MI_Billy_Murphy_2_2
Jaime: Welcome to part two with Billy Murphy. What we talk about on this video is ‘millionaire math’. He talks about EV – expected value. This is trying to determine how much something is going to be worth without you having to do anything yet. Stay tuned.
Jaime:Now what I want to do is get down and dirty with trying to figure out what EV is and how people can get that number. Give us all the metrics that you go through so that someone else can do it too.
Billy: It’s easier if you have an idea of the sales and traffic other people in the space are getting. If you don’t, it’s more difficult, but you can still do it with more due diligence. Let’s take an ecommerce store, for example – if there’s a certain niche I’m looking at I’ll do a quick calculation of the numbers, looking at the estimated traffic for a handful of keywords in the space. Then I’ll look at the competition for those key words, so we’ll look at the competition at, say, the number five spot and look at a handful of the main keywords. As you know, you’re ranked one through ten on Google, the higher ones are going to get substantially more traffic than the lower ones. The first one is 25-40% but number ten is 1-2%. So I calculate the math and get an estimate of the amount of traffic I can expect to the site. Then I multiply times the margins that I have on my products. Then I multiply that by a number that I actually have for stores, so that’s the stores EV number. If I’m looking at a bunch of different niches I’ll take the EV of, say, five or ten niches that I’m thinking about getting into and I’ll take the one that looks like it’s the best opportunity and I’ll do the due diligence on it, then I can see if anything changes, if there’s anything that would affect me doing it. With the ecommerce stores it was relatively easy to see that a niche would make, say, $3000 per month, based on what I’m seeing, so you can know roughly what you’re going to make going into it, assuming you can hit your targets. You’ve got to do your due diligence to make sure you can do it. But with ecommerce stores it was pretty easy to do what I did to do that.
Jaime:How did you get those numbers? Like the 1% - how did you figure it out?
Billy: I talked to friends. At that point I wasn’t in ecommerce yet, I was just starting so I talked to buddies who were already in it and asked ‘What’s a rough conversion rate for ecommerce stores?’ and I kept hearing ‘1%, 2%’ so I just used 1% as a conservative estimate.
Jaime:And ranking at number five on Google – how do you know that you can do that?
Billy: I wasn’t an SEO guy. That was another thing I would just ask people about. You can hire an SEO guy and say ‘Here are ten places I’m looking into – tell me what you think about the competition for these.’ Obviously they’re not going to be exact but they can give you a range, they can say ‘The top seven, it’s relatively dependent but there’s not much after that,’ or ‘Here are a couple of main stores but there’s not a lot of competition after that.’ Obviously it’s getting a little harder to do SEO like that but at least at the time it was pretty simple, like from six down there was pretty little competition. I would just pick someone’s brain and it doesn’t take someone who knows about that stuff a lot of time.
Jaime:Would you hire an SEO guy and say ‘I’m looking to do this stuff, so help me with the research and then help me later,’ or did you just ask people to give you some information for free?
Billy: I would talk to a lot of SEO guys that I was thinking about hiring to do the actual SEO on the stores, so a lot of the initial consultations would be ‘Do you mind checking this out?’
Jaime:Go you! Smooth.
Billy: So it was basically free.
Jaime:I love that. But it also helps you to know whether they’ll be a good SEO guy in general, if they start telling you stuff and it doesn’t really make sense, because you knew a little bit about SEO to begin with. Okay, so you have these numbers and you come up with the EV and you can go through your ideas, whether it is a niche or business idea, and figure out what the potential is.
Billy: A lot of businesses aren’t as simple as stores – a harder example would be a membership site. We’ll just keep the numbers simple – let’s say someone charges $100 a month for a membership site. You could look at it and think about what the size of the market is and how many people would pay for it. First of all, is there anyone doing anything similar? That’s the easiest way. It almost feels like cheating. This is the simplest version of calculating an EV, but all you have to do is look at the business and if you know this business makes $400,000 per year, see what they’re doing, how they make their money, why they make it that way, how they market it and can you market it in the same way, can you market it better? Assuming you can make a better product, it’s essentially solved for you – they already solved it for you, they essentially did your due diligence so all you have to do is due diligence on how they did it.
Jaime:They proved the model for you. What about copying, though? We talk a lot about competition – if you have a competitor that’s already out there, doing it, how hard is it for you to come along and swoop up either their customers or other customers?
