On Passive Income

How I created a passive income stream and my advice to those starting off. Learn about the four great freedoms.

On 23 April, 2014 I gave this speech to the Berlin chapter of the 4 Hour Work Week Entrepreneurs and Lifestyle Designers Group. The focus is on passive income, and it applies chiefly to people starting out, but is also of interest to established business owners wishing to remove their labour with minimum sacrifice in quality.

Intro

For the last four years I’ve been blessed with a passive income source where the entire sales process is automatic and, if I so desire, I can forget about the income source for months on end and still meet my financial needs. When I moved to Berlin just shy of two-and-a-half years ago, I brought my source of income over with me on a USB stick.

In this speech I’ll break down the basic freedoms supplied by a passive income source, I’ll reveal how I devised mine, Oxbridge Notes, and I’ll share the advice I wish I had heard when I was starting out, with the hope of sparing you the same mistakes I made.

What do I do? I conjecture that you’re already rolling your eyes and thinking “oh no, not another goddamn startup pitch”, so I’ll limit myself to two sentences: I run a website where students at prestigious universities upload notes they created during their university studies to help them ace exams and sell these notes to others. I charge an average of 30 euro per set of notes and take a 50% cut.

The Great Freedoms

Introductions out of the way, let’s examine the main reasons why you might want a passive income stream. To my mind, it’s all about freedoms: freedom of location, free time in that you have a low number of hours required to work, freedom of scheduling, in that you have flexibility to choose when any necessary hours are, and freedom of boss.

Realizing all four freedoms at once will be more difficult than achieving only one or two of them, so think about which freedoms have the highest priority to you in designing your passive income stream and working towards having all four freedoms. You might even be able to win one of these freedoms within the next week by tweaking some part of your current working arrangement.

Most of you would have heard of financial leverage, for example buying a house with borrowed money in the hope of multiplying gains should the price of the house rise. You probably haven’t heard of “freedom leveraging”, that is where you gain one freedom in your working circumstances, then leverage that new freedom to win the others. For example, you start by attaining freedom of location and use this to move to a country with lower costs of living, thereby reducing the number of hours you work and securing freedom of time. Next, you invest these newly gained hours into building the skills that will free you of a boss, and so on and so forth.

Let’s examine these freedoms in a little more detail, and talk about how you might begin to access them:

1 Freedom of location (working from anywhere in the world)

This freedom empowers you to earn your keep while travelling or take your job with you when you relocate to a new place.

For you to be location free doesn’t necessarily mean colossal changes to your current working arrangement. You might simply ask your current boss if they are willing to experiment with remote working, or find another one who is. Increasingly, such companies exist.

For example, my freelancers at Oxbridge Notes are location free, which suits me fine since I don’t have an office. The freelancers enjoy the working conditions, and that makes Oxbridge Notes a more attractive place to work. I’m glad that I can provide nice working conditions.

2 Freedom of time (low number of hours)

Spending less time doing unpleasant tasks, or “work” to meet your financial needs means more time on your hobbies, your creative projects, your skill-building and your pleasures. I heard a figure thrown around in entrepreneur communities that 100k/year without having to work is worth 700k/year when you need to work full time to achieve it. The figure was probably born at 2am in some city pub, but origins aside, the order of magnitude sounds about right to me. Earning full-time pay with only a fraction of the normal time is a radical improvement in quality of life. Psychiatrists shouldn’t prescribe antidepressants: they should prescribe passive incomes.

For some, freedom of time can be achieved with tweaks in their current setup. For example if you earn a high hourly rate freelancing (say $150/hour as iPhone developers with US clients pull in), and your financial needs are modest, then you could, as I know people in Berlin actually doing, work solidly for two months per year then take the next ten off. The guy I have in mind likes his booze, so he runs a hobby bar that breaks even during the rest of the year. A nice arrangement, and one that’s quite achievable to those with the right skills and the right network.

3 Freedom of scheduling (flexibility of when those hours are)

Freedom of scheduling is not quite the same thing as freedom of time. If you work only one hour per week, but are required, without fail, to be at a computer for one minute every four hours of the clock that pass, forgoing sleep, romantic partners, parties or travel arrangements, then you have dreadful working conditions.

