Home-based e-business - an option for the self-employed?

Chapter 3 - Opportunities available for home-based e-business

There are lots of opportunities that can be made via the Internet, those which are available for home-based e-business, by the author's interpretation, can basically be defined into four categories: (1). Web publisher (2) Sells physical products, (3) Sells soft products, (4) Provide Services. These categories are not mutually exclusive in that many online businesses derive income from more than one category. For example, an online shop whose primary business is to sell MP3 music files may also sell MP3 players, and sign up as affiliates to sites that sell other electronic items. For the purpose of simplicity, this study will examine the 4 categories as stand alone businesses. Each category has different requirements of back-end services and technical expertise. In this study, each category is examined closely with two examples selected, in order to assess which are the best options for individuals based in Hong Kong .

3.1. Web Publisher

Many large Internet companies such as Yahoo, MSN and Netscape derive some or most of their income from publishing. A published may earn income through the following means:

•  CPM – the advertiser is charged a rate for each 1,000 banner impressions. The typical going rates are from $0.1 to $10.00.

•  CPC – the advertiser only pays when a click to his advert occurs. The most well-known CPC program is Google Adsense. The actual amount paid per click is highly variable and may vary from $0.01 to $50.00

•  CPA – the advertiser only pays if a click to his advert results in a sale or lead. Typically, the payment rate is in terms of % of the sale which varies from 3 to 70%.

•  Selling text links – the advertiser is charged a fixed rate to put a text link on the publisher's website for certain period of time. The monthly rate for text links generally varies from $5 to $100.

Taking CPM, CPC or CPA adverts provide a means for small web site owners to earn money by taking advertisements on their web sites. It is almost completely risk free in the monetary sense and is thus particularly attractive to persons who may wish to work at home. Two options will be examined below. In the first option, the individual acts as a publisher where he provides a web site that takes in advertisements. In the second example, he signs up as an affiliate for a shop-front program that provides a ready-made web site for him to promote.

3.1.1. Publisher

A publisher is a web site owner who publishes content on the Internet. He may offer advertising space to prospective advertisers. In general, web sites that are not well known and do not have a high volume of traffic start taking advertisements through joining affiliate programs, whereas larger and well-known web sites take in advertisers directly and generally demand a higher rate. Advertisers who want to buy advertising space on web sites may pay for impressions, click-through, leads or sales [30]. An impression is the display of an advertisement, text or graphics. A click-through is when someone clicks on the advertisement and goes to the sponsor's web site. A lead occurs when the person who clicks through gives contact information, such as name and email address. Companies may also offer to pay commission on sales, either a set amount per transaction or a percentage of sales for each sale generated by a click-through or over the course of a customer's lifetime with the company. Each affiliate program states how much it is willing to pay for which service. For example, one may pay $.01 per click-through while another may pay $1 per lead, or both [1].

To establish an affiliate program, a text or banner link is placed onto the publisher's web page that leads to the advertiser's site. Traffic referred to the partner site is tracked either by the partner site itself or through a third party such as Commission Junction [7]. Depending on the agreement with the advertiser, the publisher will be rewarded for hits, leads or sales with a certain amount or percentage-wise per sale. It could be a very time-consuming process to identify, contact, and set-up an affiliate program with various advertisers. It would be easier to do this through a third party such as Commission Junction, Link Share, bCentral. Merchants and affiliates are brought together in a 3 rd party structure that organizes the agreements, monitors the operation, and disburses the funds.

