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Starting a Business in a Downturn

Even though the concept of a recession carries with it many negative connotations, recessions are also often hotbeds for innovation and many of today’s large powerful global companies were started by brave, enterprising entrepreneurs during an economic downturn.

Greg Fisher

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An economic recession is commonly defined as: “two consecutive quarters in which a country’s gross domestic product shrinks”. Even though the concept of a recession carries with it many negative connotations,recessions are also often hotbeds for innovation and many of today’s large powerful global companies were started by brave, enterprising entrepreneurs during an economic downturn: Microsoft, Walt Disney,General Motors, IBM, Toys “R” Us, Hewlett Packard, UPS and Wikipedia were all founded during recessionary times.

Potential clients open to new options

During an economic downturn, many companies are seriously looking for ways to save costs. They are therefore open to change and willing to consider options which offer them better value. A new start-up that offers an existing firm a better value proposition than what they are currently getting is likely to have an easy time convincing them to switch. During an economic downturn companies let go of their supplier loyalty to uncover innovative new ways to save costs and this gives new start-up businesses new sales opportunities.

Talent comes cheap

One of the largest expenses for many start-up businesses is the salary bill. During boom times salary expectations can sky rocket. During a downturn employees and contractors have fewer options and they are willing to work on terms that are more favourable to the entrepreneur.Many of today’s most successful web companies were founded by savvy entrepreneurs after the dot.com bubble burst, when there was a dearth of talented IT people looking for jobs and willing to work for very reasonable rates. In boom times talent is expensive; in a downturn talent can be accessed at far more favourable rates giving you the opportunity to get your business off the ground without overspending on people.

Excess capacity at suppliers

A recession is almost always preceded by a period of high demand. In times of high demand, suppliers build up capacity. When demand drops off, most suppliers have excess capacity. As a start-up company, in boom times, you have very little sway with suppliers but in a recession when they have excess capacity, you have more negotiating power. You can negotiate favourable payment terms and other benefits to be able to start your business off on the lowest cost base possible. In boom times many suppliers won’t even talk to an insignificant start-up, in a downturn they are scrabbling for business and will want to work with you on your terms.

What you do to make a downturn in the economy work in your favour as you launch a new business

To take advantage of the opportunities that arise during a downturn,you need courage. Peter Drucker said: “Whenever you see a successful business, someone once made a courageous decision” and that is exactly what is required to establish a new successful business in this day and age. In addition to courage, flexibility, focus and the will to negotiate will stand you in good stead as you launch your start-up.

Don’t be too locked in – adapt

Downturns in an economy are times of uncertainty, therefore don’t put too big a bet on what the future may hold. Many of the businesses mentioned earlier in this article were successful because they were adaptable. After getting into business in a downturn, the founders realised that new opportunities were emerging as the downturn came to an end. The key lesson is that all downturns are followed by up turns and entrepreneurs who are already operating and are flexible enough to be able to respond to new opportunities will be the ones to benefit most from an upturn.  Set your business up so that you are moving positively in a general direction and be ready to pounce on new opportunities as they arise.

Focus on what counts

During an economic downturn many incumbent firms will be distracted by non-value adding activities such as layoffs, restructuring, and cost cutting. Firms engaged in such activities tend to forget about the customer. As an entrepreneur it is critical for you to focus intensely on your customers. The two most important activities for a start-up are making sales and generating cash and to do these two things, you need to please customers. As you please customers you can build up new levels of customer loyalty. This creates a solid platform from which to build and grow your business in the future.

Keep negotiating

During a downturn a start-up entrepreneur should keep negotiating.Don’t just accept list prices or terms. Always seek to make your situation more favourable. During a downturn when companies are scrambling for work and can be desperate to make sales they may be more flexible in negotiating contracts to keep you happy as a customer. As you start your business during a downturn be sure that you are ready to negotiate at every opportunity, don’t accept things too easily or quickly.

Warren Buffet said: “Be fearful when others are greedy, be greedy when others are fearful”. This quote is as true for investing in the stock market (the context for the original statement) as it is for investing your time and energy in starting a new venture. Most people will shy away from launching a start-up during a recession but it is exactly that fear that opens the door of opportunity for you to establish the foundations of a new profitable, powerful enterprise.