I don’t see this freedom highlighted enough in the 4HWW community, but you ought to consider how frequently, at what times, and with what regularity your passive income stream requires you to be present to work. For example, before I outsourced customer service, I needed to check my emails at least once every two days, which limited certain types of travel where I was without WI-FI, and lead to great stress when I couldn’t get online.

4 Freedom of boss

Having a superior isn’t as much fun as being your own boss. You have to adapt to your boss’s way of doing things and to be polite and people-pleasing, when sometimes you just want to scream at them for being unreasonable. You don’t feel independent when someone is telling you what to do and how to do it, and, most of all, you don’t have true independence when someone has the power to fire you and remove your income stream.

Of course, absent a superior, it means that you must take in hand ultimate responsibility for ensuring everything goes smoothly, and you have no mentor to train you or help you in a fix. For this reason, you buy this freedom at a cost to your worry levels, and you raise the threshold of skills you are required to develop in order to maintain your income stream.

All in all, having a boss is not wholly incompatible with the other freedoms, so you might accept having a boss as a compromise in your lifestyle design.

Devising Your Passive Income Stream

Profitable business, as I see it, is producing something that other people want so badly that they’ll part with their hard-earned cash in exchange for it, with the necessary added condition that you have created this product and found customers at a low cost in your time/effort/resources.

That leads to the two most basic questions you should ask yourself when crafting a passive income stream.

  1. What do your current talents and skills enable you to produce, cheaply, that other people will pay for? If you ain’t got no skills, then you’ll need to develop some before you have a remote chance of a passive income. Baring inheritance, you don’t get something for nothing in this world.
  2. How do you propose to locate and convince paying customers, and deliver the products to them? In short I’ll call this your “reaching”. Others call it “marketing”, but I find the term “reaching” more helpful in imagining the actual actions you will be required to take in order to make sales.

To put the above into perspective I’ll acquaint you with the story of how I thought up Oxbridge Notes.

I graduated college with a law degree; went to work in a London law firm as an intern and during my time there I shrunk at the thought of how repetitious and boring it would be to sit in the same office for 35 years. No salary, no matter how handsome, could convince me to sacrifice my thirst for adventure and variety, and I realised that despite the effort I had put into my legal studies, I did not want to be a corporate lawyer. To use the language of economics, it was a sunk cost.

Around this time I saw 4HWW(The Four Hour Work Week) in a bookshop, flipped through it, and fell in love with the idea. I never bought or read the book: all I needed was to know that it was possible to earn money in a location-free, low-time-commitment manner. Just knowing that something can be done empowers a person to achieve what they previously thought impossible. I believe it’s for this reason that as soon as an athletic world record is broken, such as the four minute mile, many other athletes soon reach and surpass that same benchmark.

For a week I brainstormed on what value I could provide. I looked at my skills (passable writer, HTML/CSS, undergraduate legal education), my interests (music, self-improvement, technology), my assets (the thousand pages of notes I had written in college), and the prospective partnerships within my social network (I had a friend in Bolivia who wanted to import wood and leather into Europe and needed European assistance).

I examined each of the values I could provide and asked myself how I could cheaply deliver that good to customers in a manner that allowed me to be location-free and time-free. (At this time I didn’t think about the freedoms with as much granularity as I do today.)

One of the ideas on my list that didn’t make the cut was “College Admissions Tutor”. I believed that local parents would pay top euro for assistance in getting their child into a prestigious university. I suspected I could reach the customers through advertising at secondary schools for rich kids and through advertising in local newspapers, so I thought myself to have reachability covered. I would not, however, be location free because I’d need to be in a room somewhere with these kids. Let’s be realistic: VOIP services like Skype are, even to this day, too unreliable to tutor online.

One of the most powerful slogans I developed for scoring my options was “the ideal income stream would be one where I produce something once then sell many times”. Professional writers, like Adam Fletcher speaking before me, embody this model. Selling information or monetizing a website also fit this bill. Since I had about 200 hours experience fooling around with programming in my spare time, I felt I knew enough to build a basic interactive website, so I decided to limit my search to website ideas.