When an individual has decided to attempt to earn a living by being a publisher, he should first to create a web site that can attract high volume of first time and returning visitors. Generally, forums, interest groups, chat rooms or hobbies sites are comparatively easy to set up and be able to attract high traffic of target groups and have a higher potential to generate actual sales. Accepting of advertisements on a web site inevitably affects its image to its visitors, people may find it very disturbing especially with pop up ads, flash banners or some ads that stop you returning to the original window. Therefore, a publisher should carefully select the ads for his web page. Basically, it is better to choose some ads that are related to the theme of your web site and are also more effective in generating click and sales. There are a lot of affiliate programs on offer with some offering a very attractive rate of remuneration. However, many do not provide a means to the publisher of tracking his performance and entitled remuneration. Therefore, one should always select well-known advertisers such as Amazon.com. Another way to promote affiliate programs would be through an opt-in mailing list that the affiliate has built up. The affiliate would typically e-mail members on his mailing list making recommendations on merchants he is affiliated to. Provided that the mailing list is large and targeted, the affiliate can often generate a lot of conversions if this copy convincing enough. Another method would be to buy advertisements from search engines such as Google and Overture and direct the traffic onto the merchant's site. This may sound an ideal way to earn money as it does not even involve making a website or constructing a mailing list. Certainly, some affiliates have reported huge earning using this method. However, the financial risks are quite high since advertising is quite expensive.

The other option would be a third party agent service like Commission Junction [7], which it brings many affiliate programs together in one place. Both publishers and advertisers have the advantage of tracking many affiliates or affiliate programs together. The publisher simply selects the programs he wishes to join and the agent will make the necessary arrangements. Commission Junction is widely regarded as the best agent on the market at present and therefore it is examined in more detail. Publishers from all countries, including Hong Kong may sign up with Commission Junction. Payments are made once a month that consists of all the earnings from the different affiliate programs that the publisher has joined. The advertisers pay all the agent fees.

Estimate of publisher earnings

A prospective publisher should estimate the amount of traffic required for his site to generate enough hits or sales in order to make a desired income. The below is an estimate of the potential earnings that can be derived from CPM, CPC, and CPA programs for a website with 10,000 page views per month. In the case of a CPA program, an average order size of $50 is assumed.

              Impressions   Click-Thro Rate      Sales      Commission          Earnings 

CPM           10,000                            $0.2-10                         $2-100

CPC           10,000                2%                      $0.01-0.5           $2-100

CPA           10,000                2%           4          5-75% per sale      $2.5-150            

Text Links         -                 -           4          $5-100              $20-400                                                   

From the above figures, it seems apparent that the payout from CPM, CPC, and CPA are similar but in practice, the actual CPC and CPA earnings depends very much on the site. In the case of Adsense, the payout rate for clicks differs dramatically depending on the actual keyword. The variation is even greater in the case of CPA programs. In general, the higher the commission rate, the harder it is to generate a sale. The publisher may wish to drive sales by advertising their site but this would increase the overheads of the business. Morover, since the margins for CPA programs are often thin, it is quite possible that the publisher may lose money especially if they are not experienced. However, affiliates can also promote merchants by means through their own opt-in mailing list. However, this is not easy to attain a large mailing list of committed invidividuals.

Selling text-links actually does not depend on the traffic that a site receives. Rather, it depends mainly on the “Google PageRank” which is a method used by Google to rank sites. Buyers of text links hope that it will help their sites to obtain a high PageRank in return and possibly more traffic from Google and other search engines. However, it is apparent with the recent changes in Google's algorithm that “PageRank” has become much less important. To maximize income, it is possible to put more than one program on the site e.g. join a CPM program, join adsense, promote affiliate programs and sell text links at the same time. Therefore it is quite possible to earn up to $500 with a website with only 10,000 page views per month.

Generally, it is not difficult to generate 10,000 page views per month for a normal web site with a moderate level of promotion. However, if one wants to go beyond 10,000 hits, it will require more effort and creativity to attract recurrent visitors. To earn a full-time income, one would have to operate one or more web sites with more than 100,000 page views per month which is extremely difficult to set up and daunting for the beginner. The alternative would be to set-up multiple sites with 10,000 or more per month. Besides being proficient in web design, the webmaster must also be proficient in promotion. Affiliate programs are now well established as an integral part of e-business in N. America and Europe but not so in Hong Kong . Therefore, prospective publishers must sign up with advertisers that are based overseas. One approach is to build up hobbyist web site targeting Chinese cusotmers, e.g. on watches, stamps and models, and have links to the appropriate retailers overseas. This approach would however be only successful if the items are more expensive or not available locally. Another approach that is taken by many is to set up a free adult website with a soft content with links to paying adult sites with a much harder porn content or retailers in sexual accessories.

