Case study: Increasing profitability with passive income

Businesses survive (and thrive!) by continually generating income. But as a business owner, it’s easy to get caught up in a vicious cycle of performing a service, getting paid for it, performing another service, getting paid for it, etc.

That turns into a treadmill because you become dependent on that income and if you are not able to do the work, the income dries up. Additionally, you can’t grow beyond the time you have available to perform the service.

Therefore, if you are a business owner who wants to grow your business, you need to do it with passive income. Passive income is sometimes misunderstood. Some people think of it as “do-nothing-and-make-money”, which is basically impossible.

Rather, you should think of passive income as “work-once-and-get-paid-on-an-ongoing-basis”. That’s a big difference and successful passive income generation does require some initial investment of time, money, and effort.

Building passive-income-generating assets for your business is a great way to transition your business from a active (service-dependent) income to passive income. (If you’re looking for some ideas about passive income, check out this blog posts 5 levels of content monetization).

One of my clients came to me with that very problem. She is a well-known expert on the topic of finances but she was on a “treadmill” of services — consulting and speaking — that prevented her from growing her business a lot more. She had published one book, which helped her gain that expert status, but it was time to do more.

I brainstormed a few different options to help her generate some passive income and the one we decided to build first was an e-course that people pay to take.

First, we built a free e-course that provided great content. Second, we created a paid e-course that provided an advanced version of the free e-course. With so many people attracted to the free e-course, we were able to promote the paid e-course to a targeted, highly-interested audience, and people started paying my client for the course.

Just that one course wasn’t enough to completely replace and exceed the income my client was generating as a consultant and speaker, but that wasn’t her goal. Rather, she wanted to create a steady stream of income that continually trickled in, which is what is happening right now as people subscribe to her e-course.

And the best part is: Now that this e-course has been built once, it runs automatically and requires very little effort on her part to ensure that it continues. So the investment she made once will pay for itself and continue to pay her over and over again for years to come.

Passive income versus active income

In this blog post, I want to talk about the differences between passive and active income and how they relate to your business.

THE BASIC DIFFERENCE BETWEEN ACTIVE INCOME AND PASSIVE INCOME

Active income is money you earn that requires your effort.

For example, if you sell a service that you must first complete – such as freelance writing, graphic design, etc. – you are being paid for a combination of time, skill, and effort. And if you don’t put in that combination of time, skill, and effort, you don’t get paid. Or if you sell a product that requires some work on your part (i.e. to assemble or customize or ship), that is active income as well.

Passive income is money you earn without any effort on your part.

For example, if you write a book, you can sell it and earn passive income because you only need to write the book once.

UNDERSTANDING ACTIVE INCOME AND PASSIVE INCOME

Active income is commoditized. You get paid proportionate to the amount of time, skill, and effort you put into the product or service you provide. In other words, for every product or “unit of service” you provide, you get paid. If you want to make more money, you have to provide more products or units of service.

Passive income is a bit of a misnomer. It should really be called non-commoditized income. When brand new entrepreneurs hear the words “passive income”, they start to salivate because it sounds like you’re getting a ton of money with no effort at all. Experienced entrepreneurs know that passive income takes some work to set up and run… but it’s non-commoditized because the money you make is not as closely tied to the effort you put in. You can start an ad-based blog and put in hours of time in the beginning to add content and market it, but you can easy up in the future as traffic builds. Eventually, you can run the business with very little effort on your part.

A good example of the difference between active and passive income is to look at two different real estate investors.

  • One real estate investor flips houses. She buys a house, fixes it up and sells it. That’s active income because she gets paid as long as she’s buying, fixing, and selling.
  • A second real estate investor rents houses. She buys a house and rents it out. There is a little effort in the beginning to buy the house and maybe fix it up a bit, and there might be some ongoing effort to maintain the property and collect rent, but ultimately it’s passive income because the second investor gets paid on an ongoing basis for her initial effort even if she doesn’t buy and rent any more houses.

WHICH TYPE OF BUSINESS SHOULD YOU RUN?

Your ultimate business goal should be to build a passive (non-commoditized) business that doesn’t require you to put in an hour of effort to get paid for that hour. But realistically, you need cash flow first and it’s very easy to start up an active income business that produces cash flow. So if you’re just starting out and you need some cash, start with an active business but immediately begin building passive income opportunities (i.e. ebooks, ads, and rental houses) into your business model.

Passive income for financial and real estate professionals

Most financial and real estate professionals perform a service for their clients (for example: investing in stocks, selling life insurance, searching for a home to buy, or listing a home to sell). This is “active income” because it requires you to be present and spend some of your time and talent to deliver the service.

