What if you ran a website that made a whopping 2% profit per month? Would you be living a millionaire lifestyle?
Most people would say “no way”. If I didn’t know any better, I’d be right there with you. Basically what a 2% profit margin means is if your site makes $1,000 per month in sale, your expenses to generate that $1,000 is $980, leaving a profit of $20.
Wow, How Exciting Right?
Well, this is exactly what a friend of mine does, but on his 2% profit margin website, he is able to fly around the world in first class and stay at 5 star hotels every single month. He is truly living the millionaire lifestyle.
Here’s How He Does It.
He has a website that sells kids outdoor wooden playground sets. Obviously by selling these huge wooden playgrounds online, after shipping and all the competition in that market, it’s a very low margin e-commerce product.
But, his average order size is $2,600 per sale. His cost for a $2,600 playground is $2,100 and he spends about $450 to generate each sale (advertising, credit card processing fees, etc), so his “profit” per sale is a measly $50 per playground set.
I didn’t even know you could sell playground sets online, but he does and he sells a lot of them! In fact, he sells an average of 6 playgrounds per day, every single day of the week. By running some quick numbers, he is making about $300 per day in profits based on $15,600 per day in sales. His total profit for one year comes out to about $110,000 (about $9k per month).
Not bad, that’s for sure, but that’s not really that much money to be taking trips around the world every month like he does. So what’s his secret?
Credit Card Points!
You see, he has an American Express card that allows him to earn points for travel. For every $7,500 he puts on his AMEX card, he “earns” $100 in free travel. Since all of his playgrounds are dropshipped from the manufacturer, he is able to pay for all his inventory using his American Express card. Also, his advertising is put on his AMEX card and whatever other expenses he has.
His business spends $465,000 per month on his American Express card. That means, his card is earning him $6,200 in FREE TRAVEL every single month. He earns almost as much credit for free travel than he does with his entire business…
It’s a pretty neat concept. His passion is traveling, so rather than spending his own money on flying to Paris for the weekend, his business expenses allow him to do it for free. Imagine what you could do if your business generated $74,000 worth of free travel for you this year. You could take your entire family on multiple vacations, all fly first class and stay at the best possible hotels, all completely free. Now that’s a sweet benefit of starting your own business.
How hard would it be to make $2,000,000 per month in sales if you were spending $1,980,000 to generate those sales? You would be making a whopping 1% profit of $20,000 per month from the website, but you would also be earning $26,400 PER MONTH in free travel if you used your AMEX card.
Crazy.
Author: Max
Updated: May, 2012
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Updated: May, 2012
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That’s a great example of smart business operation. American Express card is a good choice for traveler. It does pay off your travel cost if you use it properly.
Nice! I should start using more with my AMEX card. Thanks!
Love this blog post so much! Stumbled!
Holy crap. One of those things you don’t think about, but yowza. And who knew there were 6 people EVERY DAY buying two grand worth of playground sets from this dude alone. That is totally awesome.
Of course, this assumes you’d want to spend your time jetsetting. Just because that’s the perceived millionaire lifestyle doesn’t mean everyone wants to do it…so it’s not profit, if it’s of no use to you.
Um, yea David. The article focuses on travel. Put the same concept to work for you with Capital One that gives you cash back. The dollars may not add up, but if you don’t want to travel that much, then earn cash back. The concept is the same, the end result is different. Maybe the author should spell out everything for you so you don’t have to think for yourself.
Great post man. Thanks.
I can’t see why anyone would want to spend so much time flying. I’m always quite pleased if I don’t have to travel somewhere in my spare time.
does he have to pay taxes on his free credit travel (does the irs see it as income)?
Naomi – I know, it’s just one of those weird niches. He also does a bit of offline advertising.
David – He is FAR from a jetsetter. He just enjoys traveling and experiencing new things. He would probably travel just as much if it was his own money.
Liz – Not everyone likes to travel. Personally I can take 1 or two good trips per year and that’s enough for me.
Chris – I have no idea how his accountant categorizes this. I would assume it is income and is taxable. I think AMEX just gives a statement “credit” as their reimbursement for travel.
He probably puts the travel on his business card, so that’s an expense and the statement credit is income. It would probably be a wash. I have no idea how he handles this. I guess he “could” be flying to Paris to see if there are any new playground sets he wants to import?
this is a very good example to follow for people that think they cannot make money with ecommerce. I run a website is a highly competitive ecommerce market and realized early on that the profit margins had to fall to make it work.
Profit margins came down a bit, but it was made up in volume sales. The AMEX situation I never thought about, but will be looking into that shortly.
Good post!!
Hi Max – This sounds good and the income must be very nice. But the trouble is with a 2% profit margin is that you can soon be making a loss, if your costs go up, or your sales go down.