I started by building an example of the crappiest of all website categories: a directory. The beauty of a directory is that it’s simple enough for an extremely newbie programmer, and the straightforward business model is every bit as suited to a newbie businessman. My pitch went like this: You’re a lawyer in Ireland, you have no website, you pay me 100 euros a year for your place on “findsolicitors.ie”. The Yellow Pages telephone directory in my parent’s house had a list of every lawyer in the country’s contact details, and there were industry-specific magazines circulated to the Irish legal community, meaning that, in combination, I could foresee getting enough of the attention of my customers to have a chance to sell access to my directory.

I built this website over a few weeks and once it was done, I’m ashamed to admit this, I didn’t have the courage to release it and market it. I felt intimated by the legal community and socially anxious about putting myself out there and risking failure. Ridiculous, in retrospect, but I disclose it because your self-confidence, or rather lack of, will crush any chances you have of 4HWW.

I set my sights lower than marketing to the legal community and modified the lawyer directory website to showcase private secondary school tutors instead of lawyers. Johnny is bad at Math - use this website’s search feature to find a teacher in your Irish town that will teach Johnny after he comes home from school. Teachers get their profile for 40 euro/year.

I read up on SEO and optimised the website for Google with a few tricks before launching. (e.g. I added three random parental-friendly jokes onto more than a thousand blank pages for various Irish cities in the hope that it would be enough content for Google to bother indexing the page and awarding me a search result. To my amazement it was.) A few weeks later I got my first sale, and it felt positively wonderful! For the first time in my life I had earned money directly from the market, without a middleman, and all of my own design and doing. I felt such pleasure and self-worth at the achievement, feelings that I still experience every time I think about sales in my current business.

I had a few more sales from the private tutors website, but it only ever made a few hundred euros. Seeing that it wasn’t taking off, I returned to the drawing board and decided to construct something else.

In college everyone in my year said I made excellent notes, so I resolved to sell my old university law notes online. I edited my Word documents to remove any copyright infringing parts, and asked a few classmates for permission to use the areas they covered but I missed out. I coded a basic HTML website with a simple CSS template, and it took me nine days to design the website, write the copy, get a shopping cart plugin working, create free samples and eventually launch. Post launch I sat back and waited but, unlike with my tutors website, no sales happened through my SEO efforts.

At the time I was watching the TV show “The Wire” and one of the characters, Proposition Joe, said something that really resonated with me. Business is simple, you gotta “buy for a dollar, sell for two”. Although I took the meaning a little out of its intended context, the message for me was that “you need to spend money to make (more) money”. So, with great reluctance, I opted to pay for online advertising via Google Adwords.

And when I did it was magic; I had switched on a garden hose of sales. My notes being a new product that no-one yet owned, and it being exam season, I sold a couple of thousand euros worth of the stuff in the first month, so much that I flew to Japan for a month and Bolivia for three, enjoying myself and operating the website from coffee shops and hostels. Sure, I paid Google a chunky proportion of my income, but I wouldn’t have gotten any sales without advertising, so I was delighted with the partnership.

I knew that my notes would fall out of date the following year, so I resolved to turn the website into a platform where other students would provide the content and I share the profits. I bought a stack of books on programming, and studied them in detail, a task which was initially difficult and time consuming, but an investment I’m glad of having made. My efforts to future-proof Oxbridge Notes worked and my income stream survived. In exchange for my risk-taking, I’ve been rewarded a dream 20s, one in which I’ve indulged my interests beyond the farthest reaches of normality, travelled extensively, and had no boss other than my customers.

That’s my story to date. Let’s look at some details that I wish I knew when I starting off.

Detailed Pointers

Build Your Income Stream From the Ground Up Using Fresh Web Accounts

When I started Oxbridge Notes I used my personal email address for the web services I relied upon, such as my web server hardware, my Paypal account, my Google Docs, whatever. Then, once I hired help, I had to switch my accounts, sometimes with great annoyance, to be registered with the info@oxbridgenotes email address.

I advise you all to begin your passive income journey by creating an artificial separation between everything personal and everything associated with your income stream. It might seem easier to use your personal account with some provider for “one little thing”: trust me, it isn’t and you’re about to fall into a trap.