Unfortunately, you only have 24 hours in a day so there is a potential cap on the amount of money you can make by providing services to clients. And in some cases, if you have multiple service offerings (as is the case of a financial advisor who also sells insurance, for example), you can end up overloaded with so much service-offering that you don’t have time to grow your business any more.

That’s where the passive income model comes in and it can help you to grow your income and it can give you a little more freedom to reduce your face-to-face time with clients, if you want. I also like the idea of passive income for financial and real estate clients because these industries can be boom/bust industries so passive income provides another revenue stream to help smooth out the peaks and valleys.

WHAT IS PASSIVE INCOME?

Passive income is another type of business model. It’s a revenue stream where you don’t have to spend the time delivering a service. Instead, you sell something else that is complementary to the services you deliver (I’ll tell you some of the options later in this blog post).

For that reason, there is less of a “cap” on your income potential because whether you sell one or one hundred, you still spend the same amount of time.

The name “passive income” is a bit of a misnomer because there is still work involved. (Side note: If you look around the web at passive income possibilities, you are going to find a lot of opportunities that requires some effort even if they promise no effort at all, and you are going to find a lot of failed entrepreneurs who didn’t realize that their passive income required some effort to be successful). Some of the work involved might include marketing and advertising, emailing, accounting, and team management.

But don’t get scared off! What makes passive income so attractive is that you can put in some effort but get a much larger, ongoing result than you would by working one-on-one with clients.

You can continue working one-on-one with clients but the passive income part of your business allows you to generate additional revenue and grow your business to the point where you can dial back on some of your face-to-face time-intensive services.

PASSIVE INCOME OPPORTUNITIES

For financial and real estate professionals, there are many different passive income opportunities. Here are a few that are popular:

These are some possibilities that I’m really excited about and have seen many of my clients succeed with. (Plus the following two blog posts give you some ideas to turn your existing financial or real estate business into a more passive income business: How to be a lazy serial entrepreneur part 1 and How to be a lazy entrepreneur part 2).

HOW TO GET STARTED IN PASSIVE INCOME

  • Look at your own skills and weaknesses. That can tell you a lot about what you’re likely interested in promoting. If you have a weakness in the business that you’ve overcome, an ebook on that topic might be good. If you have a weakness that you haven’t overcome, don’t focus your efforts on creating a passive income stream around that. If you have a strength in a particular area, spend your efforts on that. (Case in point: I don’t love managing other people so my passive income streams are going to be focused on things I can do. It’s not likely that I’m going to build up a huge staff of people unless I can get an Operations Manager involved very early).
  • List the problems that your clients come to you with already and find ways to solve those problems… for example, by writing something (a book or an ebook) or by promoting someone else’s services (as an affiliate).
  • Look at your systems and processes. Is there something you do well that makes you so successful? Perhaps it can be developed into a product.
  • Look around to see what other competitors are doing and add your unique twist to it. (Note: I’m not recommending that you steal the content or the idea!!! But if you see a real estate agent who is selling an ebook on how to prepare a home to be listed, and you have a better way to do it, you should write your own ebook on the topic.
  • Here’s a blog post about how to develop products that are complementary to the services you already provide.
  • Click through Amazon and see what popular books are for sale in your category. Do you have any insight that you can share on one of those topics? Even if you don’t have enough for an entire book, perhaps you have enough for an ebook.
  • Send me an email. If you’re at a total loss, I’m happy to help with some free email-based consulting to give you some ideas and get you on the right path.

WHAT’S NEXT

It never hurts to broaden your options. Make it a goal in the next few months to create one more income stream. It doesn’t have to be big, comprehensive, or perfect. But get something together and put it out there and build from there. In the short term, you won’t retire from a flood of unexpected cash. But it will give you more credibility and more opportunity.

How to grow your business with passive income

In my recent blog post, I wrote that there are only 3 ways to grow your business.

The first way an entrepreneur can grow their business is through replicating their sales funnel. In today’s blog post, I want to talk about the second way that an entrepreneur can grow their business: By creating passive income.

“Passive income” is a phrase entrepreneurs use to describe something created once and then sold over and over (unlike a service or a manufactured-each-time product). An ebook is an example of a really popular form of passive income: You write it once and then resell it over and over again.

WHAT PASSIVE INCOME OPPORTUNITIES ARE AVAILABLE?

There are plenty of passive income opportunities available but they can generally be divided into two models:

  • Access-to-information: This is where you create a piece of content and then sell access to it. For example, you might sell downloadable ebooks, reports, or templates; access to listen to audio files or view video files; access to knowledge centers; whatever. Your customer pays you in order to get access to information in whatever form that is convenient for you to create and for them to access it. You’ve seen these sites: There’s usually a “Buy Now” button for someone to purchase an ebook.

