Entrepreneurs are supposed to be incredibly wealthy… but how exactly do they make their money?
No, entrepreneurs don’t steal from the poor and downtrodden. Entrepreneurs make money by starting a business and then selling a product or service to make money. That’s a pretty good summary of how entrepreneurs make money.
But that doesn’t really explain much and that doesn’t make for a very interesting article.
So let’s go deeper into the topic.
We’ve talked about the actual definition of the word “entrepreneur” on this site before as well as what it means to be an entrepreneur. We won’t rehash that article but let’s start off with an example of an entrepreneur.
And for the sake of familiarity, let’s go with Elon Musk.
Elon Musk is probably the poster boy of being an ultra-successful entrepreneur despite being a bit eccentric. He built numerous successful businesses and companies such as PayPal (the online payment processor), Tesla (the electric car company) and SpaceX (the rocket company). Musk built those companies up, made some extremely impressive profits then eventually became a billionaire and one of the richest men on Earth.
And if he has his way, he’ll eventually be the richest person on Mars.
Elon Musk is the poster boy of entrepreneurship because of how successful his businesses are and how innovative his companies’ offerings are. Entrepreneurship is synonymous with making money and making revolutionary products. Elon Musk… he definitely does both of those things.
Do you think that we’re going to unveil some grand and well-hidden secret of entrepreneurship? Do you think we’re going to tell you some dark and forbidden spell to instantly make you a millionaire? Do you think we’re going to absolutely blow your mind?
Nope. Sorry to disappoint.
We won’t be telling you that one trick that’ll turn you into a successful entrepreneur. We’ll just be telling you how entrepreneurs usually make their money. It’s not going to be mind blowing but it is going to be informative.
Here’s the most basic and obvious way for an entrepreneur to make money. They can produce and sell a product to customers. Selling to customers directly can be called business-to-consumer (B2C).
For example, an entrepreneur could make a mop with a new, improved design and sell it to consumers for an amount of money that the consumer is willing to pay. The entrepreneur innovates and makes a new mop which is easier to clean with that they sell to consumers for a profit.
Another way that entrepreneurs can make money is by providing a service in exchange for payments. Selling a service can either be business-to-consumer (B2C) or business-to-business (B2B).
An example of a B2C service is a plumber providing their plumbing service directly to a consumer. The plumber helps fix the consumer’s toilet and is then paid for the service that they provided.
An example of a B2B service is an accountant providing their bookkeeping services to another business. They audit another business’s accounts and are paid for providing that service to another business.
Starting a business is one thing. If an entrepreneur wants to make a serious amount of money, they need to build and grow their business. It sounds obvious but growing a business is a completely different skill set compared to running a business.
This difference trips up and causes a lot of problems for beginner entrepreneurs.
If an entrepreneur wants to grow their business and their profits, they usually do one or more of these three things:
- They find a way to get more customers. This is usually done with advertising and marketing campaigns.
- They figure out how to increase their customer’s average purchase value. This means that the entrepreneur needs to figure out how to make their potential customers and their past customers spend more money with them.
- They need to find a way to get regular, repeat customers. An entrepreneur should always strive to make their customers into loyal fans of their business who wouldn’t want to do business with any of their potential competitors.
Growing a business is a complex task and there are many strategies that are readily available to an entrepreneur. That being said, you could boil down all those strategies and techniques to the three points above.
PS: Another way that a business can increase their profits is by reducing their costs… but cost-cutting to improve your profits can be a risky game that can actually damage a business. It is possible to reduce costs without compromising quality but it’s harder than you’d think it is.
The section above covered the basics of how entrepreneurs make their money. Now that we’ve covered the main ways an entrepreneur makes their money, let’s go a bit deeper into the topic.
This section is going to cover some lesser known ways that entrepreneurs can make money. To reiterate, there won’t be any world-shattering business secrets in this article. However, there might be something in this section that’ll give you a lightbulb moment and help you start or improve your business.
Let’s go into a topic that’s both hopeful and depressing. Chances are pretty high that your first business is going to be pretty bad and it’s going to fail. That’s pretty bleak.
But don’t worry! Because it can get better.
Many entrepreneurs fail with their first business but they learn a lot from it. They take what they learnt from their first business and make sure that their next business is a success. As long as you keep going and learn from your mistakes, you will find some success eventually.
You might not become a billionaire but you will find at least some success.