Be Productivity Obsessed

Revisit our earlier definition of business:

Producing something that other people want so badly that they’ll part with their hard-earned cash in exchange for it, with the necessary added condition that you have created this product and found customers at a low cost in your time/effort/resources.

A successful 4HWWer is someone who delivers equivalent value in four hours of work as another person does in 40 hours. Think about your working day: how much is spent browsing Facebook? Doing “facetime” to please your coworkers? In unproductive meetings? Fine-tuning something that doesn’t provably impact product quality or increase sales significantly? I would guess that the average worker could do as good a job in 30% of the time with discipline and sensible productivity techniques.

Productivity has the stereotypical image of a hyper-caffeinated life-hacker with 90 tabs opened in their web-browser, working while jogging on a desk treadmill and flossing at the same time. The kind of productivity you should be concerned with is not that; it’s no more and no less than finishing, advertising and shipping a product in as little time as possible.

This kind of productivity means you are only as productive as the weakest link in the chain between idea and finished product in your customer’s hands, meaning that you’ll need to focus on improving your speed in all the processes along that trail. Most importantly you need to cull analysis paralysis by cultivating the ability to quickly make and thereafter stomach decisions where all options are less than ideal.

I recommend that you set yourself the goal of getting your first sale within 120 hours of beginning to produce your passive income stream. Yes, that limits the scope of what you can produce to something simple, but on the plus side you are forced to tackle all aspects of the business, and practice productivity in the sense I belaboured above.

There’ll be plenty of time for your bigger ambitions once you have a passive income and a ton of free time. The most important thing for you now is to practice the full stack of basic business.

Some perils of particular danger to the new passive income earner are going to “business coffees” with like-minded people, saying “yes” to oddball customer requests (i.e. providing a service you don’t normally do, when it’s inefficient for you to do so, instead of telling the customer “sorry we don’t do that, but try this great other thing we offer”), and consuming productivity porn, such as reading blogs on productivity instead of, well, being productive.

Systematise Everything

Your passive income stream will, without doubt, have repeating tasks that you’ll need to complete. In my business, I require systems for evaluating whether new notes are good enough to sell, for placing good notes online in a manner that’s optimised for search engines, for running online advertising to recruit new authors every summer, for dealing with various customer questions, and for providing accounts in a timely manner to the government.

Much of your time-savings will come from streamlining these tasks so that they are easy for you to fulfil, or better yet, figuring out how to cheaply outsource them to others in a way that maintains reasonable standards of quality. The holy grail of systematising, of course, is automating these tasks out of existence, through code or clever leveraging of your customer’s time. For example I direct all customer service queries about the contents of the notes I sell to the author that wrote that set of notes, thereby completely freeing me of that burden. The author is happy to answer the question, because they know they are on the verge of a sale.

The process of systematisation begins with you identifying all your repeating tasks and jotting them down in a bullet-pointed list. Now create a fresh document for each of these tasks and write out roughly how you do currently do it. To my surprise, I realised that the act of writing out a business process is the most important part of systematising, for when you are forced to crystalise the process into words, you quickly see the waste and disorganisation in your current mode of operation, and ideas for improvement flood into your mind.

Once you have documented a process, not only will you have begun optimising that process, but you will also have created training materials to hand to outsourced assistants, or for future-you, should you forget how to do one of your maintenance tasks after a few months vacation on your passive income. Last, but not least, these documents are part of the package you must compile should you hope to ever sell your business; money in the bank trumps a passive income.

Side-note: Increasingly, there are software tools that let you manage or distribute your processes. Process.st wrote an introduction to business process management, if you’d like to explore this avenue.

Religious Keeping of Receipts and Business Expenses

A disciplined approach to expensing hardware equipment(monitors, laptops, etc.), web-services, home-office expenses, financial transaction costs, educational costs(books, courses), and business-related travel dramatically cuts down your tax bill, leaving you to enjoy a higher percentage of take-home pay on your income. It’s not about how much money you make: it’s about how much you take home after all taxes. Soon after you start earning, ask an accountant (or, if you don’t have the money, an experienced businessman) to teach you how to properly and legally expense.

