In a previous article (What is Passive Income?) we defined passive income for our purposes to be self-sustaining online income that doesn’t require a real-time presence. And we are only interested in passive income strategies that do not require significant up-front capital investment so we are ruling out things like stock market investing, property rental, peer to peer lending etc, as they require substantial capital. Now we’re going to look at some methods of achieving this.
Although there are lots of different ways to earn a passive income, to meet our requirements they broadly break down into 4 main methods:
The big advantage of selling digital (as opposed to physical) products, is these can be fulfilled (delivered) automatically online. You can create an ebook, training course, or downloadable product, and setup an online system where payment and delivery happen automatically without you having to do anything.
Because the products are digital, there are no issues with faulty products or wrong shipments. You may have to deal with occasional returns or refunds (it’s a good idea to offer a money-back guarantee, as this will win you more sales than it loses you), but these don’t necessarily have to be dealt with in real-time, as long as you do it in a reasonable time.
You may also have to deal with customer enquiries or pre-purchase questions, but these can be dealt with by email. If you produce your sales material well, and include things like FAQs, then these can be kept to a minimum. If you’re getting a lot, then you can probably afford to outsource these queries to a VA (virtual assistant) who will handle them for you, according to guidelines you’ve laid down.
You can use technology such as automated email autoresponders to give an immediate response, which gives the customer reassurance that their query is being dealt with, and buys you a bit of time if you happen to be kayaking up the Zambezi at that moment.
There is no cost of goods with a digital product, so sales are 100% profit once you’ve covered your production costs (if any), and deducted your transaction costs for credit card processing, or whatever.
There is no stock to hold, and little or no up-front investment other than your time if you create the product yourself. If you outsource some or all of the product creation (such as graphic design for example), you can often get this done very cheaply using services like fiverr or upwork.
So digital products offer massive profit margins, low or zero up-front costs, and a product you create today could well still be selling in 5 years time.
Although physical products have an inherent disadvantage, in that they have to be physically delivered, and that they can break and go wrong, this business model has become increasingly popular since Amazon launched their Fulfilled By Amazon (FBA) service.
Here you deliver your stock to Amazon, and they store it, pack it, and ship it for you, as well as dealing with returns. But they don’t just do that, they also sell it for you too. Amazon has the biggest customer base in the world with thousands of people visiting every day specifically to buy things.
If you can crack the Amazon rankings, and get them to feature your product at the top of their listings, it can quite literally fly out of the door. All you have to do is to re-stock Amazon periodically, and bank your cheques.
Now if you happen to have your own physical product that you can manufacture passively from your poolside sun-lounger, that’s great. But what if you can’t?
What you can do, is to find a product you want to sell, and have it manufactured and branded with your own label (called white labelling or private labelling). Alibaba.com is a website that specialises in helping you to source products, mostly from China, where you can do exactly this.
Obviously selecting the right product is critical — you’re looking for a product that sells well, but not in a category that is so competitive that you can’t make any headway. And you need to do your marketing within Amazon correctly, by choosing the right keywords, writing great product descriptions, using good photographs, setting the right price, and getting good reviews. There are several courses that teach you this process in detail.
There is one disadvantage with this business model and that is inventory. Before you can sell the products on Amazon, you have to buy them yourself, usually in significant quantities. If your product sells well, and you have good margins (the difference between the price you paid for the product and the price you sell it for), that’s not a huge problem. Simply start small, and build up your volumes once you know the product sells. But there is a risk that you could buy stock that doesn’t sell, or takes a long time to sell. The courses will teach you how to minimise this risk, but it is always there to some extent.
If you get it right, you can not only make a very good passive income that is scalable (by adding more products), but also build a business that can be sold for many times its monthly profits at some point down the line.
Drop shipping is where you place an order with the manufacturer, for direct delivery to your customer, usually under a plain label or even your own label. The great advantage of this business model is you don’t buy the stock until you have sold it — zero inventory risk.
The downside is it’s not quite so passive. You have to deal with things like faulty products, incorrect deliveries, customer service questions, warranty issues, and so on. And you really need to deal with them promptly, which means you have to be always available, even if you’re not actually called upon very often. This could seriously disturb your tropical island bliss if Mrs Jones’s toaster arrived in the wrong colour just as you’re putting your squid on the barbecue.
Having said that it is possible to create a very good semi-passive online business by using dropshipping. You can outsource the customer service to a VA (virtual assistant) to remove the need to be always available, although you will probably always need some involvement to deal with things the VA can’t handle.
I do know people who have done exactly that, and who live the full Digital Nomad lifestyle by dropshipping, so we won’t rule it out, but for me anyway, it’s less attractive than the other options.
Affiliate marketing is the biggest business that nobody’s ever heard of. Although affiliate marketing is employed by some of the biggest companies in the world like Amazon, eBay, and virtually every major consumer brand and high street retailer, as well as thousands of smaller companies, the average person in the street has never heard of it.
Affiliate marketing is a system where companies (merchants) pay people (affiliates) commission on sales resulting from the affiliate’s promotional activities.
So as an affiliate you promote the merchant’s products or services, and the merchant will pay you commission on any sales that come from you.
The merchant will generally supply you with a custom link to send visitors to their website or sales page that identifies you as the source of that visitor, and if they end up buying something you will earn a commission. There are several different ways in which it works, and several different ways in which you get paid, but that is the general principle.
