Measuring Profitability in Web Based Business
Is your web based business profitable? Profitability is measured using sound business metrics. Business metrics are measures of how profitable your web business is compared with others that offer the same product or service. Essential business metrics include marketability (also known as viability), competitiveness, and break-even point. Each of these will be examined with respect to two typical web based businesses.
Web Business Case Studies
Amy and Andy started their businesses around the same time. Several months later, Amy is running a very profitable web business. Meanwhile Andy has decided the whole venture was a mistake and he is returning to the conventional workforce. The difference between the two businesses is the essential metrics covered in this article.
Marketability and a Profitable Web Business
A potentially profitable online business should ideally sell something that you, the owner, are enthusiastic about. Yet, enthusiasm and passion are not enough to make an online business profitable. In order to have a sustainable online business, you need to sell something that people want to buy.
Andy loves collecting old-fashioned post cards, which is also what he sells. Amy, by contrast, sells baby products, something she also enjoys, especially since she is herself a work-at-home mother. Which of these do you think is the item with a larger market? If you guessed baby clothes, you’re right. This is a primary reason why Amy has a profitable web business and Andy does not. If Andy had done research into the marketability of old-fashioned post cards, he would have discovered that the market is extremely limited. This in turn decreased his chances for a profitable web business.
Competitiveness and a Profitable Web business
Before starting her now-profitable web business, Amy took a look at another business metric, competitiveness. This is a measure of how many other people sell the same product or service. If marketability measures whether there is a demand for an item, competitiveness measures whether there is a sufficient supply in the marketplace to meet that demand. Amy discovered that baby product sales is a highly competitive market. To make her web business profitable, she cultivated a sales niche. That is, she sells custom-made baby clothing.
In Andy’s case, competitiveness is beside the point. He has no competition because few other people made the mistake of selling a product for which almost no market exists. Again, his chances of running a profitable web business were diminished.
Break-Even Point in a Profitable Web business
A profitable web business is one that sets pricing based on the break-even point for its market. The break-even point is the point where sales or revenues equal expenses. Your web business realizes no profits or takes losses at the break-even point.
A break-even point is perhaps the most vital business metric in a competitive market like Amy’s. For Amy to maintain profitability in her online business, she knows she needs to undersell larger companies that make baby products. At the same time, she wouldn’t have a profitable web business if she reached the break-even point. Therefore, she needs to adjust her prices in a way that will generate profit while keeping closer to her costs than a larger retailer.
As for Andy, ignoring the break-even point was another factor that prevented him from having a profitable web business. His initial price was so high that the few people that might have been interested in buying old-fashioned post cards from his web business denied him profits by shopping elsewhere. He then lowered his price so drastically that he earned pennies on each sale he made.
To run a profitable web business follow Amy’s, not Andy’s, lead. When you start a web based business, use standard business metrics and watch the indicators as your business income and profits grow.