Justin Cooke

November 16, 2012

Everyone dreams of passive income when first starting their online business.

It’s okwe did it too.

The dream of sitting on a beach on some tropical island while the money rolls in is enticing for obvious reasons. The “earn while you sleep” message is drilled into our heads by the same people who would rather sell you an ebook or have you click their affiliate link rather than providing actionable advice that can really help you get there. So…is it really possible?

Tim Conley from Foolish Adventure brings up an excellent point describing how the term “leveraged income” is a better description of what we’re looking for than “passive income”. I prefer this term and think it more aptly describes our process of putting systems in place through the use of human machines to do the heavy lifting for us. There’s always an “active” piece involved in our revenue streams…the difference is between us doing the work and effectively replacing ourselves with capable team members within our organization.

Question: So how does someone just starting off take advantage of leveraged income and process to build themselves a revenue stream requiring very little work?

Answer: They don’t!…at least not to start.

In fact:

“Leveraging systems or automation before you’ve done it yourself profitably is a sure-fire path to epic failure.” – Click To Tweet

You have to do it yourself first to figure it out. There is no other way…at least not for you. (or us!) I’m sure there are exceptions to this rule…but it’s much more likely you’re the rule and not the exception here. That’s why we are constantly hammering this point home in blog posts, podcast episodes, interviews, and presentations.

  • Have an awesome idea to automate great travel discounts for expats?  – Great! Do it manually first to test market viability and get user feedback.
  • Want to build the next keyword research tool that will blow away Market Samurai and Long Tail Pro? – Great! Offer to provide keywords (that you’ve researched manually using your process) to market leaders to test through the process and build evangelists.
  • Want to sell websites directly rather than using a 3rd party platform? – Great! Slap up a spreadsheet with a PayPal button and see if people buy from you. (Yepthat’s exactly what we started with.)

Did it work? Awesome! Now automate, put systems in place that take you out of the equation, improve your margins, etc.

This isn’t pie-in-the-sky bullshit from a couple of guys with a bit of success. Some amazing online businesses started with little more than a crappy design, vague plans, and a “buy now” button.

Take a look at CD Baby in 1998:

CD Baby homepage in 1998

Source: Shopify

Wouldn’t win any design awards, right? And yet this company was actively built up, leveraged with automation and an awesome team, and ultimately sold for 22 million.

Let’s talk business plans. You’ve probably heard of a little company called INTEL? Check out their original, one-page business plan:

INTEL Original Business Plan

Source: Tumblr

That poorly-written, vague document got them $2.5M in funding and jump-started their growth to a $115 Billion valuation. (In 2011)

Actively pursuing an income stream by doing it yourself isn’t nearly as sexy sitting on a beach with a drink in hand, raking in millions of dollars…but it is a touch more realistic! Here are some of the real advantages in pursuing “active” income:

  • Easy To Iterate/Pivot – The first thing you start with will look quite different from the monster you’ve built when you really start rolling in cash. It’s MUCH easier to learn, make changes, and adjust when there are less people involved. Use this important period to really nail the process down.
  • Active Engagement Opens Doors – Many people mistake our business plan as simply building/monetizing/selling niche sites and that’s not the case at all. The reason we have this blog, the podcast, etc. is so that we can actively share what we’re doing. This has brought us a ton of opportunity and value outside of niche sites…something we wouldn’t have had if we did this privately/secretly.
  • Easier To Scale – Understanding the intimate details in the process makes replicating it through automation or your team much easier and lets you avoid some of the mistakes that come with the “Chinese Whispers” problem.

I had the opportunity to meet Simon Black of SovereignMan fame while I was in Bangkok. He’s a fairly controversial guy and brought up a few points I wasn’t fully onboard with, but there was one thing he said that REALLY resonated with me. I’m paraphrasing here, but when asked a question about the “lifestyle” part of lifestyle business he said something to the effect of:

“F&$% THAT. I’m in the prime of my life right now and have a chance to really make a difference. Why would I sit around and not do everything I can to create the most amount of value with what I have?”

Look, I love to travel, sip fruity drinks poolside, and settle in for a good movie as much as anyone, but I absolutely, 100% agree with the sentiment here and aspire to do the same through actively pursuing value chains and revenue streams.

Where do you stand on this? Do you agree with the pursuit of active income or am I off base? Let us know in the comments below!


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Discussion
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  1. Rose says:

    Joel, I’m honored to not only be included in this list but to be able to call you my good friend as well. I’m glad that I can play an enangrcuiog role because that is exactly what you have done for me as well. Keep at it man! Really looking forward to seeing you in Portland in a few weeks!

