You probably think that setting up a passive income business takes next to no time at all, has no associated risks, and needs no special skills...
Well, you’d be wrong on all counts — and that’s just the start of the truth about real passive income. Don’t believe everything you read online, and be aware of things that are frequently ‘hyped up’.
Below I outline 6 truths about real passive income. Read on, and not only will you find out how passive income really works, you’ll understand how you can make a living using this popular business model.
1. There’s no work involved in real passive income
Many people think that real passive income is simple, that you can stay ahead of the competition and earn money without putting any effort in at all. This could not be further from the truth.
In order to make real money, your source of passive income needs to be well-managed from day one and you will need to hustle for your money.
You’ll need to pick out a great niche. Getting the right niche requires a lot of research, as you need to find an area that is both profitable and which has yet to be exploited. At Echo Studio, we do not pursue any projects that don’t have a validated niche. Market research, immersion, and validation is the first step of our system because it’s the most indicative to a venture’s success.
Marc Andreessen, a legendary entrepreneur, investor, software engineer, and co-founder and general partner of Silicon Valley venture capital firm Andreessen Horowitz, has popularized the vital importance of finding product-market fit in an a blog post called “The Only Thing That Matters.”
Here’s a passage from that post:
Carried a step further, I believe that the life of any startup can be divided into two parts: before product/market fit (call this "BPMF") and after product/market fit ("APMF").
When you are BPMF, focus obsessively on getting to product/market fit.
Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital -- whatever is required.
When you get right down to it, you can ignore almost everything else.
I'm not suggesting that you do ignore everything else -- just that judging from what I've seen in successful startups, you can.
Whenever you see a successful startup, you see one that has reached product/market fit -- and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.
Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30" monitors for all the programmers, top tier VCs on the board -- heading straight off a cliff due to not ever finding product/market fit.
Ironically, once a startup is successful, and you ask the founders what made it successful, they will usually cite all kinds of things that had nothing to do with it. People are terrible at understanding causation. But in almost every case, the cause was actually product/market fit.
Because, really, what else could it possibly be?
For more information on how to validate your market, give us a call.
Once you’ve got your niche and know how to sell it to your target market, you need to make sure that your method of drawing an income from it continues to best serve the needs of the market and your customer base.
If passive income involved no work, then everyone would be earning their living passively.
2. You can start earning a real passive income in no time at all
One of the great appeals of real passive income has been the idea that you can set up a business that allows you to passively earn money in your spare time – in no time at all. This is another myth.
The truth is that there are many things you need to do to get your business set up and to bring customers to it. For example, take affiliate marketing. You might think that all you need to do is set up a website and write some articles. However, just some of the behind the scenes work involved includes:
Arranging the hosting
Picking the theme
Finding products and companies with an affiliate program
Writing the content for your website (remember, affiliate articles are long, well-researched, and keyword targeted. This takes a lot of time)
And that’s just the start. All of this takes time, and you might not see any money from your business for months. So, while you can start a business based on the real passive income model in your spare time, it’ll take a lot of your spare time to do it.
Through our online courses at Echo Studio, we’ve seen that dedicating 5 hours per week to following a step-by-step system is a solid amount of time, but without clear steps laid out for you, it’ll take inordinately more time.
When I started building my own online business, I was bootstrapped, I tried learning everything on my own, and I lost months worth of time just trying to figure out what I should do or learn next.
It wasn’t until I splurged $2,400 to take an online course called Zero to Launch that I actually started getting somewhere and seeing progressive results. Till this day, that course is the best investment I’ve ever made because it gave me a clear picture of what the necessary steps were and it got me started.
3. It costs nothing to run a business based on real passive income
Todd R. Tresidder is an ebook author who writes on a range of financial matters. He’s also someone whose business model is considered a form of passive income. However, Todd is very clear that there are plenty of start-up costs and ongoing costs that come with his work.
He explains that he needs to “invest in the cover, software, and monthly overhead to run the system.” Among the ongoing costs that come from running his ‘passive’ business is using a Virtual Assistant (VA). This helps save time but he still has to pay for the service and “pay the price in training, research, and management of the VA.”
This is just a small sample of the startup and ongoing costs that come from running a business based on real passive income. The reality is that whatever you chose as your niche it will cost you both time and money.
The key is to ensure your products or service have validated demand and will easily cover those costs. Information products like an e-Book or online course can be incredibly lucrative because their profit margins are so wide, they’re infinitely duplicatable, and they can be accessed by anyone with an internet connection. However, if you’re not careful, you could spend tons of time and money building an online course no one will buy.
4. One source of real passive income is all you need
The key to long-term success in the stock market isn’t simply to buy low and sell high. To make money from the stock market you need to diversify your portfolio by investing in as many different areas as possible. Real passive income is no different.
The reason for diversifying is simple: it spreads risk so that your income is not dependent on one area. In spreading your risk you also widen your potential revenue streams.