Setting up a high-volume web site is not an easy matter for the beginner. A high degree of knowledge competency with the Internet, and also with the content of the web site is required in order to become a successful publisher. To earn a full-time income, several web sites may have to be set-up. However, once a web site becomes well established, advertisers may come to the webmaster directly offering much higher remuneration rates than would have been otherwise obtainable through the usual affiliate programs. Advertisers are often willing to pay rates of up to US$35 per 1,000 impressions in comparison to the figure of US$ 0.2 – 10 [1]The degree of monetary risk involved in setting up as a publisher is much lower compared to other types of e-business. The only risks involved are amount of time and money spent in setting up the website and promoting it.

New Developments – Google Adsense

Important developments have occurred that made affiliate program and publisher a much more viable preposition. The appearance of Google Adsense has revolutionized the market for publishers. Google Adsense is a CPC program and of the highest paying programs available, with effective CPM ranges from $0.5 to $4.00. Morover, since Google is the largest advertising agency on the Internet, there is usually a lot of advertising inventory available, unlike other networks. The advent of Adsense has enabled many webmasters to go full-time. However, the income is highly variable. Again, it is possible to supplement the Adsense income by putting CPM and CPA ads on the same website as well. The downside is the number of clicks and the income generated is highly variable. Other programs are becoming available such as the Yahoo network and BrightAds by Kanoodle.

3.1.2. Complete Website provided by the merchant

Another alternative is to make your own website from a datafeed provided by a merchant. The datafeed would contain a catalog of the products carried by the merchant. It is possible to use a software program to generate a new complete website from the datafeed and this can be done in minutes. This tool would make affiliate marketing easier for many people.

3.2. Selling Physical products

In this scenario, physical products are sold through the Internet, either through auction sites such as eBay [11] or through a fully-fledged e-shopping web site. Amazon.com is an archetypal e-shopping site. It started selling books initially but is now a fully-fledged online department store. Selling physical products will come as second to many in Hong Kong . Hong Kong has been a major trading port with imports, exports, and re-exports accounting for an important part of its GDP. Its close proximity to China means that it had access to one of the greatest sources of manufactured products in the world. Its proximity to other major manufacturing nations in Asia, such as Japan, Korea, Taiwan, Singapore and other Asian countries means that there is an abundance of imported products from these countries which are suitable for re-export. Besides having access to an abundant supply of manufactured goods, the postal and courier services from Hong Kong are highly efficient which make it highly suitable as a base for mail order companies that ship internationally. In this section, selling physical products through online auctions and selling them through a fully-fledged online shop are examined.

3.2.1. Auction Sites

The simplest way to sale physical products online is to list them in an auction site such as eBay [11]. It is not difficult to make a profit from buying and selling in auction sites but one will need to do some research. It is better to either select some rare item that people are willing to bid at a higher price, or some hot items that offer a lower than market price. The main advantage of selling through auction sites is that very little technical knowledge is required. One does not even need a web site or carry out other forms of promotion. The only requirement to sell through an auction site is a valid e-mail address. However, the way that the item is presented i.e. pictures and description, may affect the final price realized by the auction. Many traders sell their products through auctions exclusively, whereas others use auctions as means of generating traffic to their site. Traders can also use auction sites to test the market response to individual products.

eBay [11] is by far the most popular auction site and is an online marketplace that creates a powerful platform for the sale of goods and services by individuals and businesses. There are millions of items across thousands of categories for sale on eBay and it is an easy to use auction site. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Sellers have to pay fees for listing their products and selling their products through eBay. Fraud protection is provided by eBay up to a value of US$250. There are a lot of options and strategies available for selling on eBay and other auction sites in terms of setting the open bid price, whether or not to set a reserve price, multiple item auction, and to pay more to eBay for extra exposure. Which is the best approach depends on the individual product and experience has to be gained through trial and error.

