saw a guy on Twitter responding to James Holt about dropshipping. James runs a course on dropshipping, and recommends you have $500 to start with should you want to test dropshipping out as a business model.
This is good advice and when people have asked me about dropshipping, I’ve recommended something similar. For most dropshipping models, you are going to be relying on page traffic, and you are also going to need to buy the products as well. This can mean you are buying before you get money cleared, and so you need the money up front.
So $500 is a healthy minimum. But numerous times, people really come to me, or they have gone to people like James, and said, “what if I have $2000 or $5000 to spend?”
And the Internet marketing dogma would have you believe that if you have more to spend, you can scale faster and make more money.
This isn’t quite accurate, and in this article I’ll explain why.
Scaling ISN’T Turning On A Tap
The online marketing courses will tell you that scaling things is like a tap that you switch on and off. In principle, this is true. In practice, it isn’t.
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Here’s the thing; if you don’t know what you are doing, you can lose a lot of money very quickly with nothing to show for it.
And if you have some edge, skill or insider information, you can take not a lot of money and make huge return on it.
When James recommends starting with $500 budget for dropshipping, he isn’t saying that because $500 is a magical number that will guarantee your profit or return on investment.
He is saying that because you have to be willing to lose $500 in order to train yourself so that you can make a profit in the future.
The $500 is an apprenticeship fee in essence.
Now tell me; if you spend four times as much on a degree, does that mean you will get four times as much income from it in the future?
And the answer is probably not.
By the time you have spent $500 in ad spend, you should know what you are doing. Assume that you test 20 products with that $500. You will spend $25 testing each product for viability.
Let’s say you determine that two products are winners and eighteen are duds.
You can work this out whether you spend $25 or $100. You will know within $25 whether the product is going to sell or not. There’s no need to spend more.
The same is true for your own skills. If you write an ad and that hasn’t sold with 200 visitors, then you don’t need to test 1000 visitors because something is wrong. The extra money serves no purpose until you have a winner.
Scaling Isn’t Exponential Forever
So the first part of the two-part misconception is that the more money you throw at something, the greater the chance of success.
The second part is that you can scale forever. There are some unscrupulous gurus who will say, “if you can make one dollar online, then you can just do that 100 times and make $100 online.”
It isn’t that simple (unfortunately.)
Scaling is a tricky business, even if you are just talking about paid advertising.
Let’s say you have a product that you can sell to a market of 10,000 people. When you start advertising, you might have a reach of 1000 people. Obviously you can scale this. So you scale it to 10,000 people.
But eventually you hit that ceiling of 10,000 people. You cannot throw more money at advertising to those people, because they’re probably already your customer and you should instead work on getting recurring revenue and building the lifetime value of the customer.
As Always, Your Skills Matter
I wrote once about buying and selling websites. I saw a guy once who had spent thousands on a niche website. He didn’t want to do the hard work of building a niche website, waiting for the SEO, and finding all of the products and affiliate programs, so he just bought a website that was earning a couple of hundred dollars a month.
Inevitably, the website made less money over time. He said that obviously website auction sites are scamming and you only get bad deals from them.
This isn’t true, and it relates to scaling in that this guy thought he could buy an already working website. But the issue was that he didn’t have the skills to back it up, and so he bought into something that was more complex than he could deal with and less money as a result.
With the scaling thing, people think that they can buy business success out right. People think that they can just hire a VA or throw more money into ads.
If you don’t know how to run your own business, then there is no way you can get VA to do it because you can’t train them. You are wasting your money. Learn the skills first.
If you are writing ads and sales letters which convert at a measly 0.2%, then the last thing you want to do is throw more money at what is a terrible funnel. Learn the skills first and then improve before scaling.
You can scale an online business. At some point you should. Otherwise you end up working 14 hour days and stressed to no end.
But is important to have the base infrastructure designed and set up before you try to do so. Scaling should be a process where you have already got a profitable system in place first, and it must be done slowly and with trepidation.
It is better to raise your advertising budget by five dollars a day until your return on investment maxes out, then it is to throw $100 a day from the outset.
It is better to learn some copywriting and sales skills and then try your hand at buying traffic than to spend your way out of a lack of profit.
And it is better to get your business so successful that it is too time-consuming to run and then hire a VA than it is to hire a VA and have them not have any work to do.