Insider Secrets To Internet Business Success

I talked about the importance of business systems in the last part. In fact, I pointed out that your system IS your business. In reality, a business is nothing more than a pile of step-by-step procedures that when followed by you and your partners, employees, contractors, and vendors results in profit.

It’s really magical if you think about it. Words become money.

I also pointed out that it is nearly impossible to have a stable business that remains the same size and continues forever doing exactly the same thing resulting in exactly the same amount of profit. Businesses either grow or they shrink. A shrinking business eventually becomes unprofitable and dies. So it is extremely important that you not only create a system that is profitable, but also ensure that it produces in business growth.

To do that, it is essential that your business system includes procedures to measure every important metric in your business and that new procedures are tested to see if they improve those metrics.

For example, let’s say we have a procedure that is intended to promote a web-site by putting flyers on the windshields of cars in the parking lot of a brick-and-mortar business that has similar customers.

Maybe your web-site sells solar-powered pet collars that light up at night to increase the visibility of pets. So, your procedure includes the steps for an employee to make copies of a flyer that tells about your product and includes your web-site address. The employee then puts them under windshield wipers of cars parked at nearby pet stores and veterinarians where you can be reasonably sure that they are received by pet owners.

You might be tempted not even to have a documented procedure. It’s very simple, right? Just tell your employee to go do it.

That could work just fine for a while. Maybe you even use a tracking URL so you can monitor the profitability of this activity.

But what happens when it suddenly stops working or becomes less profitable? Why did it stop working?

It must be the employee because the activity is so simple that you don’t even need a procedure. Right? So you hire another employee and get even worse results. Is the new employee even less effective than the old employee? What do you do?

Perhaps you watch the new employee to make sure he really puts the flyers on the windshields. But, say that even when you confirm the flyers are properly placed, the metrics don’t improve.

What happened? You notice that the current flyer is on white paper, but you think you started out with canary paper. But you aren’t sure.

You also think you remember that the flyer used to be folded in half and the new employee just put it under the wiper. You once noticed that the old employee sometimes put the flyer under the wiper and sometimes tucked it into the driver’s window.

Maybe some of these things matter. Maybe they don’t. Maybe it is the time of the year. Maybe it is the time of the day that the flyers are being distributed. Maybe these businesses mostly have repeat customers so there are few new flyer recipients.

There are lots of things that could be the culprit. It could even be a combination of factors.

Now you clearly see that you did need a procedure, one that includes all the details: what time of day, what color of paper, how to fold it, and where to put it exactly on each car. When that location was impossible to access (recessed wipers for instance), it needed to give alternative locations or instructions to go to the next car. It needs to say whether permission should be requested from the business owner first, etc.

Every detail may be important and you will never know until it is too late, unless you create a detailed procedure for even the simple tasks.

Once you do that, you don’t wait for a problem. That is what shrinking businesses do. Instead, you need to have another procedure that includes making changes to every aspect of the flyer distribution procedure.

Try folding in half. Try canary, white, and blue paper. Try driver’s side windshield wiper vs. passenger side windshield wiper. Try face up vs. face down. Measure the result. Improve the procedure every time you find a variable that improves the metric.

If you do that constantly, then you will probably never see the day that the procedure seems to stop working. Instead, you will see steady improvement over time. You will learn what works and what doesn’t work.

If that day does come, you will have a very long list of things that you know from prior testing are NOT the problem. That means that the list of possibilities is much shorter.

That is what a growing business does. A growing business is never happy to have an unchanging business system, even if it is profitable today. Every business system can be improved. A growing business is a constantly improving business.

What is an Internet business? Some look at a web site and call that an Internet business. But that isn’t correct. A web site is an asset of a business just like an office chair is an asset of a business that has an office.

Some look at the legal documentation and say, “That’s the business.” That seems true because that is what you turn over to the new owner when you sell an Internet business. For a corporation, the stock certificates and board meeting minutes are also assets of an Internet business. Ownership of stock certificates denotes a partial ownership of the business, but still isn’t the Internet business itself.