The charges levied by eBay on the seller are quite high, especially for low value items. If the seller chooses to accept payment via credit card through PayPal or other payment processors, then the final fees could be as high as 10% for items below US$25. Moreover, prices realized through eBay are usually at a marked discount to comparable products sold in online shops. Therefore the selection of the products is paramount to success in eBay. In general pre-owned items tend to do better than new items as pre-owned items have hard to compare prices. Collectible items such as pottery, porcelain, old toys or watches also do quite well on eBay.

A winning bidder or seller in an eBay transaction can leave feedback for other users. This is the only means by which a prospective buyer can judge the reliability of the seller. These comments can be positive, neutral, or negative, depending on your experience. Every eBay member has a feedback profile, this is an important detail when it comes to avoid being cheated upon. Therefore, it does take time for an individual to build up his reputation on eBay.

Individuals who wish to sell a quantity of product will use Multiple Item Auctions (Dutch Auctions). However, one has to be resident in the U.S. or have a feedback Rating of 50 or above. This makes it difficult for newcomers to eBay in Hong Kong who wish to sell a large quantity of a particular item in one go. The US$250 guarantee provided by eBay against fraud is vital as a confidence building measure for both sellers and bidders. Recently, eBay acquired PayPal, which is the most commonly used means of payment at auctions. This should lead to an enhancement of the service provided by eBay.

3.2.2. Online Shop

The most important decision is in selecting the product for sale. Products that sell well on the Internet are usually either rare, or at a marked discount to street prices. They should be easily recognizable to the customer so that he will know what he is buying without seeing and handling the items, unlike jewelry and clothes. The items should preferably be small and light in weight so that they can be posted easily. The price of the product should preferably be between US$20 to US$250, because if the price is too low, then it would not be worth the effort as substantial time is required in processing the order. Conversely, if the price is too high, the risk to the retailer is increased. Moreover, many prospective customers are unwilling to spend large amounts of money online because of fears over credit card fraud.

The advantages of running an online shop is that it markedly diminishes the need to keep a large inventory of products. Provided that reliable suppliers can be found, it is possible to operate the business on a just-in-time inventory basis so that goods are only ordered from the supplier when there are actual orders from customers. However, more often than not, suppliers do require their customers to keep substantial stock and thus a fair amount of risk. There is also a certain amount of risk from orders lost through the post. In the author's experience, the rate is well less than 0.5% for orders sent by registered mail but substantially more for those that are not. Orders sent by courier reach their destinations much faster and are less likely to be lost, but are much more expensive in terms of shipping costs. There is substantial risk arising from credit card fraud. In general, web sites that sell items with a broad appeal that can be easily resold e.g. cellular phone and flash memory are much more susceptible to credit card fraud. Whereas those that sell products to professionals are much less susceptible. However with practice, it is quite easy to detect the majority of fraudulent transactions.

Another possibility is to use drop-shippers i.e. order from wholesale companies who will drop-ship to your customers. The advantage of this approach would be that there is no stock to carry and thus no financial risk of unsold inventory. However, the suppliers normally charge a high price for drop-shipping and thus the profit margins would be lower. Moreover, unless the drop-shipper agrees to use the merchant's own company logo, there is a chance that they may steal the customer. Many users have also complained of a high entry fee charged by drop-shippers and have even been scammed in the process.

3.3. Selling Soft Products

Soft products are those that can be transmitted directly through the Internet to the buyer after payment is made. It can be in form of graphic images, documents (eg. ebooks), software programs, music (MP3 songs or even mobile phone ring tones), games, movies or pornographic photos and videos etc. Selling soft products through the Internet appears to many as the perfect business. The business can be based anywhere in the world and there is very little maintenance i.e. there are no articles to post, no services to provide, and unlike affiliate programs, little maintenance of the web site is needed. Indeed adult web sites are probably the most profitable segment.

The main disadvantage of selling soft products is that the merchant is much more liable to credit card fraud. It had been reported that as much as one-third of credit card transactions through site selling soft products are fraudulent. Although unlike physical products, there is no monetary risk in losing the product, the merchant is still liable for a chargeback fee of up to US$30 per transaction. Moreover, sites where a lot of chargebacks occur are liable to have their accounts terminated by the payment gateway provider. In this section, two opportunities will be reviewed: selling ebooks and setting up an adult site.