Downturn start-up success stories: Flickr USA

Scarcity of funds and resources trigger creativity & innovation: Caterina Fake & Stewart Butterfield – co-founders of Flickr.com

Husband and wife, Stewart Butterfield and Caterina Fake, started a company originally called Ludicorp soon after the dot.com bust in early 2002. Many would have suggested that it was an unwise time to start a new technology company.

There was very little to no external funding available, IT start-ups had a reputation for being fly-by-night operations and most new opportunities were thought to have disappeared when the NASDAQ crashed in 2000 and 2001. Yet the pair of entrepreneurs set out to create a new multiplayer online game called “Game Neverending”. Fake describes their timing as follows: “This was in 2002 and it was still in the great technology bust period. There were failed dot.coms all over the place, office space was cheap and some really awesome developers were available, who wouldn’t otherwise have been out on the open market two years earlier. So it was actually really well timed. I think that the timing was important because you could operate in a much more independent mode.”

Less start-up capital – greater speed & innovation

As the husband and wife team were developing their online game, which was to be their first major product, the back-end development fell behind the front-end development, and so while they were waiting for the back-end to catch up – being restless hacker types – they built an application that would allow players in the game to share pictures. After a while they realised that the picture sharing feature that they had randomly developed may have a broader application and be more valuable than the game itself.

They called the picture sharing application Flickr and launched it as an independent photo sharing website. “So Flickr started off as a feature. It wasn’t really a product. It was a kind of Instant Messaging which you could drag and drop photos onto people’s desktops and show them what you were looking at. We built it really fast; we had a lot of the technology already from the game, but we built the first instance of Flickr in eight weeks,” explains Fake. The photo sharing website, Flickr, soon became incredibly popular and Fake and Butterfield abandoned development of the game to focus on the website. Flickr was recognised as one of the pre-eminent Web 2.0 applications and was bought by Yahoo in 2005 for a reported $35 million. Fake suggests that starting in a downturn contributed to their success: “The money was scarce, but I’m a big believer that constraints inspire creativity. The less money you have, the fewer people and resources you have, the more creative you have to become. I think that had a lot to do with why we were able to iterate and innovate so fast.”

Downturn start-up success story: Clif Bar USA

Negotiations with designers, Manufacturers & distributors result in big payoff: Gary Erikson – founder of clif bar

While on a 175 mile bike ride in November 1990, Gary Erikson decided to create a company that would produce energy bars for people participating in endurance activities. He was living in San Francisco and at the time the USA was caught in the grips of a nasty recession, not that Erikson knew or cared. He worked with his mother, an accomplished baker and cook, to develop a bar that would be both tasty and nutritious.

After months of experimentation in his mother’s kitchen he had developed a bar that he was confident would appeal to cyclists, runners, climbers and others who needed easy access to nutritious food. He then needed to find a company to manufacture his bars, a distributor to get the bar into sports stores and a designer to help him develop the packaging. He found all three fairly quickly and easily, primarily because they were all looking for extra work, having been hit by the recession (not that Erikson knew this at the time).

The contract manufacturers were “delighted to do business with him” as his bars absorbed some of their excess capacity. The designer was able to devote time and attention to his packaging and his new brand and the distributor had the capability to begin distributing his products “as soon as they were ready”.

He called the products Clif bars after his father, Clif Erikson, who had instilled the love for the mountains and the outdoors in him at a young age. By the time he had his manufacturing and distribution arrangements in place it was 1992 and the economy was starting to pick up. In year one he sold $700 000 worth of Clif Bars and in year two he sold $1,2 million worth of bars. The business has gone through many ups and downs but it is now a profitable private company with $200 million in annual sales and a reach across the globe.

A business built on fortune & determination

It is only in retrospect that Erikson realises how fortunate he was to have started when he did. He was unaware of an economic recession so he just forged ahead, focusing on product development and distribution while his competitors were being distracted by many other financial and people issues. He also realises now that contract manufacturers and distributors would ordinarily shy away from working with a start-up company because the volumes are too small and the risk too high. But in a recession, when they need work, a start-up business becomes an attractive proposition.