  2. csgo says:

    Wow cuz this is extremely greatexcellent work! Congrats and keep it up

  3. Maureen Hannan says:

    I love the term “leveraged income”–and the philosophy behind it. I think we’ll see many, many more refinements of the whole notion of passive income via online properties. And there’s nothing wrong with being in love with the idea of cash-flow coming from sources that don’t need constant babysitting. As a landlord, I can tell you that it’s a false dichotomy to say that it’s EITHER passive-income-generating holdings OR actively working to make a difference in the world. My rental properties generate an income for me that allows me to be a better writer (my primary profession), a more available parent, and a more confident entrepreneur. I wouldn’t want to sit around twiddling my thumbs waiting for the rent checks to arrive (even if it WERE that easy each month :-) In the same way, I view income-generating niche websites as pieces of online real estate that supply an income that frees me to use my talents as I choose.

    • Glad you are taking this sort of approach Maureen. Too many people think they can just sit back and collect on their business. I imagine at the highest levels this probably does exist to some degree, but I’m not Rockefeller! ;-)

  4. Brendan Mace says:

    You can still have a HUGE amount of passive income rolling in through some sites. I agree, though, that profits are much larger with an active approach. That being said, some niche sites can pump in profit for years with little to no maintenance.

    But yes, a more active approach almost always leads to better earnings!

    It’s kind of ironic that a significant amount of income is much easily achieved through ACTIVE marketing efforts.

  5. […] Screw Passive Income – 1,176 Pageviews […]

  6. Greg McGee says:

    I just turned 62 this weekend, and I’d still much rather have active income than passive income. But I could use a vacation….

  7. Joe Affking says:

    You need a bit of passive income coming to work on other things. If it was passive you’d still be spending all your time on it. By setting up some initial passive-ish income streams you can work on the other things.

    I was making a bit of money online then I went into full on passive mode. It lasted a few months but now I only make 10% of what I was earning. I learned my lesson!

    • JustinWCooke says:

      I don’t know, Joe…I think I disagree a bit here. Chasing passive income is what EVERYONE is trying to do…creating themselves an automated cash-cow that just pays them day after day.

      I think you’re much better chasing down the active or leveraged income…there’s quite a bit more opportunity there and, if you make it work, you can put systems in place that allow you to scale it up.

  8. Kurt Henninger says:

    Yep, been there done that. The best advice I ever head about “internet marketing” is to ask the basic question, what business are you in? What are you selling? Who are you selling it to? Then use the internet to leverage that to a wider audience.

    It’s a hard nut to be in the business of getting traffic to a no-value website.

    • JustinWCooke says:

      Absolutely, Kurt.

      I know people now that have plenty of traffic and no real monetization in place…that sucks. It’s especially bad because you might have traffic, but it could be the WRONG traffic…have to start testing through offers and see what resonates.

      To be honest…we really need to firm up our outsourcing offers. Make our value propositions much more clear and then productize some of our services…working on it! :-)

  9. If you do what you love, is that work?

    • I would argue yes, it is. There’s always going to be some task involved that you dread. Overall, though, if you get enjoyment our of what you do, you’ll be able to do it longer and better than most other people.

  10. John @ Blokeworks.com says:

    Great article guys. Yep most people want to sit on their arse and push a magic button and get income rolling in.. You gotta work at it, you gotta hustle.. every day.

    • JustinWCooke says:

      Thanks, John!

      No magic button, unfortunately…but it IS possible to make good money online if you’re willing to put the time/work in. To be honest…I think some are better off with a job than trying to start their own online business.

  11. John Neil says:

    For serious.

    I made my first thousand online with active income in 2 months. Tried for 6 months to make $1 with ‘passive income’ … didn’t work out so well.

    I wish this advice was more common

    • JustinWCooke says:

      Agreed, John…wish this concept was discussed more. I think leveraged income gets most people to where they want to be to achieve their goals and is a more worthwhile target.

  12. Hey Guys,

    I definitely also think that passive income is quite overrated in the IM space. Building something actively might not leverage your time initially, but then you can start hiring quicker and put the wheels in motion.

    I’ve more or less given up on the whole passive income thing and I’m now working on creating a global brand instead, starting from the tiny kingdom of Denmark and then hopefully spreading slowly out.

    One thing I do want to point out is the difference between passively generated income and systematized actively generated income. Just because you are working actively and not leveraging your time, there is nothing stopping you from having mechanisms in place that allow you to (for instance) sell n number of products at the same time (webshop sales funnel compared to phone sales)

    I hope you are all well, enjoy the remainder of the weekend!

    • JustinWCooke says:

      Hey Kristoffer,

      Totally agree with putting systems in place that allow for sales batching, wholesale offers, affiliate sales, etc….great point. Let everyone else chase after passive income while you’re mopping up the leveraged income! :-)

  13. I think we should define what passive income is and then discuss all we want.

    In my book passive income is when you take action to set up an income stream , this streams carries on and you don’t have to do anything to support it directly or indirectly.