Is it the accounting books? The monthly income statement is an important measure of the value of an Internet business. But the accounting books are just records of what the business has achieved in the past. They, too, are not the business itself.

Is it the people? That may seem to be the case because the employees make everything happen. But, assume you are the head of an Internet business. If you sell it, you will disappear from the organization and yet it will still go on. The same is true of each employee, contractor, and vendor. They will come and go, and yet the business can have a continuing existence.

An Internet business (like any business) is the sum of its systems. It is the procedures that the owners, executives, employees, and contractors follow to make the business function.

If you have no procedures, you have no system and you have no business.

If you have procedures and a system for everything you do, then you have an Internet business. A business is really a collection of step-by-step procedures that are performed by employees and, contractors (and even computers) to perform tasks that earn income for the business.

An Internet business is a system. If you aren’t building, documenting, testing, and improving your business system, then you don’t have a fully fledged Internet business.

If you have a complete business system that can function even when employees, contractors, vendors, and even the owners (e.g., YOU) are changed, then you have a true Internet business.

That is why it is so important to build, document, test, and improve every procedure that forms your business. Those procedures ARE your business. Improving them is what it means to grow your business!

There is one salient difference between successful entrepreneurs and failures. Successful entrepreneurs stick with a proven plan until they succeed. Failures quit.

It really is as simple as that. If you set off on a trip from Los Angeles to New York, you will succeed if you:

1. Follow the map.

2. Don’t get distracted.

3. Stick with it until you get there.

It has been done millions of times. It works.

Achieving Internet business success takes precisely the same three things. You must “beg, borrow, or steal” a proven plan or create the equivalent. This is your map. If you follow it, you will get to your desired goal.

You must then avoid distractions. All entrepreneurs have ADD to some extent; it is a common trait shared by those who seek to start their own business. It’s something of a “road hazard.” As you start your drive, you will see signs for “The world’s largest ball of twine – take highway 20 south 5 miles” or “The best steak in Mississippi – take next exit.” Going to either of these distractions can pull you off your route and add time to reach your destination. You must learn to avoid them.

For success, you must “stick with it until you get there.” It takes several days to cross the country by car. It takes several months or even several years to build a successful Internet business. If you drive from Los Angeles to Las Vegas and then decide that “this won’t work” and you quit, you will have set a “self-fulfilling” trap for yourself. Yes, that won’t work.

What works is following the proven path until you achieve your goal. You must stick with it until you get there. As basketball superstar Michael Jordan phrased it, “I have missed more than 9,000 shots in my career. I have lost almost 300 games. …. I have failed over and over and over again in my life. And that’s precisely why I succeed.”

I have been watching Chef Gordon Ramsey’s “Kitchen Nightmares” program recently. Chef Ramsey owns a dozen world-class super-profitable restaurants worldwide. He knows how to run a restaurant business.

His show documents how he helps other people fix unprofitable restaurants. I am always amazed that I notice things that could be done better that Gordon Ramsey completely ignores. He sometimes completely ignores incompetent employees.

But there are several elements that he always focuses on. These are the elements that apparently matter for any successful restaurant. He focuses on:

1. Cleanliness and sanitary food handling and storage.

2. Freshness of food.

3. Taste of food.

4. Decor.

5. Speed of service.

6. Passion of owners.

Because he is a chef, you might assume that he would focus on the stature, reputation, education and expertise of the chef. He doesn’t. He has worked with completely untrained young people as “chefs” and turned the restaurant around.

I actually suspect that he only looks at the decor and the speed of service for the sake of the TV show. The show almost always redecorates the dining area as part of the retreading. That makes good TV, but from watching Chef Ramsey and his focus, it really appears that he doesn’t care that much about decor. You also seldom hear customers comment about the decor.

