Published on September 27th, 2011 | by0
4 Steps To Building Your Million $ Biz
Noah Kagan built two multi-million dollar online businesses before turning 28. He also looks great in orange. (Photo: Laughing Squid)
Q101.com HIGHLY endorses the work and beliefs of Tim Ferriss. What? WHAT?!! You don’t know who he is?! Well, he is the author behind a must-have book if you want to break free from “Cubical Land”, The 4 Hour Workweek, as well as some other very intriguing and even trans-formative books. He’s also the entrepreneurial mind behind many, many businesses. You should read his stuff, even if you like Cubical Land…you will learn tips and strategies to rock it there, and in your personal life too, even if being the boss (we prefer “owner”, naturally!) doesn’t appeal to you. With any luck, he’ll be a Q101.com Blogga someday! His insights are ridiculous!
Read on from Tim’s blog here mon frere:
I first met Noah Kagan over rain and strong espressos at Red Rock Coffee in Mountain View, CA. It was 2007. We were both in hoodies, had a shared penchant for the F-bomb and burritos, all of which led to a caffeine-infused mindmeld.
It would be the first of many.
The matchmaker then introducing us was the prophetic and profane Dave McClure, General Partner of 500 Start-ups, which is now headquartered just down the street from Red Rock.
Mr. Noah has quite the start-up resume.
He was employee #30 at Facebook, #4 at Mint, had previously worked for Intel (where he frequently took naps under his desk), and had turned down a six-figure offer from Yahoo. Since we first met, Noah’s helped create Gambit, an online gaming payment platform and a multi-million dollar business; and AppSumo, loved by entrepreneurs and moms everywhere. He also helped pour fire on both the 4-Hour Workweek and 4-Hour Body launches.
The purpose of this post is simple: to teach you how to get a $1,000,000 business idea off the ground in one weekend, full of specific tools and tricks that Noah has used himself.
He will be your guide…
For some reason, people love to make excuses about why they haven’t created their dream business or even gotten started. This is the “wantrepreneur” epidemic, where people prevent themselves from ever actually doing the side-project they always talk about over beers. The truth of the matter is that you don’t have to spend a lot of time building the foundation for a successful business. In most cases, it shouldn’t take you more than a couple days.
We made the original product for Gambit in a weekend. “WTF?!” Yes, a weekend. In just 48 hours, some friends and I created a simple product that grew to a $1,000,000+ business within a year.
Same deal for AppSumo. We were able to build the core product in one weekend, using an outsourced team in Pakistan, for a grand total of $60.
Don’t get me wrong–I’m not opposed to you trying to build a world-changing product that requires months of fine-tuning. All I’m going to suggest is that you start with a much simpler essence of your product over the course of a weekend, rather than wasting time building something for weeks… only to discover no one wants it.
I know what you’re thinking: “Yes, Noah, you are SO amazing (and handsome), but what can I do this weekend to start my own success story?”
Here are the steps you can take right now to get started on your million dollar company:
Step 1: Find your (profitable) idea.
At this stage, you are simply looking for something that people are willing to spend money on. So grab a seat and write down a list of ideas that you think might be profitable. If you’re having trouble coming up with ideas, try using the methods below to speed the research process along:
Review top sellers on Amazon. Find products that already have guaranteed customers, then build something complementary. A good example of this is Dodo making a gorgeous $60 case to buy for your iPad (which costs over $500, and over 5 million sold).
Think of all the things you do on a daily basis. Anything done more than once has potential for a product or service to improve the process. For me, one of those products was a mirror I could hang in the shower. It saves me tons of time while shaving, and now I don’t know how I ever lived without it.
Be cognizant of products you use and frequently complain about. Before Gambit, we were constantly asking our payment tool partners for certain features, yet our requests were always rejected. That was the impetus for us to create Gambit for our own games.
Check completed listings on eBay. This allows you to see how well certain products are selling. It’s also an easy way to measure sale prices of items and gauge the overall percentage of the market that’s receiving bids (i.e. in demand).
Look for frequent requests on Craigslist gigs. These listings are from people actively searching for someone to give their money to in exchange for particular services. Try searching for certain keywords (e.g. marketing, computers, health) and keep track of the total number of results displayed. Evaluate the most popular keywords and see if you can create a product or service around those requests.