It’s actually pretty common for entrepreneurs to realise that they’re not suited for one field or niche and then pivot into a different but related field. They then become successful in that niche because of their experiences and failures.
Here’s an example of a successful entrepreneur that pivoted and learnt from their earlier failures. We’re going to talk about Milton Hershey.
If you thought we were going to talk about Elon Musk, we already sang his praises earlier. For the sake of variety, we’ll be talking about Milton Hershey.
Milton Hershey is the entrepreneur who you can thank for Hershey’s Kisses and every other chocolate treat that you enjoy from the Hershey Company. He failed at starting a candy company multiple times before finding success with the Hershey Company. He learnt from his prior failed candy businesses and made a leaner business that only focused on selling caramels. From that point on, he grew the Hershey Company into what you know today.
What’s an up-sell?
Basically, it’s when you offer an upgrade on a product or service that you’re already offering. An entrepreneur will offer a more expensive product to their customer by convincing the customer that their bigger, better option that has all the bells and whistles is worth some extra money.
A good example of a company that thrives on up-sells is McDonalds. It’s almost certain that everyone who goes to McDonalds for a regular cheeseburger walks away with either a double cheeseburger or a Big Mac because McDonalds is just that good at offering their customers up-sells.
The other up-sells that McDonalds actively pushes are size upgrades on their drinks and fries.
Up-sells are pretty common but have heard about down-sells? It’s when you offer a cheaper or slightly worse version of your offering to a potential customer. While offering a down-sell might seem like you’re flushing money down the toilet, down-sells can be a great way to increase your profits while building your business’s reputation.
A down-sell can help your business by:
- Increasing your profits. Remember this: some money is better than no money. If your potential can’t afford your higher priced options, a down-sell can still help you make a sale by offering them a low-cost option.
- Building your business’s reputation. You can build a good reputation with your past customers and potential customers by offering down-sells. This is because you come off as more honest and much less sleazy than salesmen who do everything in their power to get you to buy the most expensive thing they have for sale.
An example of offering a down-sell is a car salesman offering you a budget-friendly car when they realise that you can’t afford something more expensive.
A car salesman with a good heart would try to sell you a Toyota Camry when they realize that you can’t afford a BMW 8 Series to make sure that you don’t wreck your finances. The car salesman in this example builds up a reputation for being an actual honest car salesman while also still making a sale.
Last one, what’s a cross-sell? Up-sells and cross-sells tend to get mixed up but they’re two different things altogether. A cross-sell is when you offer a related offering when your customer is interested in or wants to purchase one of your offerings already.
Offering drinks at a restaurant to customers who ordered food is an example of a cross-sell.
Another example of a cross-sell is when you buy a smartphone and you’re immediately shown wireless earphones or studio headphones on top of your purchase. Apple is a master at cross-selling products and they pretty much have it down to a science.
Did you know that you can make money by selling off your business?
It’s common knowledge to most people in business but a lot of regular people are surprised that this is the case and can’t wrap their heads around it. Think of it like building and selling off a house. You build a house brick by brick but instead of living in it, you sell off the house to the highest bidder.
When an entrepreneur grows their business to a decent size, they have the option to sell it off. Businesses typically sell for a multiple of their yearly profits. If a business makes $250,000 a year, you could potentially sell it for $500,000 to $1,000,000.
An entrepreneur would need to build up their business to be big enough to get bigger multiples. The higher the profits a business makes, the higher the multiple and the more attractive the business would be to potential buyers. The industry your business is in is also a factor that comes into play when you want to sell off your business for the highest amount possible.
A great example of entrepreneurs that built up a successful business and sold it off for a huge amount of money are Jacob Kassan and Kramer LaPlante.
These two entrepreneurs started the watch company MVMT in 2013 and eventually sold it in 2017 for the impressive sum of $100 million. They started a company that sold watches directly to consumers, made it grow and make impressive profits then eventually sold the company for a multiple of those profits.
Entrepreneurs have no shortage of ways that they can potentially make a lot of money. However, this is balanced out there are an equal amount of ways for them to fail and end up flat broke. If you want massive rewards, you need to take massive risks.
That can either motivate you to dive right into entrepreneurship or scare you away from it completely.
Hopefully this article taught you a bit about how entrepreneurs make money and gave you some good ideas if you’re thinking about starting one. If it gave you an idea that will help you improve a business that you’re already running, then that’s even better!