Downturn start-up success story: Trainiac SA

Delivery on the customers’ changing needs and tight financial control spark success: Rob Dennison – founder of Trainiac

In 2001 Rob Dennison was recovering from having been part of a failed VC funded technology company that had gone belly up during the dot.com bust. After returning to South Africa from Boston, his top priority was to create a sustainable growth business requiring minimal capital. He did not care that South Africa was in a cycle of declining GDP growth or that there were recession fears in a number of economies across the globe. What he cared about was proving to himself that he could be successful as an entrepreneur and he cared about creating something that would allow him and his family to lead a comfortable fulfilling life.

A unique product creates its own gap

What he lacked in resources, he made up for in energy and creativity, developing innovative picture based learning products from the office in the cottage in his backyard. He chose to enter the training industry because skills development was supposed to be “the next big thing” with the enactment of the skills development legislation in South Africa. He also liked training as an industry because it is an area where “creativity, not capital, creates a barrier to entry”. He had no capital but knew that as an entrepreneur and innovator, he could be creative.

In retrospect Dennison realises that the uncertain economic environment probably helped him win his first client. A major multinational company was looking to revamp its training programme for low-end employees and Trainiac’s unique picture based learning tools and methodology offered the chance to drastically reduce the training cost per employee while increasing the retention and enjoyment of the employees participating in the training. If times had not been tough, Dennison concedes that this client may not have been looking to do things differently. “They were under cost pressure and were therefore looking for an alternative approach; we offered them a value for money solution,” says Dennison.

Worthwhile disciplined financial control

In the first few years of operation Dennison and the Trainiac team did not worry about the economy because they were more worried about their own survival. “Being in survival mode forces you to learn to be lean… and operating with a very low cost base allows you to survive in any economy,” says Dennison. “We only bought the fourth desk when the sixth person arrived… looking for every possible way to save money and the philosophy of not over-spending on anything still runs deep in the company today”.

Still today, Dennison keeps a very close eye on his bank account, checking it at least twice a day. He always knows the most important financial indicators for his business such as order book, debtors days and work in progress. He developed these good basic habits because he started the business under such tight constraints. Even now that the business is growing rapidly and is profitable, he still sees it as a key part of his role as business leader, to know and respond to these indicators.

Trainiac now has over fifteen multinational clients with whom it does ongoing work and it has done over sixty projects. The company has a presence on two continents, Africa and North America, but it works for clients all over the world. Dennison moved out of the cottage in his backyard many years ago and he now houses his workforce of approximately 20 people in an office in Rosebank.

Dennison believes that as a small agile company, with a pioneering spirit and an innovative approach, Trainiac is well equipped to deal with the current slowdown in the economy. “As long as we keep doing good stuff, adding value to our clients and being creative, there is no reason why we should take big a hit,” he says.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

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Launch

Selling The Dream

When you’re starting a business, the secret to success is getting everyone — from customers to suppliers — buying into your vision.

Alan Knott-Craig

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I started a company in 2016 offering road building in residential areas for local municipalities. I realised that there is too much risk involved and I do not have the capital to purchase machinery. The overheads are also too high. I feel more comfortable supplying municipalities with commodities. I have been in sales and have good people skills and sales experience. However, I’m struggling to get a foot in the door. Manufacturers are reluctant to give me a credit advance. As a result, I had to let go of many opportunities. How do I overcome this obstacle? — Martin

I can only speak from my own experience selling to municipalities. I did it once, successfully. This is how I did it:

  1. I convinced the municipality to roll out public WiFi in low-income communities.
  2. The municipality awarded me a contract.
  3. With that contract in hand I shopped around to find a company that I could sub-contract. That company had to take a risk that the municipality would pay me, and I would in turn pay him. I had to take the risk that the sub-contractor wouldn’t deliver the goods.
  4. I found a sub-contractor.
  5. We deployed the WiFi.
  6. The municipality paid its bills.
  7. There was never a hint of corruption.

In retrospect I realise I was the beneficiary of a succession of benevolent miracles.

