Passive Income, Part One: Pipe Dream or Sound
By Marc Ostrofsky
Passive income. It's the Holy Grail of lifestyle entrepreneurship. It sounds
great - work four hours a week and make a full-time living. Spend your time
on the beach, with your family, or doing whatever else floats your boat.
I know people who've done it, but they're few and far between, which has a
tendency to make a lot of skeptics, who then dismiss the concept entirely.
Most entrepreneurs don't start their business with the goal of one day
owning a second home in Colorado or the Caribbean. (Or both.) They either
saw a great opportunity, had an itch that needed to be scratched, or had a
big idea of how to change the world.
And most of them fail. Why? One of the most common reasons is cash flow. All
too often it's not even a very big shortfall, nor a very long one, but the
business owner simply doesn't have any more available cash or credit and the
orders just aren't quite there yet, or the product's not quite finished, or
And that's where passive income comes into play.
Entrepreneurship is a rollercoaster ride - passive income just makes sure
that you don't bottom out in the natural dips that come with the territory.
Think of it as a heavy-duty shock absorber. And for all those businesses
that don't have piles of VC cash sitting in the bank, it can be a critical
business survival strategy.
Passive income isn't just a startup strategy, though. For a mature company,
it can be a path to increased profitability, or a way to expand your
business without an external capital infusion. It can also be an exit
strategy for the founder - the way to transition from managing your business
on a day-to-day business to owning it as an investment - an "asset under
Let's first understand what passive income really is, and what it isn't.
There are two general categories of passive income:
Residual income is received over time from work done once, for example:
• An insurance agent who gets commission every year when policies renew
• A direct sales rep's income from her customers when they reorder
• A dance instructor who produces a video and sells it at the studio where
• A life coach who creates a workbook and sells it online
• A photographer who makes his photos available through a stock photography
clearinghouse and gets paid a royalty whenever someone buys one of his
There are many different ways to generate residual income across a wide
variety of businesses. It may be recurring income from current customers, or
automated sales of a product to new customers. It doesn't have to be fully
automated, but any human involvement must be minimal.
Leveraged income is money you make off the work of other people, for
• An information product publisher selling through online affiliates
• A network marketer who builds a downline and receives commissions on those
• A general contractor who makes a profit margin on the work done by
• Franchising your business model to other entrepreneurs
Again, there are many different models in many different businesses. The key
is that you are making money off of other people's labor, rather than
primarily your own, and that you are only paying them when revenue is
actually generated, i.e., little or no overhead expenses.
Passive income is not merely recurring income, such as a consultant on a
monthly retainer, or a subscription-based publication. While these
structures may offer more stability, they also come with an obligation to
perform in a timely manner, which has a tendency to rear its head at the
most inconvenient times for your core business activity. With truly passive
income, basically all you do is process transactions.
There are a lot of misconceptions about what is really passive income and
what isn't. Blogging is not passive income - unless you've outsourced
everything to a team of writers, designers and virtual assistants and are
still making money on top of that. Buying and selling on eBay isn't passive
income - unless you're selling exclusively items that can be drop-shipped,
without you ever touching them. Self-publishing a book which gets sold
primarily at the back of the room at your speaking engagements, by you, is
not passive income. Making your speaking deal include a copy of the book for
In part 2, we'll take a look at specific ways you can apply passive income
concepts in your business.
Internet entrepreneur and legendary ecommerce pioneer, Marc Ostrofsky,
launched his book May, 2011, titled Get Rich Click (@getrichclick), teaching
people how to make money with real world examples. View two chapters for
Get Rich Click - two chapter sample