What this means for your passive income business model is one or two things:
You either need to have a niche that enables diversification or bundling products
Or you need to have a diverse range of niches
Ramit Sethi, a personal finance advisor and pioneer for online entrepreneurs, shares an analogy of creating a “financial flywheel”.
Basically, when you release one product, like a $5 e-Book, and start making a profit from that product, your financial flywheel starts spinning, slowly but surely.
Say you’re just starting out and you’re selling 10 $5 e-Books per month (I use 10 as an example because it seems pretty realistic for anyone to sell to 10 people per month). That’s 120 e-Books per year for a total yearly profit of $600. That amount of cash flow is definitely not enough to live off of right?
However, say, as you grow your audience and expertise, you add new products like a $20 e-Book and a $200 online course. Say you sell 10 $20 e-Books per month and get 10 students for your $200 online course. That’s $2,400 per year profit from your e-Book and $24,000 per year profit from your online course.
Altogether, your business is now grossing $27,000 because you’re now selling two more higher-grossing products on top of your original $5 e-Book. Your financial flywheel starts spinning exponentially faster as you add new products.
Now, say you build your premium-priced flagship online course that teaches everything your niche needs to know for $2,400 and you sell it to 5 students per month. That’s now $12,000 per month, $144,000 per year.
On top of that, to make taking this premium course more accessible and less daunting, you offer an accelerator program on top of the course for which students can pay $4,000 (instead of $2,400) and get weekly 1-on-1 coaching with you to help keep themselves accountable and complete the course.
Say 1 of the five students you sell your course to per month wants to join the accelerator program. That’s now $13,600 per month, $163,200 per year.
For all the skeptics, you offer a 365-day money-back guarantee, that way any student can complete the course, show you they did the work, and still get a refund if they want.
Total, you’re now selling:
(ex: Product → Profit)
$5 e-Book → $600/year
$20 e-Book → $2,400/year
$200 online course → $24,000/year
$2,400 online course with accelerator program → $163,200/year
TOTAL → $190,200/year gross profit.
I created a Product Pricing Calculator to help me validate my product ideas, make earning projections, and decide how to price and package my products. You can download it for free below:
Say your margins are terrible, you’re overpaying virtual assistants, and, after other associated costs and taxes, you only make half of that for your net profit.
That’s still $95,100/per year almost entirely automated, which means you’d be making more than most entry-level python coders for a fraction of the time (not bad for someone who started with a $5 e-Book right?).
This is because selling information products is like making compounded interest.
Once you set up an automated system for your product, it simply keeps churning out a profit. There are associated costs with running the system, but, if it’s a good product targeted to the right niche, there are also considerable profits that outweigh those associated costs.
As you add more and more products that are sold automatically, your flywheel spins faster and faster and can eventually churn out serious profits without adding any costs.
Watch the video below to get more information on how you build more than one source of passive income…
5. Any idea can be turned into a business based on real passive income
As I touched on earlier, finding a niche for your passive business takes time. The reason for this is that not every idea is profitable. Niche selection is crucial and you need to be very aware of the market that you select, including your competition and your customer base.
In order to know if the niche you’ve selected is profitable, you need to review what the market demand is. We cover that in step two of the Echo Studio System: Market Research, Immersion, and Validation.
You can then take an idea that you know is successful already and build a landing page within the niche you have selected, to gauge interest and reduce the risk of picking an unprofitable idea. This also cuts down the start-up costs of setting up your whole business, leaving you with the more passive job of analyzing demand.
We've helped clients generate their own profitable ideas based on our audit of their skills, strengths, and interests. We run every potential idea through our demand matrix and profitability tests to gauge whether it’s worth pursuing or not. That means, anyone can come up with multiple profitable ideas, but not every idea can be turned into a profitable business.
However, the reality is that even a well-researched, and well-applied idea offers no guarantees of success.
6. Real passive income is guaranteed
My last point is short and simple. For those who consider passive income a guaranteed way of making money: you’re very wrong.
In fact, this myth exposes the most important truth about passive income: like all business models, there is a risk that your passive income business will fail. Nothing is ever guaranteed, and you will need to keep moving with the times and innovating.
There is a ton of hype around online business and tons of scams that come with that hype. You have to take everything with a grain of salt and test your assumptions.
Now you know the truth about passive income: there’s no such thing as real passive income. This doesn’t mean that it’s a complete myth, but what it does mean is that to build a successful business based on a passive income model you’ll have to work, spend money, and take risks. Now that you know, you’re in a great position to start your online business based on the real passive income model.
Recommended reading: Start an Online Business
Adrien Harrison is the Founder & CEO of Echo Studio, which offers online business consulting and automation for small business owners, freelancers, and startups. You can learn more about Adrien by visiting echostudio.co/about or following him on Instagram @therealdigitalnomad
Patrick Foster is a writer and e-Commerce expert from Ecommerce Tips — an industry-leading ecommerce blog dedicated to sharing business, entrepreneurial insights from the sector, and covering the various different business models. Check out the latest news on Twitter @myecommercetips.