The same goes for speed of service. Although he simplifies menus to improve service time and harps on fixing systems in the kitchen to get food out faster, you really don’t see massive focus in that area either. And many episodes show that even the people who are unhappy about the speed of service completely change their mind and say, “This was worth the wait” when they get quality, fresh, tasty food.

The passion of the owners is really only important to Gordon Ramsey because it affects how clean they keep the kitchen, how willing they are to buy and prepare fresh food, and how committed they are to prepare high quality food that is tasty.

It always comes back to those first three items in a successful restaurant. Everything else is secondary. If you have a clean kitchen, buy local, fresh food, and prepare it well so that it tastes yummy, your restaurant will be successful.

People will put up with attitudes from service staff. People will accept high prices. People will even forget about the long wait when they taste something truly fresh and delicious. So where’s the focus?

To borrow a cliché, “It’s the food, stupid!”

What is the focus in an Internet business? You have to decide that for your own business model. But there are a lot of things that people focus on that simply don’t seem to matter:

1. Fancy graphics on their web site.

2. Twenty different payment methods.

3. Easy communication, so people can chat with customer service reps forever without every buying anything.

4. Easy refund processes.

5. Coupons and discounts.

All of those things can impact an Internet business, but they aren’t core areas. They don’t increase sales or earn customer loyalty in an impressive way.

With an Internet business, it is the product–just like it is the food with a restaurant. If the food is tasty, people come back. If the product purchased from an Internet business satisfies the buyer, they will come back.

So, what’s the focus for an Internet business?

“It’s the product, stupid!”

If you don’t forget that, your Internet businesses will thrive, just like Gordon Ramsay’s restaurants (and television career).

Profit is the goal of any business entity, but I am amazed at how few Internet business owners even understand what profit means.

I often offer consultation services for new or struggling Internet businesses.  One of the first questions I ask them is if they are profitable yet.

It is a simple question with a yes or no answer.  But I hardly ever get a yes or no answer.  The person I am working with simply doesn’t know what the word “profitable” actually means.  So they answer based on their vague definition of “profitable” which in their mind is a subjective concept.

Profitability is certainly not a subjective concept.  It has a very solid and widely accepted definition and I am not the only person who will ask you that question.  That means you must know the answer.

In addition, it is your goal to attain profitability and then to maximize the value you return to the shareholders of your business.  Your goal in creating the business was to improve your customers’ lives in some way, but the business keeps score on your ability to meet that goal using “profitability” as its only measure.

Let’s define profitability so you can confidently know if your Internet business is profitable.  You will also then know what factors are used in calculating profitability so you can adjust those factors to make your Internet business profitable faster.

Profitability is simply your revenue minus your expenses.  If your revenue is higher than your expenses, then you are profitable.  If your revenue is less than your expenses, then you are not profitable.  It is as simple as that.

Profitability has absolutely nothing to do with how much cash you have in the bank.  You can have a profitable business with zero cash in the bank and you can have 10 million dollars in the bank and not have a profitable business.

Profit has nothing to do with what you owe to creditors.  Your business can be 100% debt free and have 10 million dollars of cash assets in the bank and still not be profitable.  It can also owe 100 million dollars to creditors with no assets to cover those debts and still be a profitable business.

Profit has nothing to do with assets or liabilities at all.

It also has very little to do with cash flow.  You can sell 10 million dollars worth of products every single day and not be profitable.  You can sell one product a year for $10 and be profitable.  While it is impossible to be profitable without some cash flow, amount of cash flow has absolutely nothing to do with whether you are profitable or not.

Assets, cash-on-hand, liabilities, net worth, cash flow and revenue are all important metrics in a business, but every single one of those metrics can be changed at will if you are profitable.

If you are having cash flow problems because you need to spend $10 million to fulfill a new large order that you won’t be able to bill until six months in the future, then you can get a bridge loan if you are profitable.  If you aren’t, then a lending institution is going to wonder if you are going to spend $10 million to earn $7 million like you have in the past due to your record of not being profitable.