Every Customer Service Question Means There’s a Problem with your Website

Initially, with Oxbridge Notes, I received a great many customer service emails asking how to open the various file formats we sell, amongst other matters. I read somewhere that you should treat customer service queries as bugs in your onsite communication. So, to reduce the number of these customer service queries, my software now checks the filetype of the notes and pops up information on the download page about opening that file type on various platforms. You want to provide the right information to your customers at exactly the right time - not only do you save time but you also save the customer time and stress in not knowing how to use your product.

Do Not Lose the Progress of your Thoughts

Periodically, I’ve needed to do some heavy thinking and experimenting with some aspect of my business. For example I would experiment with using different themes in my Facebook advertising photos - does danger sell better than sex, or does food outsell both? What is the maximum amount I can bid on Google Adwords for each set of notes while still remaining satisfactorily profitable?

I might devote a full day arriving at a result then implementing it. But, because I’m not working on the business day in day out, I’d forget the details of the results, and a year later, when I want to run a new online advertising campaign, I can’t remember what avenues I tried the previous year. When every minute counts, that’s a dreadful waste of otherwise free time, and now that I’m aware of this I do all my important business-related thinking by typing my thoughts out into files in a folder I call “thinking aloud”. By referring to these documents, I can pick up where my thoughts previously left off.

The Killer Skill

If you could learn any one skill in helping you achieve a passive income what do you think that would be? You’re probably thinking programming. Wrong.

The killer skill for passive incomes is online marketing. I didn’t make money until I started using SEO and Google Adwords. With another business I used to help run, Bolivian Express, a journalism school in Bolivia, we didn’t make a single sale until we emailed 20 university mailing lists.

No matter what your passive income source is, you need to reach and convince customers to buy. Sure, programming is a tremendous help in enabling you deliver your product automatically, but there are a hundred times as many reliable freelance programmers in the world as there are reliable freelance marketers.

Copy-writing, SEO, Adwords, Facebook advertising, email marketing and social media marketing all come into the scope of online marketing. A business not using at least a few of these disciplines is like a physical brick-store, say an IKEA, setting up on an island in the middle of the ocean, telling no-one that they opened, yet expecting customers to throng to their doors.

A realistic way of viewing online marketing is that “you will get exactly the number of customers you direct to your website and convince to buy”. If you can convert a decent 1.5% of visitors to paying customers, and each customer earn you 10 euro profit pre-marketing costs, then you need about 6666 new visitors for every 1000 euro you make. And you need to subtract the cost in time and effort in finding those 6666 visitors from that 1000 you made. If you plan on making 30,000 euro, and your conversion rates and profitability are as above, then you’ll need about 200,000 visitors per year. Since everyone else on the internet is fighting for traffic, you’d better have a plan on how you’re going to grab people’s attention.

The number one reason passive income streams fail, I believe, is because people don’t learn how to online market.

Switch Hats Regularly.

One problem you want to avoid with your passive income source is ploughing all your time into one narrow part of your business, likely product (be that the blog articles, the Ebook, etc.), whilst avoiding the others. It’s too easy to get sucked up into the tasks you enjoy most, or are best at, whilst avoiding the harder, more “work”-like tasks that drain you energy but are necessary to ship your product and sell it to paying customers.

I much prefer programming to any other aspect of my business, and one hack I used to force myself to rotate my attention more evenly was to consciously match the number of programming pomodoros (or half hour work slots if you don’t know what a pomodoro is), with marketing pomodoros. The programming suffered in the sense that I took shortcuts and have a ghastly list of bugs I’m aware of, but these bugs don’t really affect the delivery of value to customers in 99.5% of cases, so this is an engineering imperfection I’m willing to tolerate in exchange for added sales.

Further Reading

I owe most of what I’ve said above to the books and blogs that influenced my thinking, so if my approach appeals to you I recommend you read Rework by 37 Signals and the E-Myth Revisited by Michael E. Gerber for general business philosophy, then for online marketing and web business, I recommend every blog post by the brilliant Patrick McKenzie.


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