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A Business Lesson

Recently, WM Media purchased a website with advice on savings payday loans. Normally, we wouldn’t purchase this type of website because it’s a niche that is full of spam. However, we made an exception in this case because we wanted to test its risk vs. returns.

The sellers are a web development firm in India who had shown themselves to be very trustworthy and reliable. We’d just concluded a $38,000 deal with them, so this website is very small by comparison. Additionally, we had also established a fixed price for any websites we buy from them in the future – 16 times its previous month’s earnings.

Therefore, when we saw the $160ish screenshot of its adsense earnings for the previous month, we quickly settled on a price of $2700. In less than an hour, the money had been transferred and the website in our possession.

A few days later, as I looked at the earnings for this website, it dawned on me that it was only getting a few visitors per day! Then, as I took a closer look at the website itself, it only had a few pages of mediocre content! Popularity wise, it barely had a hundred backlinks (links from other websites pointing to ours) equaling about $50-100 worth of promotions. In fact, it didn’t even get a single search engine visitor!

Here was a website that costs maybe $300 to replicate that we paid $2700 for!

When Your Business Is Going Well

So how did this happen? How did we miss that?

Let’s take a look at our normal steps of evaluating a website:

1) Check how much content there is and the quality of the content.
2) Check how many backlinks there are, and what sites in general are linking to them.
3) Check the age of the domain.
4) Check the current traffic levels and traffic sources.
5) Check the current revenue.
6) Evaluate the potential upside and downside of the website.

In this specific case, we’d only checked last month’s revenue and briefly skimmed the content. We’d completely ignored the age of the domain, the upside/downside of the site (by assuming it’s the same as other ones), and guessed the popularity based on their adsense statistics.

When we discussed the price with the team in India, they’d actually warned us that the earnings for January were significantly lower. Yet, we went ahead anyway!

This is undoubtedly linked to the $38,000 purchase. Having just bought a large website and seeing that it has turned out very well, we became lax in our evaluations! We stopped doing the very things that made the first purchase so successful!

Business And “Win Tilt”

This is a very similar situation to those experienced while playing poker. When people win a little or lose a little, their playing style doesn’t change too much, and they continue playing well. However, if they suddenly win a lot of money (say $10,000 in a $5/10 No Limit Game), their playing style suddenly changes! Because winning money had been so easy, they become more lax in their starting hand requirements and their play in general. Hey, it’s so easy to win, so why not win more? They become careless because they have such a huge pile of money in front of them!

In the worst case, they lose all of that money back because they are playing so poorly. In the best case, they lose a little of those winnings and still end up a big winner. It’s the latter case that is very deceptive and must be guarded against. Because we’ve won so much, that extra $1000 or $2000 we lose at the end doesn’t make as big of an emotional impact. After all, we’re still up $8000 right?

However, $2000 is $2000, whether you have won $10,000 or lost $5,000.

Business, like life, is naturally cyclic. Sometimes, you will have tons of customers banging at your door, while other times, you’ll be out feeling lucky to have any customers at all! When things are going well, you may not notice that $2,000. However, when the cycle changes and you’re not doing as well, that $2,000 you lost earlier will be felt all the more! Besides, if you’re starting to make bad decisions on a consistent basis, it’s only a matter of time before you end up broke!

In poker, my friends and I named this phenomenon “Win Tilt”. In poker, a player sometimes starts to play poorly when they’ve lost a lot of money, generally termed “Tilt”. However, the much less noticed situation is when the player starts to play poorly when he wins a lot!

Cherish Your Successes

This happens in other walks of life besides poker and business too! When some people get married, they forget what they’ve done to secure the love of the other person in the first place. When some people get rich, they start wasting money on random things. When some people get a job, they stop trying hard like they did in school.

What are the things you really cherish in your life?

Do you remember how you got them?

Are you still doing the things that got you where you are?

It’s a very dangerous situation because when you have nothing, it’s easy to notice a loss and fix it. However, when you’re winning, it’s very easy to let it slip and keep making the same mistake – all the way until you have nothing again!

Events such as these serve as a constant reminder: Not only do we have to keep improving ourselves in order to grow and succeed, we also have to maintain the things we’ve done to get us where we are now!

It’s important to be careful when you’re winning, because mistakes are just as costly as when you’re losing!

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6 Responses to “Why You Should Be Careful When Your Business Is Going Well”

  1. A Website Deals Results In A Lesson About Trust on February 15th, 2008 9:08 am

    [...] few days ago, I’d written about WM Media’s deal in Why You Should Be Careful When Your Business Is Going Well and lamented us for not doing the due diligence that was required on the website. Today, however, [...]

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