As much as I’d like to make that much money – I would much prefer to sell less but have a higher profit margin. It gives you far more room to manouver.
I agree with Cath Lawson:
High profit margin will earn you more for long term. If you only have 3% conversion rate, you would better make more profit on each items you sold.
I would love to get that credit card points for my travel!
So you are saying you would rather make $3,000 per month if you had a 40% profit margin than if you made $10,000 per month with a 2% profit margin…”just in case something goes wrong”?
Any extra $7,000 per month sounds better to me, although math isn’t my strong point…
If costs go up, then you simply need to renegotiate your terms with the suppliers. Sales go down, you need to focus on marketing.
It doesn’t matter if you have a 2% profit or 20% profit, if your sales go down, your going to be making less money regardless.
This works because AMEX is more likely to make a profit off of you paying your bills a day late than handing you money for you paying them on time, every single month, not a day late.
Which AMEX card is this, exactly?
Sounds nice, but putting my sceptical hat on for a moment…
Most of our suppliers won’t accept payment by American Express – that’s the first problem. And if they did, and you were putting a lot through, the fees to Amex from them would be huge. In fact, you could almost certainly negotiate with the supplier for a deal where you pay by bank transfer (usually the cheapest and most efficient way to do it) in return for a discount of around 2% – perhaps more. That would dramatically improve his profit margins and he’d have actual hard cash to spend, rather than points that are tricky to use in any other way.
I’d also question his approach. The drop shipper is probably making far more money from each transaction than your friend. He’s clearly successful at selling, but I have to wonder at his ability to cost-cut and and negotiate. Some improvement in margins could be readily found, I’m sure.
Blair – I believe he uses a “Gold” card?
David – I’m yet to find a distributor that doesn’t accept a credit card for payment. All of the e-commerce stores I’ve owned, we always paid for inventory with credit cards (sometimes $40,000 orders at one time).
The reason why is the alternative is bad for suppliers. If they send out the inventory and then send out a “bill” later on, it’s much harder to collect those accountants receivable. They then have to deal with collections and wait for their money, whereas with credit cards they get their money immediately.
I don’t have time to do a bank transfer every single day to pay for products. Wire transfers have a $30 fee and you have to go to a bank to do them.
Also, if you notice in the post, he actually gets a 21% gross margin on the products he sells from the supplier. This is a pretty common markup for products like these. After all his advertising expenses he ends up spending about 19% of his profit to produce the sales, leaving a net profit margin of just 2%.
He is one of the best business minded people I know. He negotiated his rates so he is paying much less than most of his competitors in the market.
Walmart operates on a 3% profit margin just FYI.
Hi Max – looks like it’s more of a US thing then. In the UK a bank transfer is free (or maybe 30p if you pay charges) and is now completed within just a couple of hours with most banks. And if the payments are done with an invoice reference your accounting system can auto-reconcile the payments and input the appropriate data for you. We can use online banking to arrange these transfers too, so it takes moments. I use it for paying all my bills, and encourage all clients to pay us the same way.
I guess it’s important for us all to realise that there can be major differences between doing business in each and every country and that this can have a major impact on profitability, time to payment and so on.
Fascinating use of the ol’ credit card. Great site I stumbled!
That sounds like a pretty good deal to me. I know quite a few people in the drop shipping business. I wouldn’t have ever thought to use it for bulky playground sets. Very cool.
David – I still don’t understand why anyone would want to pay via a bank transfer? That kills your cash flow. If you put it on a credit card, you can pay it off 20 days later with no interest due. This is especially important if you buy inventory in bulk before selling it. It gives you a chance to sell the products before you fork over the money for buying the inventory.
You can pay your credit card with an electronic bank transfer if you wanted to I guess, but I’m all about leveraging other people’s money. This is a great example of doing that.
Freelance – Yea, it’s amazing what you can sell online!
That’s a great example of leverage. Thanks for sharing.
Maybe it’s famous people that buy these bulky items online to avoid being seen in stores? I can’t imagine buying garden furniture and such like online.
Andy – I think what people do is shop in retail stores to find what they want to buy, then they go online to buy it cheaper.
The sets he sells for $2600 online sell in retail stores for about $4,000.
Max – that is soo on the money. I do that all the time now. I visit a store and get a hands on feel for a product and then go online and find a good deal (not necessarily the lowest deal though as that can be more hassle than the potential payoff). The world is abundant, why pay more when you can pay less. Great blog.
I still don’t fully get this, Max…
Having a month extra to pay in sounds like it’s great – but in reality it’s a one shot benefit that’s only worthwhile at the beginning. You get the initial 8% uplift on the year, but each year after will be exactly the same.
