The One Thing You Must Know About Passive Income, or Else!
If you don’t master this one thing, you will fail in earning a passive income online. What am I talking about? It’s something called automation. I like to say that automation is Passive Income’s best friend. Without automation, there is no real passive income. Let me give you some examples:
You work for a company. You work X hours, and you get paid X dollars. Are you earning a passive income? Obviously not. Next…
You own a small store at the mall. Customers come into your doors, find an item they like, pay your employed cashier, and leave happy. Are you earning a passive income? No. You’re still working and probably putting in a certain amount of hours each day. As a “brick and mortar” store owner, you may be working less in your store, but you’re working hard making sure your products are stocked, employees are paid, books are kept, managing your employees, etc. Next…
You sell figurines on Ebay. You start an auction, people find your figurines and place bids. The winners pay you automatically each time through Paypal. Are you earning a passive income? Nope. Once you get paid, you have to manually package and ship the item at the post office. Then, hopefully it gets there in one piece. Next…
You own a website online that sells toys. You don’t have any inventory as the toys are drop-shipped to customers by the manufacturer. Customers find your website, purchase toys with an online billing form and payments are automatically processed and the money gets placed into your business bank account. You tell the manufacturer the addresses of the customers and their orders, and the manufacturer ships the items out for you. Are you earning a passive income? Not yet. You are still needed in order for transactions to be completed.
None of these example are examples of an automatic business model.
An Example of Automation
Here is a true life basic example of how an entire transaction process is fully automated to provide a passive income. Below, you’ll see a flow chart of how I make money on my blog at greenexamacademy.com. Notice where I am in the equation:
I am NO WHERE within the equation in any part of the transaction.In the wise words of Timothy Ferriss of The 4-Hour Workweek:
“I am not a tollbooth through which anything needs to pass. I am more like a police officer on the side of the road who can step in if need be…”
-Timothy Ferriss, pg. 187
This work flow is truly automated because I could do anything I want and sales would keep going through.
I still answer emails from customers, and if one part of the cycle brakes down or stopped working for some reason, I’d have to step in and work around it. But the fact is, I’m not needed to complete the transaction and earn money.
(I could hire someone to manage all customer service emails as well as make sure everything was still working correctly, but I’m not at that stage yet. Still – I wake up each morning with sales, and it’s because of this business model.)
Note that membership websites also fit this business model.
Scalability
Another way to find out if a business model is truly automated and earning a passive income is to see if it’s scalable. That means if I sell 10 items in one day or 100,000 items in one day (which would be sweet), I wouldn’t be any more involved either way.
Take a look at my flow chart. If 100,000 customers came through and bought my eBook, I wouldn’t have any problem handling that kind of influx. Now thinking back to the examples at the beginning of this post, you would not be able to handle that many customers at once. Passive income and automation is scalable.
Is Writing on eHow an Example of Automation?
In my thoughts, the actual act of writing on eHow.com is a step toward creating an automatic passive income generator. Having articles already written on eHow is somewhat synonymous to having my eBook already written and on sale.
Here is a flow chart for you eHow writers out there:
As you can very well see, YOU are out of the “transaction” equation as well. As long as you have articles written on eHow, everything is automatic and you are earning a passive income.
Other Assessments that Can Be Made
First, let’s look at this flow chart. It’s the same flow chart as my eBook example from above, but instead with YOU in it, (because this is really all about how you can improve your earnings and lifestyle). This is what you should aim for:
I will eventually give you the details about each part of this chart, but for now, let’s analyze how we can increase your earnings with this business model:
- Increase the amount of customers: The more customers you have, the more people see your webpage and ultimately buy your product. This can be done by advertising, promotion, testing content, publicity, luck, etc.
- Increase how much money comes out of your sales page: To do this, you can either increase the price of your current product, or create an entirely new product to sell along with it. If it’s an eBook, why not create an audio guide too? That’s my plan…
- Duplicate the entire equation: Since you’re not involved within the transaction, you can start a whole new project and do the same thing in another niche. Then you’ll have 2, 3, 4 or more of these all running at once, and you can continue to sit back and relax (or go to Fiji with all the new money you’re making. And while you’re there, you’re still making money…awesome).
To The Readers
I hope this has shown you the power of automation and how it is the basis for all passive income that is made online. More automation equals more passive, and less YOU. This way, you can earn money while spending more time doing things that you want to do. The technology and services are out there to make your life a lot easier – why not use them?
If you have an online business already, try and draw a flow chart and see where you fit into your own business model. How often are YOU “a part of the equation”?
If you aren’t at this point yet, I’d like to know what you think. Does it all make sense to you and can you see the benefits of implementing such a business model? Is it something you’d like to do in the future? There’s no right or wrong answer here. Some people like to be on the front lines and in the trenches while running their businesses.
I hope you enjoyed this post. Until next time!
Posted on : December 5th, 2008
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- The Latest Going-Ons and What’s Ahead for The Smart Passive Income Blog
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23 Comments (Click Here to Leave a Comment Below)
This is exactly the same conclusion I came to in my post about Passive Income, that the limiting factor in the entire equation is you, therefore you must be removed!
I love the quote about being the policeman to step in if something goes wrong. I shall certainly be aiming for that.
Andy @ Retire at 40´s last blog post..December Challenge – Free Yourself of Material Possessions
There are so many websites out there that truly just bore me to tears. Yours, however, is probably one of the most well written, and useful, sites available. Each article is well-thought out and provides useful information that the reader can use now. It would not surprise me to see smartpassiveincome start to produce a massive amount of income in the future.