If your business has more debt than assets, then you can fix that if you are profitable.  Over time, you can pay down those debts.

Profitability is everything.  And it is very simple to calculate.  You simply subtract your expenses during any particular period of time from your revenue.

A loan is not revenue.  Receiving payment from a customer for a product order is revenue.

Expenses in an Internet business can be trivial.  Beyond domain registration, hosting and payroll, many Internet businesses have no expenses.

Do the calculation.  You will need to do it anyway to make the tax man happy.  Find out if you are profitable or not without all of the distractions of the cash flow, asset and liability numbers.

If you have an accountant, simply ask for last month’s Income Statement.  If the number at the bottom of that report is positive, then you are profitable.  If it is negative, then you are not profitable.

By the way, the term “the bottom line” comes from that very exercise.  The bottom line of your Income Statement (also sometimes called Profit/Loss Statement) is your profitability.  It is on the bottom line of the report.  And it is the bottom line in any Internet business or any other business for that matter.

As part of your financing song-and-dance presentation, you had to present some market testing data. Every investor wants to know that there is a market for the product you propose before they invest.

A market is simply a group of people. It might be a group defined by gender, age, interest in a particular subject, or residence in a specific city.

Market testing is simply the process of finding out what the market wants and needs and how your product or service meets those wants or needs.

The first thing that pops into one’s mind when we think of market testing is probably focus groups or surveys. They imagine hitting the mall and randomly asking a group of people to try something and then tell them what they think.

While these methods can be useful when performed by an expert, they run a high risk of gathering data about what people want the surveyor to think about them rather than what they actually think about the product. There are advanced techniques to organize surveys and focus groups to avoid these problems, but it is important to hire a professional firm if you go this route.

A better route for Internet businesses is to test online. Are you trying to decide on whether your product should be red or blue? Put up a web-page with a picture of your red product and your blue product and make your visitor click the picture or caption under the picture to proceed to the next page. Be sure to have software that switches their left and right or top and bottom locations so that isn’t actually being measured instead. Then send some PPC traffic to the page as though the product already existed. You can review your logs to see how many preferred the red over the blue.

Try to never ask “what if” questions in surveys. Instead, ask “which” questions in an environment that feels like the prospect is actually on his way to ordering the product. That will always give you the best results.

Sometimes you will need to estimate the total size of your market. The demographics of Internet users in English-speaking countries is now just about the same as the demographics of the overall population. That means you can generally use industry market data from non-Internet sources and apply it to the Internet.

There is a great deal of resistance to change in some areas though. Several companies have attempted to start Internet grocery stores. That hasn’t worked very well. The idea seems very solid and everyone is part of the “grocery buying” market, but people are more comfortable hopping in the car and driving to the grocery store than they are in ordering on the Internet and having it delivered.

However, when you call it something else, it becomes very successful. Schwans has run a home delivery service for premium ice cream and an ever expanding line of gourmet food items since long before the Internet. Their Internet site is converting a whopping 50% of visitors into orders. Amazon also added a gourmet food line and has done very well. Their grocery section has suffered though. Simply the word “gourmet” vs. “grocery” makes all the difference even when we are talking about a block of cheese or some frozen pizza mini-bite snacks.

Your investors need to know that YOU know your market. So, by all means, get to know it by market testing. Don’t just ask your prospects what they want. Try to sell it to them and see what they actually buy (even if your site ends with a page saying “this product not yet available” right when you get to the checkout process).

A business is a group of people. Before you start doing business, you must select your team.

A lot of the criteria for selecting your team will be based on your business model and your own strengths if you intend on being a member of the team yourself.

Your available capital (initial funding) will also affect your decisions for your initial team composition.

Most successful Internet businesses obtain financing. This is because ideas can’t be protected by copyright or patent. That means the only real way to protect your idea is to corner the market by being first and growing extremely quickly.