    Example : you go to the bank once , deposit and forget it.

    If you put an affiliate link but you do something to drive traffic to that link is not passive.

    If you write a book and go out and promote it , it not passive.

    You get what mean.

  14. JustinWCooke says:

    I should be clear about something: This is NOT an attack on Pat Flynn’s “Smart Passive Income” or any other sites that happen to have “passive income” in the name. That’s the term we’re most familiar with, the term most people search for, etc…so it’s completely understandable that it’s the target for search.

    Also…I’ve received TREMENDOUS value from SPI over the years and saying Pat’s one of the “good guys” would be an understatement. We’re totally supportive of the work he’s done…it’s phenomenal.

  15. Alex Alcyone says:

    Not always. I’m almost finished writing a 500 page ebook about passive income strategies that is solid actionable advice and nothing else. And it’s not just about getting other people to do your grunt work so that you can have an easy life also: Replacing yourself is just one of fifty strategies for passive income that I devote a chapter to.
    You can’t get passive income without initial action – but the real difference is in doing work that continues to pay you after you have stopped working; versus doing work that pays once and then you have to go back to work.

    The other factor is that most people’s focus is off… they are too focused on just getting the money and not focused enough on providing actual solutions for others. Note how Intel’s first sentence included the words “Fulfil the needs”, dead center with everything else following on underneath that.
    But there’s nothing in the world to stop those solutions being ways which continue to provide value after the initial work investment is complete – and the true essence of passive income is in creative strategies which work with these principles.
    Fruity drinks and movies? Haha don’t have time for much of that stuff, life is full of opportunities to do greater things, why waste them?

    • Couldn’t agree more Alex. The most important thing is building some sort of machine that works without much intervention from you. It might not make you enough to retire, but at least it will give you time to work on the next machine the can make income with little input from you. Having several of these machine is the key to the passive income quest.

      Like I said below, this was made apparent to me when playing poker for a living. I would sit for long hours at the same table, with the same people and, ultimately got very bored with the pursuit. If I didn’t show up the next day, I didn’t make money (and sometime lost money even when I did!). I imagine consultants have a similar type story. Sure their per hour is high, but burnout is always a threat. And once they stop working, they stop earning.

  16. I somewhat agree. I would word it differently though and say that you need to stay active in pursuit of passive income. Pat Flynn is a perfect example. He is very active in his business, but he is not trading time for money like at a day job. The passive income he earns today is a result of something he did last week, last month, or last year. The stuff he is working on now will earn him plenty of passive income in the future. I think that if he were to quit right now, it would be years before his passive income streams dried up.

    That is the type of passive income I am shooting for with my sites. And I don’t mind staying active in pursuit of that dream.

    • Chris says:

      That’s good wording, Matt. And we can say something like, instead of being active in pursuing active income, be active in pursuing passive income.

      Basically we can leverage 1. Cheap labor 2. Automatic Internet systems. The first can be termed more as “leveraged income” (like AdsenseFlippers main source of income) and the second as “passive income” (like Pat Flynn’s main source of income). Both are good and can be combined.

  17. Shayna says:

    CDbaby from 1998 – seriously?!?! That’s hilarious. The baby looks rather nauseated.

    I agree with pursuing an active (but leveraged) income. Although I’ve never had completely passive income myself, 5 years ago I did have a few months when I was living abroad just off of savings and didn’t have to work. I got bored within weeks and ended up joining a small online store startup… there’s only so many pina coladas one can drink :-p

    • Agreed, the baby does look off. Heck it was a long time ago though. Logo design has come a long way.

      Some have more drinks in them than others for sure, but yeah getting bored with the simple life is something we all share. I couldn’t do it either.

      Whatever you do, you want to build some sort of structure in place that earns and runs without you. Playing poker taught me this — if I wasn’t at the table, I wasn’t making money.

  18. Yakezie says:

    Better to work hard while we are still young and have the energy, than work hard when we are old and senile. This has been my motto all along.

    Hard work pays off in spades in the future!

    Sam

  19. excellent research.

    I totally agree with Simon. I am thir…. ( well doesn’t matter how old I am :) ) and its not my time to retire on a remote island. I want to make things happen ! And one quick story. My father was longing to retire. And just three months after he retired he was asking me if he could help with my business because he was bored.

    be healthy and smile.

    • JustinWCooke says:

      Thanks, Ilias!

      I was talking to a friend the other night and we were discussing how 35-55 tends to be your prime years for working in terms of making money, creating value, etc. You finally have a chance to implement everything you’ve learned up until that point.

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