3.3.1. eBooks Re-seller Scheme

An eBook is a book published in electronic form. It can be downloaded readily from a retailer web site after payment by credit card. One can either create an eBook, commission one, or buy reseller rights from others. There are many ebooks re-seller programs available in the market. Most of the ebooks for resell tend to concentrate on business opportunities although there are others that deal with popular topics such as relationships, keep fit, and self-improvement. After surfing extensively through the web, the author found a particular e-book re-seller package that is going from US$10 to US$99 [12]. One of the web sites is shown as follows: There are a total of 61 books, the majority of which deal with e-business opportunities. It is quite clear that it is the same scheme being offered again and again by people who have signed to it. Therefore it appears to function like a pyramid or multi-level marketing scheme where only the first few individuals are expected to make any decent money.

Although it may not be ethical to run a pornographic site, it is no doubt that it is by far the most profitable e-business. According to an unofficial investigation, Hong Kong people spent most of their time on adult site when they use Internet than anywhere in the world. In April 11, 2002 edition of Next Magazine, it had reviewed how a young man made make a fortune by running an online adult chat room in Hong Kong. The registered member of this chat room has grown to over 70,000 members in two year's time. The site offers online chat and real-time streaming videos of young ladies in a state of undress. Obviously, setting up a site of this sort requires a great deal of expertise. The bandwidth demand on the server would be enormous and one may have to buy a dedicated server. Setting up this sort of business in one's home may quickly lead to complaints by neighbors and potential trouble from the underworld. Another possibility is to construct a more passive site that consists of streaming videos that are not in real-time and also still images. Most frequently, instead of making or buying one's images and videos, they are usually stolen from other pornographic sites. It is also possible to act as resellers for established pornographic sites. As in the case of Vshop, the reseller is given a web site that he has to promote. More often than not, this is done through unsolicited e-mails or other unsavory means.

Although potentially carrying the highest rewards, running adult web sites carry a certain amount of risk. First and foremost, web-hosting company charge many times more for adult sites so that it may be more worthwhile to buy a server. Secondly, promotion of adult sites is much more difficult because the competition is so cutthroat. The use of unsolicited e-mails is the rule rather than the exception as are a number of other unethical techniques, like copying the contents of well-known non-adult web sites and have it redirected to the adult web site. Not to mention the possible legal ramifications since piracy and illicit activities may be involved. Therefore although the potential rewards are very high, this is clearly not a good proposition for most people.

3.4. Services

Hong Kong is services based economy to many, offering services through the Internet is an attractive preposition. A broad range of services are available through the Internet nowadays e.g. financial, medical and legal advice, stock brokering, real estate, travel, web design and secretarial services. Needless to say, not all of these opportunities are suitable for everyone who wants to start a home business. Some require a large amount of investment whereas others require highly specialized skills. However, even if one does not have any professional knowledge or capital or connections to a particular service industry, it is still possible to enter the business through re-seller schemes. In this section, two different home business opportunities will be examined.

When choosing a service business, it would somehow limit your income potential. First of all, you have to spend most of your time completing the chores you're offering your customers. This leaves very little time for advertising. However, if you want your business to grow, promotion should always be your main concern. The second reason is that you'll have limitations on the number of customers you can handle. If you hire people on the job, you will have to train them so that they can offer the same level of service to your customers.

3.4.1. Travel Agency in a Box

This program is offered by Global Travel International (GTI) [16]. One can act as an outside agent when he is paying a joining fee of US$495 (the annual renewal fee is US$99). GTI would provide you with a training manual and most importantly, a photo ID with Global's IATAN number. (IATAN stands for the International Association of Travel Agents) . This number can earn you discounts on hotels, car rental agencies, cruises, and commissions on airline travel. An outside agent can earn up to 50% GTI commission plus steep discounts on his own travel packages. Agents can also receive a referral fee between $100 to $150 per each referral depending upon the current promotion for every new agent that he refers. It is claimed that with Travel agency in a box package, anybody can become a full-time travel agent. The independent agents do not carry out any actual booking themselves, all orders are referred to 120 full-time consultants in one of several departments such as domestic travel, international travel, cruise, packages and tours, group and meeting planning, and corporate travel.

