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I’ve been getting lots of emails lately about which type of website is the best or most profitable to start. Seems like everyone has their own ideas for what the “perfect” business is, so in this post I’m going to lay it all out there and you can decide for yourself based on these proven facts.

My personal favorite type of web business is a membership website. I’ll go over why that is when I discuss membership sites below. But first, let’s take an in depth look at ALL the options available to you as an internet entrepreneur…

1) Build A Content Website

This is one of the most common strategies people go with for some reason. The idea behind it is you just start writing as much as you can about a topic, hoping to create a following. The more content you publish, the better your search engine rankings become, the more of a following you get. Eventually if you have enough traffic to your site, you can start monetizing the traffic by selling ad space or promoting products as an affiliate.

- Positives: You can start a content website for little to no money. You can have your first piece of content up within hours and be “in business” almost instantly.

- Negatives: It takes a LONG TIME to build the traffic, content and a following necessary to start making any decent money. Because it takes such a long term commitment (12+ months), most people give up out of frustration due to the lack of money coming in to justify the effort.

Most blogs fall into this category of web business. These types of businesses CAN be very profitable once you get over the initial startup hump that keep most people down.

- Earning potential: A solid content site with 10,000 visitors per month in a moderately competitive niche market should be making approximately $1,000 - $2,500 per month. Rarely will a content site exceed $7,000 per month (possibly 1 out of 10,000 can exceed that amount). Sadly most content based websites fail to make more than $100 per month.

2) E-commerce Store With Dropshipped Merchandise

This type of business is one of the “dreams” you hear about on infomercials. A website where you can sell real products on your website, take the money, turn around and place the order with a supplier and they ship it directly to your customer for you. This is called a dropshipper supplier.

It sounds like a great idea in theory. You don’t have to carry any physical inventory, and you don’t have to ship anything out, sounds perfect right?

Wrong! This type of business is an absolute nightmare for many reasons…

First, the margins you get with dropshippers are very low. A dropshipper supplier is nothing more than a middleman. The chain of command is basically the manufacturer, the distributor/wholesaler, a dropshipper, then you, the retailer. Each company down the line takes their piece of the profits.

I’ll talk about buying wholesale in a different business altogether, but the basic rule of wholesale pricing is 50% below the MSRP price (also known as key pricing or keystone pricing). This is how “most” brick and mortar retail stores operate. When you use a dropshipper, you typically get pricing in the 25% below retail MSRP pricing (Manufacturer’s Suggested Retail Price). The reason for this is because the dropshipper has to make a profit for doing all the work and maintaining inventory, so in theory they make 25%, you make 25% and the manufacturer makes 50%. Sounds fair I guess.

The key thing to remember here is Retail MSRP. This means, if you were able to sell your products at FULL retail price, you would be making a 25% profit on each item.

Well, this is the internet folks, and people don’t pay full price for anything online. That’s the main reason WHY people shop online usually, just to save money. If they wanted to pay full price, they would go to their local store instead.

So, to stay competitive for the products you are selling, you’ll have to mark down the items at least 20% below their retail price. This means you are down to about a 5% profit per sale.

Ok, 5% profit is still not bad considering you don’t have to really do any work to ship the products.

Well, take off another 2.5% of the sale to cover credit card processing fees and you are left with a 2.5% profit per sale. If you are selling $50 items and using a dropshipper, you are making a whopping $1.25 profit per sale.

For that $1.25 in earnings, you have to

- do customer service
- track packages for your customers
- place the orders with the dropshipper supplier
- deal with returns when your dropshipper sends the wrong product out
- have to explain to the customer that the item they ordered isn’t available because your dropshipper ran out before you placed the order with them
- deal with chargebacks from customers who don’t recognize your company from their credit card bill.
- and heaven forbid you have to spend time marketing your website or perhaps buy PPC ads!

If the pricing issue isn’t bad enough, you also have to deal with selling garbage products with most dropshippers (things like knickknacks and other crap that won’t sell online).

If you are lucky enough to find a dropshipper who carries decent products, you have to make sure they are reputable. For some reason, dropship wholesalers tend to go out of business unexpectedly or stop carrying certain products due to back orders or discontinued items. This is bad news for you if you are selling products on your website and all of the sudden have no way to fulfill orders.

Don’t let this summary distract you if you still want to try a dropship based e-commerce store. Just know what you are getting into in advance.

3) E-commerce Store With Merchandise Purchased At Wholesale

This is very similar to the dropship example above, but instead of a dropshipper maintaining inventory and shipping products out, you buy the merchandise up front, store it and ship it when it sells.

There are pros and cons to this type of business just like anything else.

The pros are, you get to enjoy higher markups. You will basically be able to buy products for 50% below the retail price in most cases. (not all products are available at 50% off - Ipods for example have a wholesale price of about 15% below retail, and that’s if you can meet Apple’s $100,000 annual minimum purchase).

Because you are buying at better prices, you have more flexibility in your pricing so you can be more competitive. Even if you sell at the same 20% below retail price as the dropshipping example above, you would now be making a 27.5% profit per sale after credit card fees, which is pretty good. You do however have to do a bit more work for that money this time.

The cons are, you typically have to purchase your inventory up front and sometimes in bulk. If the products you buy do not sell well online, you are stuck with all that inventory and you may not be able to recover the price you paid for it. Also, when an items sells, you have to put it in a box, print up the packing slip, print the shipping label and ship it out. That’s a bit more work than you had with the dropshipping example.

(side note - to buy products at wholesale pricing, you will have to get a resale tax id number from your State’s Dept of Revenue office, but it’s pretty easy to do).

This is the type of business we sold most recently for mid six figures. We took a slightly different spin on it because we “repackaged” regular products before selling them. That allowed us to differentiate our products from our competitors. It’s important to have unique products when selling online, and you can do this with everyday products and just repackage them.

In other words, if you are selling digital cameras online, don’t just sell the $300 digital camera like everyone else. Instead, sell a “College Student Camera Kit” that is made up of a digital camera, a camera case with the student’s school logo on it, an extra battery and extra memory card for $330.

By making this one little change, you can take a product that thousands of other people are selling, and make it something unique that only you sell.

I’ll spend more time on unique products in the next couple of reviews…