Browse the Q&A on LinkedIn. On average, LinkedIn users are worth $134, so there is a good chance they’ll have money for you if you can provide solutions to their problems.
Step 2: Find $1,000,000 worth of customers.
Now that you’ve found an idea, it’s time to assess whether there’s a big enough pool of prospective buyers. In this step, you’ll also want to ensure your market isn’t shrinking, and that it fares well compared to similar markets.
For example, let’s say you decide to build information products for owners of Chihuahuas (remember “Yo quiero Taco Bell”?). Here’s how I would check to see if there are enough customers:
1. Search Google Trends for the term “chihuahua” and other similar words (e.g. poodle, dogs) for comparison:
We can see that the word “chihuahua” has a decent search volume (relative to “dogs”), and that “poodle” isn’t as popular. It also looks like the number of searches for “chihuahua” has been relatively stable for the last few years.
2. Double-check on Google insights:
Google Insights is great, because it breaks down the search data by location (i.e. what regions the searches are coming from), by date, and what they’re searching for (news, images, products). Click here to see the full report for the above chart.
3. Look at the total number of people available on Facebook for dogs:
3.1 million. Not bad, not bad.
And for Chihuahuas:
84,260 people. Score.
You can also see if there is a large property that you can piggyback on.
Paypal did this with eBay, AirBnb is doing it with Craigslist home listings, and AppSumo looks to the 100 million LinkedIn users. If you can find a comparable site with a large number of potential customers, you’ll be in good shape.
What helped me with finding $1,000,000 worth of customers for AppSumo was studying my successful competitors; specifically, Macheist. Their site did a Mac-only deal that generated more than $800,000. Macheist shares their sales revenue publicly, but you can use your own business acumen on the CrunchBase list to see which business you want to replicate. For instance, you might research Airbnb.com, discover that they have a profitable and growing marketplace, then decide to create a similar service for alternative verticals.
I like to create a Google Spreadsheet of the key numbers for my competitors’ businesses. Below is an example of what that might look like for Macheist in their Mac bundles. [Warning to the haters: This may not be accurate, but I used these numbers just to get a rough idea of the business’ potential.]
Step 3: Assess your customer’s value.
Once you’ve found your idea and a big pool of potential customers, you’ll need to calculate the value of those customers. For our example above, we’ll need to estimate how much a Chihuahua owner (i.e. our customer) is worth to us. This will help us determine the likelihood of them actually buying our product, and will also help with pricing. Here’s how we do that:
1. Find out how much it costs, on average, to buy a Chihuahua (about $650). This is the base cost.
2. See how much it costs to maintain a Chihuahua each year (i.e. recurring costs). Looks like it’s between $500-3,000. For this example, we’ll call it $1,000.
3. Look up their life expectancy, which is roughly 15 years. This is the number of times they’ll have to pay those recurring costs.
Therefore, a Chihuahua’s average total cost of ownership is:
[$650 + ($1,000*15)] = $15,650
Damn… you could buy a lot of burritos with that kind of cash. Silly dog owners.
In any case, these owners are already committing to spend a LOT of money on their dogs (i.e. they are valuable). After putting down $650 on the dog itself and an average of $80/month on maintenance (a.k.a. food), spending $50 on an information product that could help them train their Chihuahua–or save money, or create a better relationship between them, etc.–does not seem unreasonable. Of course, the product doesn’t have to cost $50, but we now have some perspective for later deciding on a price.
Now we need to utilize the TAM formula (a.k.a. Total Available Market formula), which will help us see our product’s potential to generate a million dollars.
Here’s the TAM formula for estimating your idea’s potential:
(Number of available customers) x (Value of each customer) = TAM
If TAM > $1,000,000, then you can start your business.
Let’s plug in some basic numbers to see the TAM for our Chihuahua information product:
(84,260 available customers) x ($50 information product) = $4,213,000
We have a winner!
Okay, obviously you are not going to reach 100% market penetration, but consider the following…
1. This is only through Facebook traffic.
2. This does not include the 5,000,000 monthly searches for “Chihuahua” on Google:
3. This is only for one breed of dog. If you find success with Chihuahuas, you can easily repeat the process many times with other dog breeds.
4. This is only for one product. It’s far easier to sell to an existing customer than it is to acquire new ones, so once we’ve built up a decent customer base, we can make even more products to sell to them.
By all measures, it appears that we have a million dollar idea on our hands. Now we can move on to the final step!