The Beginner’s Guide to Making Money Online

Oh no! Not another article about making money online! Actually, this one’s different.

See, there are many excellent how-tos, techniques, tricks, and schemes out there about how to earn your online keep. They tend to be practical advice and I think what we’re missing is a theoretical grounding. We need a backdrop that anchors all these articles into your mind giving you a map of sorts.

And this is exactly what I want to do now. I want to give you my mental model of thinking about online income generation and then show you how to use it.

The Basic Ways of Making Money

If you boil down the techniques for earning money online to their essentials, you can group them into 3 basic categories. You can make money by:

1. Selling products like Amazon.com.
2. Selling services, like eBay. Access to a restricted part of the site or an API is also a service.
3. Selling ad space, a straightforward trade of pixels for cash.

There is a fourth category, namely developing and selling domain names and websites. I will not discuss this here because I’m assuming that most readers of this blog will be interested in the top three.

The Classic Conversions Funnel

In the world of marketing, we think of the sales process as a funnel. Imagine a vertically-standing funnel with the wide side facing up and the narrow neck at the bottom. The line from the top of the funnel to the bottom of the funnel is the sales process, the stages that someone goes through that ends up with them opening their wallet and giving you money.

The width of the funnel is the number of people that reach that stage. This way of thinking tells us that the number of people that reach the next stage is less than the number of people that enter it. This is called the bounce rate. As an example: if you have a 5-step checking out process on an ecommerce site, and 100 people reach the third step but only 80 people make it to the fourth step, then the bounce rate of the third step is 20%.

You can also calculate another number for the whole process: think how many people enter the process and how many actually end up paying up. This ratio is called the conversion rate. This is a key number to know for any of the ways of making money.

Calculating Conversion Rates

As it is a key measurement to know, calculating the conversion rate accurately is very important. You need to know two numbers: the number of users that enter your sales process and the number that finish it by paying you. The latter is usually (by no means always!) easy to figure out as you can track it with payments. The former though can be a tough one to call.

The key point here is to understand where your funnel starts. A term you’ll hear a lot in this context is the landing page, i.e., the very first page a visitor sees to start the sales process. In an ecommerce site, the funnel can start at the page a visitor enters the site, thus defining all pages as landing pages and that the whole traffic to be in the funnel. Another way is to look at product pages as the sole entry points into the funnel. The problem is what do you do with pages like top-10 lists? Clearly those browsing the list may end up buying something on the list but not always. So is the list the start of a sale?

Whatever you decide, make sure you always calculate the conversion rate in the same way. Always. If you change you method every time you will have no idea whether you’re improving your conversion rate or not.

Which brings me to the next point…

Track Everything

Web analytics is the art and science of understanding what visitors do on a website. Knowing how people behave on your site will allow you to experiment. Some things you can test:

1. Sales messages. Different people respond to different benefits. Telling someone that their iPod has 80GB may mean nothing to them but telling them it has enough space for thousands of songs might tell them all they need to know.
2. Landing pages. Again, different people respond to different pages and content. You can test the actual text, the layout, the colors, typography, punctuation, and pretty much anything.
3. Funnel steps. Each step in the sales process can be optimized and you should look at each one individually.

Of course there is a lot more. The key point here is this: if you can track, you can experiment. Find the best tracking tools you can and learn them!

Market Segmentation

Every market in the world can be segmented. A market segment is a group of people that have similar traits. Typical traits are money (some like free, some are willing to pay – that’s two segments right there). Another is age (10-15 year olds, 16-25 year olds, etc). Another could be body size like height (like when selling clothes). Gender is also an easy segmentation method. There are many more and each market will have different segments.

So how do you build a market segmentation model? First you think of why people would pay you for whatever you’re selling. Are they solving a problem? Where does this problem come from? Do different people respond to the same problem differently? How? Keep probing the minds of your buyers and you’ll see themes emerging. These themes, collectively, give you the market segments.

This is easier said than done, but extremely valuable. A market segmentation model is your map of the market.

How to Make Money

credit: TheFemGeekVery simple actually: You set up a sales process, a funnel, pour people in at the top and watch paying customers come out at the bottom. Shocking, isn’t it?

This should tell you the basic elements of how to make money on the web: get more people to go through the funnel, and optimize the funnel so that you lose as few people as possible at each step. The end result is upping the conversion rate. The other thing you should note is that different people will respond better different funnels. It is very likely (even guaranteed) that each market segment will need a funnel on its own.

How do you get people to pour at the top of the funnel? That’s another blog post, I’m afraid, but it’s pretty much any way you can get traffic. You’ll hear that different traffic sources are more “targeted” or more “qualified”. What that means is that these traffic sources will fit into a segment that’s more likely to follow through till the end of the funnel than other segments.

Setting Targets

credit: keepthebyteSo you have a funnel, a steady stream of people going in, a steady income, and all of this is being tracked. Now what? Experiment and set targets. Very methodically, tweak one thing at a time and watch your conversion rate. If it goes up, keep the change. If it goes down or stays the same, ignore the change.

The experimentation should have an aim or a goal. You could say that I want to increase my conversion rate from 1% to 2%. Or you could say that I want more people from Europe to buy from my site. Or you want to reduce the bounce rate of a particular step from 5% to 3%.

Anything really but keep a list of targets and aim to achieve them. If market segments are your battlefield map, goals are your objectives to win the battle.

Pulling it All Together

Now let’s think about the three ways of making money by thinking about the funnels of each one.

1. Selling a product: the funnel starts at the landing page, however defined, and however the people come to it. Conversions are when people buy the product. An interesting model is when you give out a free trial. Trials tend to have a higher conversion rate than not having a trial version.
2. Selling a service: exactly the same as selling a product.
3. Selling advertising: your website viewers are the people who enter the funnel and the people who exit and earn you money are the people who click the ads. This means that your ads’ click-through rate (CTR) is your conversion rate.

Conclusion

So what did you just read? What I hope you now have is a set of techniques and concepts to help you think about making money online. I also hope to have sown the seed of experimentation in you so you can try different things and improve on your status quo.

I’ll leave you with this thought: At the end of the day, reading posts like this will not earn you money. What you need is execution: you need to actually do. You need to try things, fail, succeed, improve, and start again. You need to set a plan, vow to stick to it, set some targets and chase them like your life depended on achieving them. Good luck.

Pierre recently launched Social Alerter. He writes a science blog, maintains a set of SEO tools and moderates at Cre8asite Forums. He has a PhD in Genetics from the University of Cambridge, UK, and works as an innovation consultant. The thinking detailed above has been influenced by me learning from lots of people at Cre8asite Forums, in particular Ammon Johns from freshegg, and Seth Godin. Everyone’s input is acknowledged with great thanks.