The 4-Hour Workweek, Expanded and Update - Timothy Ferriss [62]
It’s all beautifully transparent and cheap.
Before we create this virtual architecture, however, we need a product to sell. If you own a service business, this section will help you convert expertise into a downloadable or shippable good to escape the limits of a per-hour-based model. If starting from scratch, ignore service businesses for now, as constant customer contact makes absence difficult.21
To narrow the field further, our target product can’t take more than $500 to test, it has to lend itself to automation within four weeks, and—when up and running—it can’t require more than one day per week of management.
Can a business be used to change the world, like The Body Shop or Patagonia? Yes, but that isn’t our goal here.
Can a business be used to cash out through an IPO or sale? Yes, but that isn’t our goal either.
Our goal is simple: to create an automated vehicle for generating cash without consuming time. That’s it.22 I will call this vehicle a “muse” whenever possible to separate it from the ambiguous term “business,” which can refer to a lemonade stand or a Fortune 10 oil conglomerate—our objective is more limited and thus requires a more precise label.
So first things first: cash flow and time. With these two currencies, all other things are possible. Without them, nothing is possible.
Why to Begin with the End in Mind: A Cautionary Tale
Sarah is excited.
It has been two weeks since her line of humorous T-shirts for golfers went online, and she is averaging 5 T-shirt sales per day at $15 each. Her cost per unit is $5, so she is grossing $50 in profit (minus 3% in credit card fees) per 24 hours, as she passes shipping and handling on to customers. She should soon recoup the cost of her initial order of 300 shirts (including plate charges, setup, etc.)—but wants to earn more.
It’s a nice reversal of fortune, considering the fate of her first product. She had spent $12,000 to develop, patent, and manufacture a high-tech stroller for new moms (she has never been a new mom), only to find that no one was interested.
The T-shirts, in contrast, were actually selling, but sales were beginning to slow.
It appears she has reached her online sales ceiling, as well-funded and uneducated competitors are now spending too much for advertising and driving up costs. Then it strikes her—retail!
Sarah approaches the manager of her local golf shop, Bill, who immediately expresses interest in carrying the shirts. She’s thrilled.
Bill asks for the customary 40% minimum discount for wholesale pricing. This means her sell price is now $9 instead of $15 and her profit has dropped from $10 to $4. Sarah decides to give it a shot and does the same with three other stores in surrounding towns. The shirts begin to move off the shelves, but she soon realizes that her small profit is being eaten by extra hours she spends handling invoices and additional administration.
She decides to approach a distributor23 to alleviate this labor, a company that acts as a shipping warehouse and sells products from various manufacturers to golf stores nationwide. The distributor is interested and asks for its usual pricing—70% off of retail or $4.50—which would leave Sarah 50 cents in the hole on each unit. She declines.
To make matters worse, the four local stores have already started discounting her shirts to compete among one another and are killing their own profit margins. Two weeks later, reorders disappear. Sarah abandons retail and returns to her website demoralized. Sales online have dropped to almost nothing with new competition. She has not recouped her initial investment, and she still has 50 shirts in her garage.
Not good.
It all could have been prevented with proper testing and planning.
ED “MR. CREATINE”