Miracle No. 1: Meeting a political leader that shared my vision and was competent.

Miracle No. 2: Getting a legitimate contract out of a municipality.

Miracle No. 3: Finding a sub-contractor I could trust, and that trusted me.

Miracle No. 4: Successfully working with the municipality to fulfil the contract.

Miracle No. 5: Getting paid by the municipality.

Miracle No. 6: Avoiding corruption.

If you believe in miracles, keep going. If you’re slightly more risk-averse (or less desperate) than I was, then rather don’t target municipalities to build your business.

You’ll note that I solved the supplier credit problem by finding a sub-contractor that trusted me. That’s the only way to do it. Not only do you have to sell the dream to the customer, you must sell the dream to the supplier. I recommend reading Shoe Dog, the story of Phil Knight and Nike.

Related: Alan Knott-Craig Answers You Questions From Business Idea To Start-up

I want to start a business, but I don’t know how to approach my local bank or investors, probably because I don’t have any experience in the business field. I am currently in a full-time job and holding on to the security of the monthly salary (which I know is wrong) but I have responsibilities. How do I break out? — Lorenzo

First, the security of a monthly salary is under-rated. Don’t be so quick to wish it away! Of course, a salary is a long-term dead-end. When you’re forced to retire at 65, you’re likely to be staring at 35 years of supporting yourself and your family relying on pension and savings alone. Assuming they don’t retrench you before age 65.

Be grateful for a salary, but be on the look-out for a way to make a living on your own terms.

That way you will learn skills that can be used after forced-retirement age, and even more important, you will be able to keep yourself busy rather than spending your old age pottering around the house in boredom and driving your significant other mad.

Forget about banks and investors. If you want to start a business, you must do it without ‘other people’s money’. Find a problem in your industry, solve that problem, get paid for solving the problem. Repeat.

Ideally find a like-minded colleague that you trust, pool your efforts and partner to find a way to make a living in your own business. Partnership massively de-risks entrepreneurship.

Related: Pay Your Dues Before Raising Capital


3-rules-for-being-an-entrepreneurAlan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.

What it’s about

It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur. For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy. This book is a collection of tips and wisdom that will help you make money without forgoing happiness.

Get it now

To download the free eBook or purchase a hard copy, go to www.13rules.co.za.  To browse Alan’s other books, visit bigalmanack.com/books/

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5 Lessons To Follow As You Take Your Product To Market

Don’t overly complicate things when launching your business. Instead, follow this advice from a successful entrepreneur so you’ll do things right.

Scott Duffy

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When launching a new business, product, or service, the most common mistake entrepreneurs make is trying to do too many things at once in the belief that going to market with “more” is better.

It isn’t. During your initial launch period, or when relaunching new products or services, “more” means additional risk. More also means unnecessary complexity, as well as additional time to market, so more capital will be required.

Below are some important things to remember as you prepare to take your product to market:

1. Don’t try to build Rome in a day

I have a good friend who raised $2 million in a very tough market to start a consumer internet business. Finding that much money to start a new business was amazing, and I congratulated him on a big win. He was ecstatic and told me he couldn’t wait to get to work on the site.

One year later, I ran into him again and asked how it was going. He sang the blues. He said he was doing terribly. In fact, he was on his way to his attorney’s office to shut the company down. They had launched a few months before but had already run out of money. I asked how that was possible, and he talked about his big vision, how his company aimed to provide everything their target customer could possibly want to buy in the category. Their goal was to be a one-stop shop. He and his team invested all their time and money building something big and comprehensive, confident their target customer wouldn’t want to go anywhere else once their website was up and running.

When the company got started, they were solving one problem for one target customer. It was a simple concept. But when the money came in, everyone started working on other “great ideas” and “shiny objects.” They kept building and building and building. They went from solving one problem for one very specific target customer to building a one-stop shop that did a lot of things for a lot of different people. Then they started running low on cash, so they decided to push the product out.

After the launch, they learned, much to their surprise, that about 95 percent of their users used just 5 percent of the site! And that 5 percent was the original product to solve the original problem.