So one very important person to add to your team first is an expert in obtaining investment capital. This person will have experience in writing marketing plans and business plans. They will have contacts in the financing industry. They will have worked for several companies and successfully obtained at least one round of financing for every company in their past.

Be sure that at least some of their experience is in obtaining first round financing. Some experts specialize in launching new companies. Others specialize more in finding new financing for companies that have already exhausted funding from all of the angel investor sources.

This expert will help you identify if you are the right person for the next most important team member to hire or if you also need to hire your “genius.”

I use the word “genius” because a lot of angel investors use that term. Almost all angel investors look for two personalities to exist in any successful Internet business. The first is someone who knows business acumen. Usually, they will accept your funding expert as that person since he obviously knows enough business acumen to put together the business plan and get it in front of angel investors.

The other personality they look for is someone who has a “vision” and will be the driving force of the business. The realization of this “vision” is what they are investing in. This person is probably you, but you will decide that together with your funding expert. If it isn’t you and your “vision” is fuzzy or you aren’t personally capable of accomplishing your vision, then a “genius” is required. This is someone who can get behind your vision and can technically make it happen. It is often a programmer.

Many Internet businesses skip these steps because they think they can’t afford them. That is not a good reason to skip them. These steps are the steps that are required for you to be able to raise the capital you need to start your Internet business.

Both of these initial team members will cost you absolutely nothing. When you formed your corporation properly as we covered in a previous part, you created the method of paying these two team members. You will be paying them in shares of stock in your new business.

Typically, an angel investment expert will want an initial 10% share of your business if they really think it is a great idea and believe in your ability to execute it. That number can go up to 50% if they believe you will need to add a “genius” to your team.

The funding will also be paid for with shares or options to buy shares in your company. If you need to add a “genius” to your team, then you will generally need to pay them a combination of a salary and stock options or actual shares. So you hire them contingent on obtaining financing and simply use their name as your “genius” when you pitch angel investors.

If you look at the top 100 Internet businesses on the Internet, you see only 1% or 2% who skipped funding. Microsoft is the most notable. Bill Gates had adequate funding from his family and from an early partner. In nearly every other case, this is the route to a successful Internet business.

Don’t skip it!

I just finished watching a video of another TED Talk. In the video, behavioral economist Dan Ariely shows some very interesting research experiments.

The video may leave you wondering if you’re actually in control of your own decisions. A few of the experiments mentioned could even relate to email opt-ins on websites. You might just get a few ideas from this video…

By this time, you have already decided how you can help others doing something you enjoy. You have also figured out the best business model to use to provide your product or service to the customer.

Now it is time to actually create the business. This is a critical step to understand and 98% of new businesses get it completely wrong.

They don’t find out until it is very late in the game and a tax attorney, CPA, business development attorney, accountant or other professional points out their mistake and tells them how much it has cost them.

So the answer is to go to those professionals right now; right? I have to recommend that to protect my own legal rear end. But now that I have recommended that you see your tax professional, accountant or business attorney because that is what I’m supposed to do… I need to tell you that I have always found them completely worthless at the very start.

This is something that I have always had to handle. It is very easy if you understand the basics, so let me explain those basics to you.

What is a business? Under the law it is a person. If you don’t know what I am about to tell you, you will likely end up structuring your business as an alter-ego of yourself. In other words, YOU are your business. This is usually the very worst of the possible options especially if you are a resident of the United States.

In the United States, businesses are sued on average of once every four years. If your business is profitable and has any recorded assets or if your business is simply an alter-ego of yourself and you personally have assets (such as a home or car), you can expect to be sued more often than once every four years. The suits will generally have no merit, but will cost so much to defend that you will end up settling. You will lose your personal assets in this process.

You can also be personally charged with a crime and go to jail for something you couldn’t even imagine was against the law. For instance, it is against the law to refuse to sell to Israel. International shipping costs are prohibitive and customs forms are a real hassle so many businesses refuse to ship international orders at all. It is a smart business decision. However, it is against the law and the penalty carries jail time for individuals who refuse to ship to Israel. If you properly structure your business though and the business commits an obscure crime such as this one, the penalty is generally a fine for the business since a business can’t be jailed unless that business is just an alter-ego of an individual natural person.

