Rule No. 2: Choose a Business That Has These Three Qualities

I don't invest in businesses unless they have three qualities:

1. An efficient marketing model
2. A substantial profit margin
3. A considerable back-end potential

An Efficient Marketing Model

By "efficient marketing model," I mean a proven way to acquire customers without going broke. This may seem ridiculously obvious, but the truth is that many start-up businesses do not have this.

Most business plans I look at have unrealistic expectations about marketing.  Two key issues, in particular, are usually off the mark:

1. How much will it cost to acquire a new customer
2. How many new customers can be acquired in a given time

If you get the wrong answer to either of these questions, you will usually go broke because you'll be spending money on other aspects of your business - product fulfillment and administration, among others. That will deplete the funds you need to reach the point at which repeat and back-end sales begin to cover expenses.

The primary of Rule No. 1 - starting with a business you know - is the knowledge you have of this one aspect of business: how to acquire new customers efficiently.

Every sector of every industry has its own model. And many individual businesses within a particular sector have their own peculiar formula for bringing in new customers. You can't possibly expect your home-based business to succeed unless you have a very good idea how you are going to attract new customers efficiently. And you can't do that unless you have working knowledge of how other, similar businesses have done so in the past.

A Substantial Profit Margin

Knowledge of how to acquire new customers efficiently is, as I said, the first and most important thing I look for when investing in a new business. But it's not the only thing. I like to see a large gross profit, too.

By "gross profit," I mean price minus cost of goods and refunds. A paperback book on building wealth, for example, that sells for $7.95 might have a $3.95 production cost. That's a gross profit of $4.00 on $7.95 - the cost of product (including refunds) being about 50 percent of sales.That's a gross profit margin many businesses find acceptable, but it's the kind of number that makes me nervous.

I like big profit margins - the bigger the better. That's why I love information products. In the twenty-first century, there are many businesses that offer large margins. Along with information based products,  entertainment and prestige products also offer large margins.

As a general rule, the larger the gross margin, the more cash you can generate with each sale. And the more cash flow your business has when it begins, the better able you'll be to keep the business going while you figure out the perfect customer acquisition model - the one that will allow your company to keep on growing.

A Considerable Back-End Potential

The third and final quality I look for in a start-up business is the potential for back-end sales. By "back-end" sales, I mean more, better, and higher-priced products and services sold to the existing customer base.

I like businesses that have customers who keep buying. I like the feeling that the work that is done to acquire a new customer will be the hardest work done. I like the thought that for every dollar I get bringing in a new customer into my business, there will be 3 or 4 or even 10 more dollars down the road.

It's much, much easier to make a second sale to an existing customer than it is to get that customer in the first place. Businesses that have this potential are natural moneymakers, because they allow the business to reinvest 100 percent or more of its front-end sales into acquiring new customers.

When you have an efficient marketing model, a good profit margin, and a substantial back end, you have everything you need to make your business grow exponentially. Your margin allows you to continuously build your active customer base, even accounting for those customers who expire or drift away.

As your customer base grows, your back end explodes - because a good back end stimulates itself. The more back-end products you have, the higher the response (and income yield) you'll get from each existing customer. When you are dealing with small business development in industries with back-end characteristics, supply-side economics is a wonderful fact of life!$

[Ed. Note: Ray Buckner’s personal team will create 10 six-figure earners before the year is over. The Traffic Authority system walks you through the process of growing your profitable online business using a proven online business model. Ray shows you exactly what he did to grow his six-figure business. To find out more about Traffic Authority, go here.]