Although touted as a potentially profitable home-based business. It is very difficult to make a decent amount of money. Besides the high joining fee, each agent has to pay an annual renewal fee (US$99). According to an article in the New York Times [35] on October 24, 1999, only four agents have earned more than US$5,000 in 1999, roughly 1 in 6,500. Therefore, this program is more suited to owners of small and mid-size businesses who wish to cut down the traveling costs for their staff. Indeed the biggest customers are often the agents himself, his friends and family. Therefore it appears that Travel Agency in a box operates in a similar manner to Vshop, where many members end up being the customer. (GTI)[16] accepts application all over the world. At present, it employs some 40,000 agents in 21 countries. However, since this is a US based company, it may not be able to offer the same discount for travel package outside the country. This is surely a disadvantage to overseas agents. Nowadays, because of the keen competition, the prices for some advance-purchase fares inside US (available to anyone) are already lower than the prices from the GTI. (The New York Times on October 24, 1999 ).

3.4.2. Web Hosting Re-seller

Web hosting re-selling is often touted as one of the basic stepping-stones into a home-based e-business. It allows anyone to enter this fast growing market without having to make expensive and highly risky investments in buying servers and data centers, and be involved in the upkeep of the equipment By signing up as a reseller, one is able to start a web hosting company quickly. Most of the time, it is not possible for prospective customers to know whether he is buying web space from a reseller or not. Web hosting services are often offered in conjunction with allied services such as search engine submission and web site design that could bring in extra revenue.

There are lots of re-seller plans for one to choose from in the market, and the prices are highly variable. Some hosting companies may charge a fixed fee for a fixed or unlimited number of domains, whereas others charge a fee for each domain. The choice should be made carefully because it could bring disaster should the need arise to switch to a different hosting company. All your clients' data may be affected or lost during the transfer. Moreover, your clients will not be amused if their site goes down regularly. Some web hosting companies such as donhosts.com [10] and fasthosts.com [15] offer unlimited domains, unlimited web space, and unlimited e-mail accounts for a very low fixed monthly fee of GBP 35-49. In theory, these accounts offer unlimited potential for profit: a reseller based in Hong Kong would be able to undercut the prices charged by all local web-hosting companies. However in practice, there have been a lot of complaints about their services and business practice. Accounts are often shut down suddenly without notice because the hosting company felt that the account was consuming too many resources. In order to have the account re-opened again, the reseller is asked to pay an exorbitant fee. A more reliable bet would be reseller schemes that offer much less on paper but ones that guarantee a 99.99% uptime. However, the potential profits would be much less. Therefore it is quite true that one gets what one pays for in purchasing reseller schemes.

 In selecting a web hosting re-seller program, there are two major criteria other than price, capacity and speed, these are the up time guarantee and the technical support. If your clients' web sites are always down, it will surely affect their business and lead to dissatisfactory. Web hosting companies that can provide an up time guarantee are more reliable and can save its re-sellers a lot of potential trouble. Since web hosting is a service business, it will inevitably get a lot of customers' requests and inquiries. If you are a re-seller with little technical knowledge in this field, it is better to choose a main host that can offer 24 hours technical support. Some host can even provide an unbranded support center where they can answer all technical inquiries directly from the end users. One should also be aware of the fine print in any re-seller agreement, such as restrictions on the web sites that can be hosted, bandwidth use, and the right for them to terminate any account without notice.

Summary

There are many e-business opportunities available for home businesses. They are broadly be divided into joining affiliate programs, selling physical products, selling soft products, and services. The requirements of which vary widely depending on the particular business. In the following chapter the essential components that goes into a successful e-business will be examined and discussed with regard to the different types of e-business opportunities.