  • Advertisements with content: This is where you create content and post ads on the content. As people click to your site and view the content, they also click on the ads and the ad revenue earns you money. In this model, you write and post the content and people view it for free and revenue is generated through ads. You’ve seen these sites, too. They’re the ones with Google ads or banners scattered throughout the content.

Of course, I’ve only described a really simplified example of each. You can mix and match and add layers to make it more effective. For example, one common way of selling digital content is with a two-step approach: Ask for your leads to become prospects by signing up for a free ezine. Then, build a relationship with these prospects and offer them your ebook.

You might want to also check out a related blog post entitled 5 levels of content monetization for a different way to look at passive (and active) content sales.

WHICH PASSIVE INCOME OPPORTUNITY IS RIGHT FOR YOU?

That depends on you and your subject matter. Here’s what I often recommend to my clients:

Posting free content with advertising is just fine but you only get paid when you send people OFF of your website to an advertiser’s site. And chances are, those advertisements are for a product or service that could be considered “competition” if you are also selling similar products or services to the same target market.

So, if you have a sales funnel that includes other products or services, don’t erode your sales in exchange for advertising dollars. Selling access to digital content is just probably better. However, if you don’t have any products or services but want to earn some income, creating content and posting ads can be a way to earn income from an industry.

Having said that, there are lots of sites out there with ads on their sites and they do just fine building traffic and earning advertising revenue. But most of my clients are real estate and financial clients and they want to build a long-term relationship with a customer, so the goal is (usually) to keep website visitors rather than send them to advertisers’ sites. The advertising model sends customers away while the access-to-information model keeps customers on your site and builds your brand’s value.

HOW DO I GET STARTED WITH PASSIVE CONTENT?

Start by figuring out if there are any services or products that you can turn passive. Pay particular attention to existing products or services that you tend to repeat. That’s a good start. This blogpost entitled Are your products and sales funnel taking up too much of your time? will help you to identify opportunities that can become passive.

PASSIVE CONTENT TIPS

Be sure to create compelling, unique content that addresses a problem or issue in the industry you’re working in (I call this The Pickaxe Factor). By doing that, you’ll be more likely to attract potential readers. If they’re reading your content on your pay-for-access-to-information site, they’ll be more likely to pay to read. Or, if they’re reading your content on your freely-available advertisement-model site, they’ll be more likely to click the advertising.

If you’re creating passive content that you’ll sell through the access-to-information model, pricing your content effectively will prove to be a challenge (because it’s a challenge for a lot of entrepreneurs). Check out How much should I charge? A magic formula to easily find the best price for your product for some pricing ideas.

And remember: This might be called “passive income” but it doesn’t mean you should stop marketing. Passive income requires very active marketing, especially in the beginning. Have a plan to market like crazy so you can build traffic to your content (no matter which model you choose).

There are only 3 ways to grow your business

Every entrepreneur wants to grow their business and they drink from the deep well of marketing and sales advice to help them. But let’s get one thing clear: All of those marketing- and sales-related tips and ideas and techniques and tricks can contribute to business growth, but there are really only 3 ways that your business can actually grow.

Here they are, in no particular order:

  • Replicate your sales funnel: This can be achieved by (1) hiring employees and managing them, (2) franchising your business, or (3) creating an affiliate program. Financial and real estate businesses may find that the first choice (hiring people to help support your practice) is the easiest and clearest option. The other two choices aren’t unheard of in financial and real estate businesses but can be a little more complicated in these highly regulated industries.

  • Create passive income: This is achieved by creating products (instead of services) that people can buy and receive without any ongoing effort from you. (An ebook is a classic example of this business model). For some ways to help figure out how to turn your active, time-intensive business into a passive one, check out How to be a lazy serial entrepreneur (part 1) and How to be a lazy serial entrepreneur (part 2).

  • Increase some aspect of the purchase: This can be achieved by increasing (1) the number of customers who buy from you at any given time, (2) how much volume you sell per customer, or (3) how much money you earn from each customer. These options are pretty straightforward to implement but their true success can be limited by some factors (such as the amount of time you have in a day to spend with each customer). For ideas on achieving all three methods of increasing some aspect of the purchase, check out this blog post on how to find the best customers in your sales funnel and earn more profit from them.

So, which should you choose? There’s no reason why you can’t select all three options and continually work at implementing them all, over time. But it also depends on who you are and how you like to operate. Each of these options requires something different from you. The first option — replicating your sales funnel — requires some administrative and management skill. The second option — passive income — can be quite profitable but requires a (sometimes considerable) up-front investment of time and money. The third option — increasing some aspect of the purchase — is probably the easiest and fastest to implement but its effects can be dampened by the time you have and whatever the market can bear.

Start by working on whichever option is easiest for you to implement based on who you are and what strengths you have. Then build off of those wins and select another option to grow some more.

Over the next few days, I’ll blog about some additional ideas and tips to help you work through each of these three options.