One of the biggest dilemmas for consultants and freelancers who are trying to grow their businesses is how to prioritize active vs. passive income.
Active income is revenue that you make by trading time for money… like billing for consulting hours or charging a fee to complete a project for a client. Passive income is money that you make by doing something once – like creating a course, webinar, or e-book – and then selling it over and over again (including while you are asleep). As a solopreneur, how should you divide your time and energy on active vs. passive income?
It’s Not an Easy Question
The active vs. passive income question isn’t an easy one. When I started my first consulting company, I focused 100% on finding and serving clients – meaning I focused 100% on active income. After launching our first e-book, I started to see the power of passive income, and began focusing more and more of my attention on creating information products that I could sell over and over again.
Eventually, my business was 95% passive income and only 5% active income. This was true of my second and third businesses as well… I started by focusing on consulting work, and eventually moved more and more of my efforts into creating passive income projects. Thus, my answer to the active vs. passive income question over the course of three businesses has been “both.”
This path makes a lot of sense for most freelancers and consultants, simply because you need revenue coming into your business in order to pay your living expenses. If you already have expertise in a particular area, you will likely discover it is easier to sign-up two or three consulting clients, each paying you $2,000 per month, than it is to make the same $6,000 selling $99 webinars… at least until you’ve built up an e-mail list.
Active vs. Passive Income: Short Term vs. Long Term Revenue
The truth is that active vs. passive income is a balancing act. Your ultimate goal should be to generate as much passive income as possible, because passive income is what will allow you to have the financial freedom that you want. Whether you want to have more family time, more travel time, or more time to grow your business, passive income that comes in day and night, whether you are working or not, equates to freedom.
In creating my three businesses, I realized that the question of active vs. passive income was really a question of short term vs. long term revenue. I needed to continue my consulting work, because I needed short term revenue… I needed to make a certain amount of money, each and every month, in order to put a roof over my family’s heads and food on the table.
But I Needed to Reach Escape Velocity
I realized that if I only focused on consulting work, I would never be able to get out of the vicious circle of trading time for money. Sure, I could gradually increase my rates, or work more hours, or hire additional consultants (which would create a whole new set of problems), but I would still be trading time for money until the day I retired.
Creating e-books, webinars, and classes, on the other hand, would be an investment in long-term revenue. I could spend 40 hours over the course of a month creating an e-book… and even though it might only sell for $19, with the right marketing that e-book might eventually bring in several thousand dollars per month, every month, for a decade or more. Every hour I spent on creating passive income products was an investment in my – and my family’s – future.
The Compounding Effect of Passive Income
As you figure out the mix of active vs. passive income for your business, one important thing to keep in mind is the compounding effect of passive income. As you build multiple passive income products, your overall income will grow, and often grow exponentially… not only will you have more products to sell, but you will also have the opportunities for cross-selling, because people who love one of your info products will often buy more (or all) of the products you have to offer.
What This Looks Like in the Real World…
For example, let’s say that you create a recorded webinar that sells for $57. You spend time creating and marketing it, and it starts to sell. Let’s say you sell, on average, 30 copies per month (1 copy per day). That’s $1,710 per month coming in from that one webinar.
Then, let’s say you create a 5-module class. You sell this class for $127. After creating the class, you do some marketing work, and in addition to people who only buy your class, many of your webinar customers also buy the class. You sell 20 copies per month of the class. That’s $2,540 per month in sales from the class.
Your efforts are additive. You spent time creating a webinar, then you spent time creating a class. You’re making $1,710 per month in webinar sales and $2,540 per month in class sales for a total of $4,250 per month in total sales.
And the best part is, you can now go create other products and keep adding to your bottom line. Of course, your passive income products won’t be “set it and forget it” products… you’ll need to spend some time marketing them each month. But most of the work – the work of creating the products – will be complete. That’s the power of passive income for your business.
My Answer to the Active vs. Passive Income Question
When it comes to active vs. passive income, my ultimate objective is always to grow my passive income as quickly as possible. Thus, when starting my companies my answer was always to invest extra time, early on, to creating information products like webinars, e-books, and classes.
Even if I needed to work a full 40 hours each week as a consultant, I would add 10 hours each week working nights and weekends to create and sell passive income products that helped me get out of the time-for-money loop.
When thinking about active vs. passive income, don’t think about it as an either/or proposition. If you currently have or are starting a consulting or freelance business, set aside some time every week to work on creating passive income products. As you start marketing those products, your revenue will grow and you’ll have the freedom to create more products, to pick and choose which (if any) clients you really want to work with, and to pursue more time with your family, friends, and personal interests than ever before.