So how can we properly structure our business to keep from losing our personal assets in a law suit or going to jail for committing a crime that we had no idea even existed?

Every state in the United States and every country in the world allows for the creation of a business entity that is a separate person under the law. In most states, these legal persons are called “corporations” or “limited liability companies.” In some countries they are called “anonymous societies.” In any case, they become a legal person in the eyes of the courts of the world. You don’t need to create this new legal person in your own state. In fact, that is generally not recommended for an Internet business with no local employees.

Instead, you get to choose which government’s rules are most advantageous for you. You get to pick the tax rate for your company. You get to choose the enter set of laws that will govern your company. That’s pretty cool; right?

Fortunately you don’t have to investigate the laws of every country on earth to make your decision. Others have already done that for you. Most states and countries just don’t have a very attractive set of laws for doing business. So people don’t even consider them.

For instance, in the United States, there are really only three states worth considering. Those states are Nevada, Wyoming and Delaware. Delaware has an excellent set of laws for companies who are traded on the stock exchanges. Most of those companies switched from a different jurisdiction to Delaware right before they went public though so you really don’t even need to think about Delaware for now. Just know that if you ever want to sell stock in your company on the three major exchanges in the United States that you will probably be moving your company’s legal registration to Delaware.

So that leaves Nevada and Wyoming. You can ask any CPA about the relative advantages of each one. Nevada has absolutely no income tax. They make their income from the gambling industry. They also have a very easy to comply with set of very clear laws for corporations. Wyoming has been competing in an attempt to be even more attractive than Nevada. Once you ask your CPA to help you choose between those two states for your corporation or LLC, they will be more equipped to help you. An open ended question about “how should I structure my company” will usually be met with an endless set of questions that you don’t know the answer to yet.

But you don’t even need to register your business in the United States if you are a U.S. resident. In fact, it is usually better not to do that. The United States has some of the most draconian laws that apply to it’s own citizens and residents that simply don’t apply to foreign corporations. The same goes for Europe. If you are an EU citizen or resident, you will often find that the best place to register your corporation will be outside of the EU. Often, Nevada actually ends up being the best choice for an EU resident whereas a U.S. resident should generally avoid registering their Internet based business in the United States for various reasons.

So where would a U.S. resident look? There are 195 some odd countries in the world. How do you find out which countries have the best laws for your Internet business? The Internet is the answer.

Other people have already gone down this track. They have already figured out that 170 of those 195 countries have no interest in being good places to start a corporation. The way you find the other countries is to search the Internet. Just type “incorporate” or “incorporate offshore” into Google and you’ll find dozens of companies who specialize in setting up your Internet business in the right country. They will each list several countries, but you will notice that it is the same 25 countries listed over an over. You will also notice that the advantages for about 20 of those countries are almost exactly the same. Only the cost is different.

The companies who specialize in helping you incorporate in the right jurisdiction will have a paragraph or two describing the advantages of each of the countries where they register companies. Read those paragraphs and narrow it down. Then talk to your CPA and make a decision.

You won’t regret taking this step. The alternative is potentially losing your house and car in a bogus law suit, losing your entire company or spending time in jail. Or more commonly, your tax accountant tells you the great news that you have to write a $60,000 check to the IRS and casually mentions that if you had structured your company correctly from the beginning that you would be paying much less in taxes. In any case, don’t wait until something bad happens before you structure your business correctly. The time to do that is now.

Jack Keifer says Xingla Pro 4 will be released in early June. If you’re looking for software to help get links back to your blogs, I’d be sure to stay tuned to Jack’s blog. I’ve been using Xingla Pro for a while and it has done wonders.

Here is the link to Jack’s post:

http://www.jackkeifer.com/a-look-ahead/