For the vendors, affiliate marketing has the huge benefit that they pay only on results. Unlike say, advertising, if they don’t make a sale, they don’t pay any commission. There is no risk to the merchant, for this reason it’s often called Performance Marketing.
As far as the affiliate is concerned, all they have to do is to send the customer to the merchant’s site, and the merchant takes care of everything else. They deal with the fulfilment, the order processing, payment, and they provide the product. The affiliate has to do nothing other than send the customer to the site, the merchant does the rest.
Affiliate marketing suits our passive income model very well indeed, in fact it’s pretty much perfect.
You don’t have to worry about product creation, it’s already done, you just have to pick which products you want to promote. You don’t need any real-time presence as everything is handled by the merchant —it’s truly passive.
There are millions of offers available to promote, and some of them can be very lucrative indeed. Some high-value products or services can pay commissions of several hundred (or even thousand) dollars per sale. Some offers pay recurring income, which can last for years after the initial sale.
There will be an affiliate offer available for pretty much any product, category, or interest you can think of. Seriously, it’s huge.
You don’t have to get too invested in any particular product or offer. If an offer doesn’t perform very well, or something better comes along, you can just switch to something else. Not something you can do very easily if you’re the product owner with manufacturing and inventory issues to consider, whereas an affiliate can turn on a sixpence (that’s a very small English coin that went out of circulation 35 years ago, in case you were wondering).
Many people start their affiliate marketing journey as an Amazon affiliate. Amazon has a product for virtually every niche or interest, or if nothing else they will have a book about it. Amazon will pay you a commission varying from around 1 or 2% up to around 6 or 7%, depending upon the product and the level of sales you reach (it goes up as you sell more). The great thing with Amazon is the customer doesn’t even have to buy the product you were promoting in order for you to get paid — you get paid on anything they buy on that visit, even if it was nothing to do with your recommendation.
(Your Amazon sales report can be very entertaining reading — you won’t believe some of the things you’ve sold unintentionally. I have never promoted nipple clamps, or angle grinders for example, but I’ve sold quite a few.)
You might send somebody to Amazon for an electric drill, and they end up buying a Batman outfit, but you still get paid. Particularly around Christmas time, this can be very lucrative as many people buy their Christmas presents on Amazon, and if you happen to be the lucky affiliate who sent them there when they do that, it can be bonanza time — you get paid on everything. Ka-ching!
The affiliate marketing process is to find a product you wish to promote, become an affiliate for that product and get your unique tracking link which enables you to get paid, and then send traffic to the merchant via that link.
If you find a website for a product that you want to promote, look carefully for a section (often in the footer) called ‘Affiliates’ or ‘Partners’. This will give information about their affiliate program, and how to join it.
Some merchants handle their affiliate program themselves (eg Amazon, eBay), and some work through a third party called a network. Some of the popular affiliate networks include LinkShare, Commission Junction and Trade Doubler.
Another way to find affiliate offers is to join all the major networks and see what offers they have. Some companies don’t publicise their affiliate activities and you will only find their offers once you’ve joined the network.
When you’ve found the offers you want to promote, and got your links, you then need some sort of platform to send traffic (ie people) to that offer. This could be a website or blog, it could be an email list, or you could send traffic from advertising on Facebook or Google.
This again is truly passive. If you can build traffic to your website or blog, you can monetise it simply by carrying adverts on your site.
There are a couple of ways of doing this, one is you can sell advertising directly to people who want to reach your audience (this will usually pay the best), or you can use a service like Google AdSense which places adverts on your site automatically and pays you every time somebody clicks on one.
For either of these methods to work, you must have a considerable amount of traffic though. If you only have a few hundred visitors per day, you’re not going to earn very much with Google AdSense, although if you’re super-targeted, and offer a unique way to reach the people they want to reach, some people may be prepared to pay a premium to advertise on your site.
Well if you have high volumes of traffic you can earn a surprising amount actually. AdSense Publishers aren’t supposed to talk in detail about their earnings, but the famous example is the blogger ‘Shoemoney’ who earned over $130,000 in one month. Earnings like that are not uncommon on high traffic sites.
I’ve never quite reached those dizzy heights myself, my best ever AdSense earnings were just over £5,400 in one month. Although that’s quite reasonable, to put it in perspective my earnings from other sources on that same month were over £50,000.
If you have traffic, you can usually find other ways of monetising (eg affiliate offers) that will earn more than AdSense, but it can be useful in a couple of circumstances:
One, there are no affiliate offers relevant to your traffic (this almost never happens).
Two, you don’t want to get involved in promoting products, either through reasons of editorial purity, not wishing to be associated with sales, or you simply don’t want the effort of finding affiliate offers and promoting them.
AdSense is very easy to implement, just a tiny bit of code you place on your website where you want the ads to appear, and it all happens automatically. It’s probably the most trouble-free way to monetise your site, and Google are very reliable payers, but you do need significant traffic for it to be worthwhile.
On the other hand, if you had 10 little sites that earned just $10 a day each, that’s $3,000 per month, which is starting to be a reasonable income.
Because of this, there was a trend a few years ago of making sites just to carry AdSense ads, which didn’t really provide any useful content for the viewer. Google of course caught on to this low-value experience, and are now very good at detecting and banning so called ‘made for adsense’ sites. Make sure that you provide valuable and useful content, and that your ads are an adjunct to your site rather than it’s sole purpose. Oh, and NEVER click on your own ads – they will kick you out of the program in a heartbeat!