Dusty´s last blog post..Fixed Income Funds – Are Bond Funds Safe Fixed Income Investments?
Pat,
Another amazing post from you. I 100% agree with your assessment of what makes passive income truly passive. Like you, my ebook is set up with eJunkie and I am out of the equation — except for the occasional times when people don’t get their download email. eHow is another great example of an automated income stream. Even without social promotion, forum activity and the like, people will find your articles, click your ads and eHow will deposit funds into your account each month.
WriterGig´s last blog post..Niche Affiliate Marketing
Pat, this is a fabulous post (and I love the flow charts!). I am bookmarking it to come back to again and again.
I’ll say it again…your experiences with In the Leed are truly inspiring. I’m so glad you are blogging. I look forward to each post!
Julie @ Write for eHow´s last blog post..eHow Article Template vs. Word
Wow, Pat, I’m learning SO MUCH from your site here! Thanks for sharing your wisdom and expertise in your posts. I’m giving this a Digg!
*smiles*
Michele
Michele´s last blog post..How to Earn Passive Income at eHow.com: Residual Income for Web Content Writers by WriterGig eBook Review
Pat, I don’t know if your posts come easy to you are if you labor over each one, but the result is the same: you are definitely a teacher. Thanks for amother great lesson.
Thanks Pat..this is a great post. I’m going to send it along to my friends who keep asking me what, exactly, do I mean by passive income.
jen´s last blog post..Who me? Featured?
Great article! Your e-book is a perfect model of passive income, something we all want to achieve… good luck with the eHow!
HowToMakeMyBlog.com´s last blog post..10 Simple Steps To Increase Blog Traffic Via StumbleUpon
I love the diagrams
– business isn’t really my thing. I wish it was. But you make things very easy to understand. It seems possible to have a bussiness without being a business person. 
L-Jay´s last blog post..Lighting the Christmas Tree
[...] truly appeals to the entrepreneur in me. While I am definitely not as good at it as my friend Pat is, I am learning a little each [...]
Great illustration, Pat! I love the flow-charts.
Sarah H.´s last blog post..Reflecting on the challenge of sticking to an organizational system
Pat – excellent post! I agree that in order to make your streams as passive as possible, you need to automate!
pfincome´s last blog post..PFI Weekly Updates – December 2 (2008)
A group of friends had a discussion along these lines last night. Thanks in part to Pat’s clear drawings, I was able to concisely explain that an online store shipping goods as a middle man is not truly passive income!
WriterGig´s last blog post..Bukisa Earnings: Report from Month One
[...] 1 – Pat from Smart Passive Income writes that automation is the key in passive income generation. [...]
Great post, Pat, and I love your drawings, tee hee.
Have you read Michael Gerber’s Emyth book yet? That’s another good one for any small business owner. He says that the main reason so many businesses fail is that they’re started by technicians (people who know the work best and want to do it all themselves), but the businesses that really succeed are set up like franchises. You do like McDonald’s and set up an operations manual that a teenager can use to make your business a success, and you yourself step out of the day-to-day operations.
I do love the power of the internet for putting automation into the process and look forward to the day when I create some product of my own and have a little army of affiliates selling it for me, lol.
Lindsay´s last blog post..How to Build Passive Income with Article Sites
I very much love the information on this article and the way you laid it out is super great!
I will have to keep this info handy and refer to it as I learn all these new things, advertising and so much more.
Carolina D.
Funny thing is that in one of my courses this semester the teacher always discussed the concept of scalability. You pretty much sumed it up, all there is to it is that you pay a fixed cost once and then after each sale you only pay a small variable cost.
Software is probably the most scalable product you could sell because the only money needed is to create the actual software. That could be an expensive process but once you create the software the next step is fairly cheap as to sell it all you have to do is burn on a cd.
Consulting on the other hand is the least scalable and passive because simply if you do not work you do not get paid,
Passive income is a dream for many, especially myself. My current passive income startegy consits of real easte and securities. When it comes to securities the best is to get paid dividends but nothing beats profting from an increase in share price. Besides that I really have no sources of passive income and let’s be honest they are not the greatest.
I run a blog but it makes no money and it is not passive at all let me tell you that. Blogging is usually not passive income because you have to work on it every single day. The best source of passive income is what Pat has done. You write an ebook once and then for the rest of your life you can make money by selling this book. Writing the book was probably a pain and took a lot of time. Now that the book is written it is extremely scalable, especially considering that an ebook has substantially less costs than a real book.
Studenomics´s last blog post..Some Christmas Thoughts
[...] out rebates, and selling the items on eBay. But what if you broke down each step and tried to automate it the best you can? Or what if you paid someone else a cut of your profits to do the work for you? [...]
Great example of how passive income works! Thanks for sharing your insights with us. Rule#1: You must be very active at first to create income that is passive later!
Steve´s last blog post..Do You Recognize these Early Warning Signs of Career Atrophy?
Awesome
I learned a lot
Thanx!
[...] my post titled, The One Thing You Must Know About Passive Income, I described that automation is the most important aspect of setting up your passive income empire. [...]
[...] problem. That is the beauty of making money online using an automated system, which I spoke about in a previous post. Traditionally, we are all familiar with this way of earning an [...]
Pat,
I just visited your blog for the first time from a recommendation by Yaro. I too am doing the eHow gig. I haven’t written an article there in over a year but am still earning close to $100 a month. It definately feels like passive income to me!
Keep up the good work.
Tommy