From $4.95 to 7-Figures: The Math of Online Business
The first product I sold from my site was a $4.95 ebook called Ramit’s 2007 Guide to Kicking Ass. It’s pretty embarrassing to look at now, but from those modest beginnings I’ve grown IWT into a multi-million dollar business. It’s not magic. It’s math. Now, I’m going to pull back the curtain on how websites make money, using my own and other students’ websites as examples to study so that your own website can earn money too.
How a website earns money online
Here’s a question from one of my students named Raffia.
“I’m wondering whether most revenue for a service or blog type website is generated from ads. Is it the CTR (that’s click through rate) that generates a high revenue, and can this alone sustain a business? This hardly seems like enough to me.”
What she’s really asking is: “What are the different ways you can earn money online?”
Over the past 11 years, I’ve tested many of these business models on my site and found what works best for websites to earn money online. Today, I’m going to walk you through these different options and tell you what happened when I tried using them on my site.
How do websites make money #1 – Ads
The first and most common business model is ads. Almost all of us have seen these. They’re little advertisements — typically using Google AdSense — on the sidebars of a website.
Here’s how they work: as you get traffic, some people will click those ads. When they do, you get a few cents, or even a few dollars per click.
I tried this for IWillTeachYouToBeRich.com. But I quickly realized ads don’t make that much money. In fact, what I came to find out was that you need a huge amount of visitors, like 50 million visitors — or more — per monthin order for your website to earn good money from ads. That’s a lot of traffic.
Back when I started in 2004, my basic idea was “If I can’t cover my rent with ads, why bother?” They’re ugly and distracting. Plus, I’ll end up spending more time optimizing the CTR on the ads than actually writing great content. So after trying that experiment for a little while, I checked the box and said I’m not interested in a business model like this.
How do websites make money #2 – Sponsorships
The next business model I want to talk about is sponsorships.
If you’ve been on email lists for companies like Thrillist, you’re probably familiar with sponsorships.
Companies reach out to other people with an email list, and they ask to sponsor an email or buy a dedicated ad.
All that means is that they get a chance to promote their products or services to someone else’s email list.
A friend and I experimented with this in the past. We put together an ad packet and asked potential sponsors if they’d like to send a sponsored email to our list. In our ad packet, we included things like our audience size, the demographics, and what kind of things our readership was interested in.
Frankly, this really didn’t work at all. We wasted a lot of time reaching out to people without seeing a lot of results. And even if we got a sponsorship for $1,000, $2,000, $5,000, we looked at how much work we were putting in and realized it wasn’t scalable.
With that said, I have a lot of friends who have businesses that run on sponsorships. They regularly get $10,000 and $25,000 sponsorships.
The reason that they’re able to do this though is that they have a sales team. And they’ve gone a step further by building relationships with marketing buyers in the industry.
When you’re first starting out, you’re probably not going to have those resources. So if I had to say one thing to you about sponsorships, I would say it probably doesn’t make sense early on in your business.
How do websites make money #3 – Sell Physical Products
The next business model that a lot of people ask about is selling physical products.
I’m going to be honest with you. I don’t have a lot of experience doing this. I’m wary of this business model because the profit margins are necessarily low.
Just to give you an example, we have a notepad that our designers created internally for I Will Teach staff. We would have had to price it at around $50 — for a teeny little notepad — just to break even if we wanted to sell it. And after we shipped it to people, our profit margin would have disappeared.
Now, I’m not the definitive expert on shipping physical products, and I do know that there is some money to be made in this space.
But for me, I prefer the profit margins offered by online products.
With online products the profit margin is higher, and it’s much easier to scale. Physical products just introduce so many variables and costs that I’m not interested in them.
How do websites make money #4 – Affiliates
Another way a lot of businesses make money online is through affiliates. If you have ever seen an affiliate ad, you will know it.
In the personal finance space, you’ll see this with credit cards. For example, a blogger will write a review of “My favorite credit cards.” At the bottom of their review, they’ll say “you can sign up for the card here — NOTE: this is an affiliate link.”
If you click that link and sign up, the credit card company is going to pay that blogger an affiliate commission. Sometimes it’ll be $50 or $75.
Over time, that can actually add up to a lot of money. And there are affiliate programs for everything — from audio books to weight loss products.
Do you know who the biggest affiliate in the world is? It’s called Amazon.com. A lot of the time, if somebody links to Amazon, they’ll actually have an affiliate code in those links.
If you click that link and buy the product, Amazon will pay the writer roughly 5% or 6% commissions.
My experience with affiliates was pretty interesting. I decided not to do affiliate links for a long time because I didn’t want people to think I was recommending stuff just to make money. I only wanted to recommend the best products.
But eventually I realized that my readers trusted me, they were already going to sign up for the accounts I was recommending anyways. So I decided to try putting an affiliate link in with one of my recommendations.
My first attempt at this was a review on my favorite bank account. I showed people screenshots on how I set it up, and I added a couple of affiliate links in there.
When I did — virtually overnight — I became ING Direct’s number one affiliate in the world. I was making more than $10,000 a month — just by putting a link in there.
That was pretty great for a while. But over time, I became uninterested in this type of business.
After a while of posting these affiliate links, the click through rates sort of tail off.
And you’ll find yourself having to deal with advertisers a lot. The returns on my time just weren’t adding up.
I’d rather just make a recommendation without going through all the hassle of getting affiliates involved.
Lots of websites make money online through affiliates. They can do it in a variety of ways. One, they can write content and add links, like I did. Other times, they can set up landing pages, capture traffic and divert it. It can get very complex.
One other really important thing to keep in mind is that affiliates can change their rules on the fly. They can change their commissions whenever they want. If they do that quickly, it can be tough for you to make adjustments.
How do websites make money #5 – Selling online information products
Now, my favorite way a website can make money: selling something you create. Typically these are information products, like a video course.
The video courses that we create for I Will Teach You To Be Rich and several other properties we have take a long time to produce. We spend tons of time researching them, outlining them, testing them, recording them, and designing them. But once we’re ready, we can release them to the world. And when we do, we keep all of the profits.
If somebody buys something from us, we don’t have to pay 30% to Amazon or 30% to Apple or anything to all these people who want a little cut.
We don’t have to do that. We own it. We can change the title. We can change the price. We could do anything we want.
Now, as you can imagine, that also takes a lot of work. So there is a trade-off.
But what I’ve found is that even when I started off really simply — by creating a $5 e-book — I was able to sell more than 1,000 of those.
That was $5,000 in revenue — I could keep all to myself. And I knew that if I could sell 10 or 100 copies, then I could sell 1,000, and if I can sell 1,000, then I can sell 10,000.
So to me, it became really powerful to know that I controlled my destiny.
If I worked hard — if I created great products — I could earn good money from this. Over time, that became the crux of our business and now we generate over 95% of our revenue through our own products. So I can’t recommend it enough.
You can take the skills and experience you have inside you and package it into something that the world will pay for.
When you do that, you can put it online and sell it automatically. Even as you’re sleeping, people will be able to buy from you. That way when you wake up, you have a sales report that says you earned $27 or $270 or even $2,700 overnight. That’s incredibly powerful.
Yes, you have to work hard up front, but once you do, you can profit forever.
So those are a few of the ways that websites can make money that I experimented with over the last 11 years. Now you can do this. You can grow your own successful online business — one that generates six figures or more.
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