Billy: If that’s the case, you have to be able to have a better product or, at worst, fill a need that they’re not filling. For example, eComLab is a hard model, however there’s no one it specifically like a membership site where you get new and up to date information on how to improve your store and things like that. There were plenty of people selling eBooks and all of that stuff, but there was a gap in the market where that didn’t exist so I knew that people were making however much on course and eBooks and that type of stuff and people were buying it but there was a gap that hadn’t been filled yet. Let’s saythat you want to start a business and there are no competitors or you don’t know the numbers of the competitors, and let’s make it a membership site so that the numbers are easy to do. If there are X number of buyers the math is pretty easy to look at. you can get a giood idea of how many people are searching for it from the traffic but you can look at blogs, forums and articles, whatever it may be, on the subject and take a $100 per month service and see if 100 people would pay for it or if 1000 people would pay for it. If 1000 people would pay for it, it’s a $100,000 per month business. People say ‘Well, how do you know if that would happen?’ Well, that’s where the research comes in – now you start getting feedback from people, talk to people, ‘Would you pay for this? If not, why not?’ Ask other people in the industry ‘Do you think other people would payfor this? Why? Why not?’ You’ll start to get a feel for it, like if 99% of people tell you ‘Yes, we definitely need this.’ You want to start businesses where people are like ‘Holy crap! I need to buy that!’ A lot of people, when they start business, they start ‘me too’ businesses. That’s where they’re not going to do well, if they just go and do something that someone else is doing because that person is successful. They’re not going to do well because it’s just a ‘me too’ business. But if you make your product better than what’s on the market it’s relatively easy to calculate the numbers. In a situation like that, you could set a range, say, based on the marketing that you know you can do you can reach this size of an audience and based on your due diligence you know people are willing to buy it or they can refer their customers and you can start putting together a marketing blue book because you know this guy will share it with his audience, here are some forums you can get involved with. You can recreate this rough map, knowing that you have the traffic and that you already have the product that people want to buy, so here’s a rough number. Lots of times I’ll take three different EV numbers for the business – so I’ll say something along the lines of ‘Let’s say I didn’t do that well and I only got 100 numbers – it would be a $10,000 per month business. Let’s say I did pretty well, the marketing stuff worked out, and maybe I get 500 numbers. Then, if I really blew it up, there’s another number.’ I’ll be conservative and say 50% of the time it’s just not going to do well, so it will be in the low end, and X% of time it will be here and X% of time it will be here. You’re making up these numbers, however, based on your due diligence. Your due diligence will give you more accurate numbers to come up with an actual EV. Then EV is your rough, expected value. Then you can say ‘Am I comfortable with making the EV number?’ If so, you can take the chance to do it. A lot of people think of business in terms of risk and failing or not failing. Totally irrelevant. Let’s say you make a business that makes $1000 a month and you’re going to be successful 100% of the time but your goal is $10,000 a month – even if you launch a successful business, you’ve failed. A lot of people don’t think about this before they start a business. On the other hand, you’re looking at a business where you’re going to fail 50% of the time, however if you succeed you’re going to make $50,000 a month – a lot of people would stay away from that business because it sounds like they would fail, however if they succeed on the other one they would actually fail. The EV gives you numbers so that you can see which is the best route for you to hit your goal – ‘Is this a business that I can get into to hit my goal?’ The EV will tell you that. You’d be surprised – the more due diligence you do, the closer that EV number will be when you actually launch the business.
Jaime:That’s really interesting. One thing that I have a question on is marketing and the moony that you have to put in. because even if the EV is $10, 20, 30,000 but you have to put in $20, 30, 40,000 in order to market it, that’s not a good business either. In your estimation we don’t deal with that – is that just to see what the opportunity is? How do you work with that?
Billy: In terms of what I’m willing to risk, money-wise?
Jaime:We don’t know how much it’s going to cost to do the marketing so we don’t know how much that will work? You tell me what you think.
Billy: I try to find that out too. I’ll give you a good example of a business I’m thinking about starting and investing in. it’s a design and developmentcompany, there are two guys that are going to run it and I’m debating funding it for them and advising it, or whatever. For this I looked at the startup costs and what it will cost to market. To know the marketing costs I basically called a buddy who’s extremely good at online marketing, like PBC campaigns and all that stuff, and asked him what theh numbers would be if I ran it. he gave me a ballpark number and we figured would could scale it up or down based on how many leads we were getting and how many we were converting. I looked at, based on the amount of work that comes in, what would our spread, our margin, be on that? I put maybe $50,000 in, in the first three or four months, and if it doesn’t work, how many sales will I need to either break even or make money? I look at it conservatively – it’s hard to know the sales rate right off the bat; first you need to know how many leads you would get from the ads, so you work backwards and say ‘If I run this amount of ads I can get X amount of leads; X amount of leads are going to cost me this much money; we need to convert at this rate to get this amount of sales.’ Again, it’s an estimate, but you’re using due diligence – like I called a guy who knows the marketing side and I talked to designers who know the design and development side. I’m not just making up these numbers and saying $100 or $5. Due diligence gives me the numbers to start calculating EV. For that business, the way I’m looking at it is, if it doesn’t work, my risk is actually pretty low. You might think I’m risking $50,000 or whatever it’s going to cost me, that seems risky, but if we spent $50,000 on setting it up and ads and all of that and we didn’t get one sale, we did a pretty horrible job. We would probably get some sales just based on the amount of leads we would get. That guy had run a campaign for somebody else in the same space and told me what they were converting at, so I knew a lot of numbers. The success side is, if it works, and we run the numbers – here’s what sales should cost, here’s what the leads should be, then it should be profitable. If it’s profitable, then it’s extremelyscalable and you can scale up. So people might look at it as ‘You might lose $50,000 – I can’t do that,’ but you’re really not going to. Maybe I’d lose $10,000 or something, in the worst case scenario, but the best case scenario is that business brings hundreds of thousands of dollars in profit per year and after the first year it will be running relatively on autopilot.
Jaime:You’re all about taking those risks, because as long as you’re okay with whatever that lower amount that you could lose might be, and you’re cool with that, then you take that risk. That’s awesome. I really appreciate that. We’re going to pull down all the data and information that you just gave us and put it into an action guide so that somebody can go through it and plug their business idea in as best they can. A big piece of it is the people that you know, because you kept saying ‘My buddy did this; my buddy did that,’ but I think one of the key things that you highlighted that works for you and for many other people is just calling people and talking to them, which isn’t as hard as everybody thinks it is. You’re probably not a big fan of calling up random people that you don’t know, but that’s where the information is. I think that’s huge. Thank you very much for going through the process.
Billy: It works the same way for things like that, the calls. The worst thing that can happen is that they say ‘No’ in the first ten seconds and they won’t talk to you, but then they might give you an hour of information for free. It’s clearly a good decision to make those calls, even if you get a couple of ‘No’s.
Jaime:You’re such a numbers guy! I can see that; the value is there. Thank you so much, Billy. I really, really appreciate it. Hopefully I’ll see you again soon.
Billy: Any time. Thanks.