So that means 95 percent of the time and money invested was essentially wasted. What can you learn from this?

Related: Hello Group’s Initial Product Failed The Night Before Launch. Today They Are An Industry Disruptor

2. Focus on one thing, the simplest thing

When kicking off a new product or service, put all your energy and focus into that product or service. Focus on one thing at a time. It shouldn’t be the hardest thing; it should be the simplest, what we’ll call the minimum viable product (MVP). The MVP provides the opportunity to learn the most about your customers, with the least amount of time, money and effort.

The MVP puts you in a position to go to market quickly, collect valuable feedback and not waste time building things customers don’t want. This strategy significantly mitigates your risk and helps avoid the trap my friend fell into. Remember, Amazon started just as an online bookseller.

3. Follow the 85-percent rule: Good is good enough

good-is-good-enough

Striving for perfection is the enemy of any product launch. As a rule of thumb, when the new business or product is 85 percent of the way there, you’re ready to go. In my experience, the level of effort required to reach 100 percent isn’t worth the additional time and expense at this stage. You’d be much better off getting something into the market and beginning to test.

4. Be great at collecting, and learning from, feedback

Once you’ve launched, listen to and learn from your users. Develop feedback loops to learn everything you possibly can.

  • What do users like and dislike about the product or service?
  • What features would they like to see added to enhance their experience?
  • Which features don’t work or generate little interest?

Do whatever you have to do to engage with your users. That may include offering incentives to get feedback on surveys or in focus groups, reaching out on social media, or generating outbound calls to learn more.

The hardest part of this process for many entrepreneurs is to be completely receptive to what customers tell you. Given your passion and all the time you’ve spent on the project, you may not want to hear negative feedback. You may be inclined to think the customer just doesn’t get it. But feedback is the most valuable tool you have as an entrepreneur. So listen, consider, and use what you learn to iterate, improve, or even throw out some of what you have built or planned.

Related: 3 Start-up Funding Tips To Help Launch Your Company

5. Avoid the shiny ball syndrome

As you start developing your MVP, you must fight “feature creep” at every step. You, your team, partners, and everyone else you share your vision with will have ideas about what should be added. While many of them will sound good at the time, they are instead shiny objects that distract you.

Your job is to stay focused on one thing, get it to market and then deliver the next thing. By focusing on one thing at a time, you can get to market quickly, learn a great deal about your product or service from actual customers and make changes based on their feedback And if your launch doesn’t fly, you have significantly mitigated your risk.

This article was originally posted here on Entrepreneur.com.

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How To Launch An Online Coaching Business

Cut through the noise and create a viral product.

Bedros Keuilian

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Work from home? Control your own schedule? Impact people across the world with your product or service?

Internet marketing is on the rise for a reason. It gives you the ability to scale your business to a global level without forfeiting your personal freedom. Still, there’s one question that still prevents entrepreneurs from entering the online space: “Is it really possible to make a living off the internet?”

Not only is it possible, it’s lucrative when done correctly. We live in the Golden Age of internet marketing. Thanks to social media, everyone can get in front of a camera and pitch their idea to the masses. Good enough, right?

Not quite. These days a big idea will only get you started; it’s what you do to bundle and package that idea that matters. Here are the three steps you need to take to launch a profitable online business.

Flesh out your idea

Of course, before you create your product, you need an idea. Your idea must solve a specific problem that a specific group of people face. Make sure you establish that before you move forward.

Now, before you begin creating your product, you need to write your sales copy. Your sales copy (or sales video, if that’s what you prefer) should be enticing enough to take prospects from “I’m interested in this” to “I need to buy this now.”

Related: Paddy Upton: People Centred Coaching

But, why write your sales copy before creating your product? Too many entrepreneurs write copy that promises a lot but delivers next to nothing. When you write your copy before creating your product, you build the blueprint to create a product that satisfies your customers’ needs –without overpromising.

Your sales copy should address the prospect’s problem, explain how your product is the solution to that problem, and include a list of bullet points that summarise the benefits of your product. Make sure you nail the first 500 words – easily the most read section of your sales copy. Finally, always create a sense of urgency or people at home won’t be motivated to buy your product.