But for regular clients most suppliers will agree to an account (especially if you buy a lot) with 30 day terms, and payment by bank transfer or a discount for not paying by credit card.
With my accounting head on, I just see problems. First of all, the credit card should be personal in order to benefit from the travel. That means the money has to go through your personal accounts and in and out of the bank. This can only work for a very small business, and it also causes an accounting headache and extra admin. I like to have a separation between company and personal accounts. If you’re self-employed then it’s better, but then there’s all sorts of liability issues you need to be wary of. Now, if the it’s the company that owns the card, then it owns the benefits from that card… which means that those card bonuses are taxable benefits in kind.
On the surface of it, your friends system sounds very attractive. But in reality the benefits are marginal, the tax & accounting position awkward, and the leverage is limited.
However, if he’s happy, that’s the most important thing. He’s making money, he’s enjoying his life, and it’s a simple business to manage. He doesn’t sound like a business mastermind, but he does sound like someone who’s found a way to live his life in a manner with which he’s happy – and that’s the important thing.
This blog post sounds like a paid advertisement for American Express, but I guess you gotta pay the bills somehow.
Mike – No, it’s not a paid ad. In fact, I could have easily turned this into an affiliate promotion by signing up for American Expresses affiliate program,
and telling people to sign up with them.
I was just sharing an interesting story.
great story – very neat idea.
I was in a conference this week where I heard a former GM of our rail company here in Brisbane say that they run the railway on margins that small.
I think this is a great concept and great article! As a website owner it is always interesting to see how others are doing it to achieve the life that they want. I may not be a fan of the traveling, but it is great for this business owner-good for him!
This concept works in other fields, too. My parents used to own a travel agency (back when it was worth owning a travel agency). Anytime a customer paid cash for their travel, the agency used some credit card that gave them travel miles to make the purchase. They traveled the world for free for many years.
Bobby
Stumbled onto this page, all i could say is “Holy crap!” that is seriously the millionaires lifestyle, and he doesn’t have to pay any taxes for those 6k, man, that must be awesome to live like that.
Great Blog, I stumbled. More posts please!
Ya true most people these days shop online. It’s just to easy. Anything you want is just a couple clicks away.
Chad Timothy
great post, i want nothing more than to own a successful business. reading things like this keeps my hopes high that i one day will!
Well at least he can travel. Smart guy, but believe me he will get tired of traveling. When I was globetrotting it took 2,5 years until I was fed up and settled down in London.
An AMEX Gold card that allows you accrued charges of $450,000? Sure, keep dreaming…
It’s a great idea. One caveat is that this business only works so well because (1) he uses an AMEX card with no interest payment and (2) he’s a dropshipper so he doesn’t have any inventory.
People should keep in mind that something like this is really risky. With such small profit margins and such huge costs, imagine a situation where it costs $900 (instead of $450) to get a new sale for the span of a month. He’s essentially lost a good percentage of his profit. It’s just one example of the many things that a lot can go wrong with low profit margin.
This all sounds really good, except for the one GIGANTIC risk your friend is taking:
Although your post didn’t mention how many distributors he’s using, I’ll assume that most of his sales are for just one or two. If he is charging the cost of goods to his AMEX before he has collected from the distributor (which is likely), he faces the chance that a distributor won’t pay up at the end of the month for some reason. Add to this that AMEX requires you to pay off the full balance every month, and your friend could be left holding a bill totaling in the several hundreds of thousands of dollars.
It’s also likely that your friend has no clue as to the financial stability of his distributors, which means that any of them could go bankrupt at any moment to his great surprise. Even if your friend was a millionaire, he would have a tough time absorbing a $400,000 loss without it disrupting his life pretty significantly.
Now you might say, “He could sue them if they don’t pay.” Well, that doesn’t change the fact that AMEX is going to want their money at the end month. Can’t pay? AMEX will sue you. Claim bankruptcy? You’re still going to have to pay it under the new consumer debt B.K. laws.
Even it you do sue the distributor, lawsuits can take years and that’s if you can even get them into court. Hope he can afford the legal costs. Distributor in a different state? Oh, now you are going to have to deal with interstate commerce laws and travel expenses.
This is why most businesses must operate on much higher profit margins. Otherwise, it’s just a recipe for disaster if you don’t have a stockpile of cash to hedge the risk.
Wow! No wonder, theres hardly anyone accepting my American express. They must be charging a fortune in fees. All so that they can pay card owners for their holidays.
This is a great way to pull some extra benefits out of a small business operation. Of course, you have to be confident that the sales wont dry up suddenly. Otherwise, he will have $450,000 in credit card debt and those miles wont be worth nearly as much to him.