People always ask me, “Well, what if I’m not a good writer?” That’s OK. Just say your pitch out loud, record it and send it to an online transcribing service. For a relatively inexpensive price, you’ll get your sales copy written out for you. Just review it, copy it and paste it to your website and boom – there’s your sales copy!

Build the “know, love and trust” factor

Most people believe you need to sell prospects first, then deliver results. But, what if you flip it? It’s much easier to sell someone once they know, love and trust you as an authority in your space, rather than selling them on your product before they even know if you can deliver the results you’re promising.

That’s why the most successful internet marketers – including myself – give away boatloads of free content via blogs and videos. Granted, the stuff we give away for free could easily be packaged together into a high-priced course, but that would be short-sighted. You don’t want prospects to buy from you once and move on – you want them to become long-term paying clients.

See, you deliver free quality content to your prospects, then they take it and implement it into their businesses. They start to see results in advance, which leads them to trust you more and more. Soon, they begin to crave more knowledge from you, and their willingness to pay for your products and services increases.

Eventually those prospects become your most loyal clients. They buy your front-end products, your upsells and your flagship products – all of which I’ll get to in just a second. But, before you get that far, make sure your prospects know, love and trust you before you worry about selling them anything.

Create your front-end product and upsells

Once your copy is written and you’re building the know, love and trust factor, your next move is to create a front-end product – a product that’s easy to sell. This could be an ebook, a membership site or a course that comes with follow-along videos.

Now, you might be tempted to charge a high price for that product. Here’s the thing: Most of the money is made on the back end. I’ll talk more about this in a second, but for now just remember that the front-end product is not the final product you’re really trying to sell them. I – along with many of my fellow internet marketers – don’t mind breaking even or losing money on front-end products because I know I’ll more than make my money back with my flagship product.

Instead, your aim should be to use that front-end product to upsell them instead. So, after they purchase your front-end product, offer them three different upsells. An upsell is a higher-priced product or service you offer a customer after they’ve bought something from you. These upsells should be done-for-you, and they should enhance the front-end product by making it easier to understand or more efficient at getting results.

Why are upsells so important? Besides adding value to your front-end product, you’ll be able to recruit more affiliates to promote your business. An affiliate promotes your product to their own audience for a commission fee. If you make money through upsells, affiliates will choose to work with your business over your competitors because you can pay them higher commissions. The payoff? You get more traffic going to your webpage and ultimately more bottom line revenue.

Related: 6 Questions You Should Be Asking When Coaching

Move them to your flagship product

That’s how you set up the front end of your online business. But, what about the back end? Remember I said that most of your money will be made on the back end and not the front end?

That’s why you need a flagship product to pitch your clients once they’re done with your front-end product. But, what in the world does a flagship product look like?

It could be high-end coaching sessions. It could be a spot in your exclusive mastermind group. It could even be a suite of software that teaches them everything they need to know about their industry. The front-end product is a way to get your clients through the door; your back-end product is the money-maker product, the one they’re more likely to buy once they’ve already purchased something from you.

I’ll give you an example. People will often find my products online. Usually when they finish using those products, they’re still hungry for more knowledge and advice. At this point, they’re considered qualified leads for my mastermind program, so we make sure they know about that programme and how to become a member of it.

That leaves you with one problem: How do you send marketing emails to every single person that buys your front-end product/upsells? It’s basically impossible, unless you’re in front of your computer screen 24/7 (which I’m sure you’re not). Fear not, because it’s actually easy to do when you use an auto-responder system to send out all those emails on your behalf.

It’s simple: When your clients purchase your front-end product, the system automatically sends them emails from you. That way, you can build a sequence where you give away even more of your best free content before sending them an offer for your flagship product. By the time they get to your flagship product, they’ll be so confident in your expertise and results that they happily pay the higher price for your higher level of service.

That’s the simple science behind converting your prospects into clients, and your clients into fiercely loyal clients. It’s how you sell your highest-priced online programmes without running into any of the typical sales objections. Follow these three steps and start building your own online business empire today.

This article was originally posted here on Entrepreneur.com.

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