Scott H Young

Why You Should Ignore Passive Income


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A big learning point for me over the last few months has been rejecting the common online wisdom of “passive” income. “You want to earn money while you sleep,” goes the rhetoric, “if you need to be there to earn a dollar, that work can’t scale!”

My rejection isn’t based on passive income being bad, or even undesirable. Simply that needing passive income is a good problem to have. For most people, the problem isn’t that there business doesn’t have enough “passive” income, but it doesn’t have enough income, period.

Lack of Scale is a Good Problem to Have

If your #1 problem when running a small business or doing freelance work is that your time doesn’t scale, you are probably doing very well.

Think about it. If you’re active complaint is scale, that means (usually) two things:

  1. You are already well-paid for your time.
  2. You have more lucrative clients, or business opportunities, than you can handle.

If these two things aren’t the case, scale shouldn’t be your #1 priority. Figure out how to earn a decent business or freelancing income before worrying about how to make it more passive.

Don’t Focus on Scale Too Early

I think a big mistake I made in the earlier running of this blog was to fall for the passive income rhetoric.

I was hesitant to let people know I responded to emails because, hey, that activity won’t scale and it will eventually reach a point where I can’t handle the volume. The thing I forgot was the word “eventually” and that, in the meantime, my ability to interact with people and respond to every email was a personal strength.

I ignored business opportunities that might not scale perfectly. Earlier, I rejected ideas of membership-based programs that involved coaching from my part because, in theory, I could only serve a certain number of people. So, instead I focused strictly on ebooks or other goods that could scale from zero to infinity.

The thing I forgot was that if you spend a month writing an ebook and only sell 30 copies, that still isn’t a lot of value for your work. Doing that same work for 100 people, even if it can’t scale to 1 million, can be more profitable and personally rewarding.

The Online World Hates Perfect Scaling

To borrow a line of reasoning from Chris Andersons’s excellent book, Free, the online world doesn’t like paying for things with perfect scale. When you do, there are forces which work against you.

So, when you decide to create an ebook, you have a product that can scale perfectly. You also have something which can be pirated easily. I once found a torrent of one of my ebooks with nearly 10,000 downloads and several highly positive reviews. Um… thanks?

With unscalable products you also have to face a higher level competition. Maybe this isn’t so much a problem in the blogosphere, but if you were starting a web 2.0 service, it might be. How can you make an excellent service that people will pay for, when Google is giving it away for free?

It’s not impossible, and I know many people who have succeeded with purely passive income business models. But I feel, for new entrepreneurs or freelancers, scale shouldn’t be a priority. Worrying about scale comes when you’re sold-out and making bank.

Early scale worries are delusions of grandeur.

How Rejecting Scale Helped My Business

It turns out, as much as the impersonal forces of the online world hate scale, they love its opposite. They love things that can’t scale.

I mentioned yesterday I sold out enrollment in a rapid learning program I was offering in 36 minutes. There were probably many reasons for this. But, I feel a big one was that I was only offering 100 spots. The program lacked theoretical scalability because I was offering feedback and coaching as part of the package.

Just as you value a handwritten thank-you card more than an automatic email, value is tied (in part) to perceptions of marginal cost.

While it may have lacked scale, in theory, in practice that means potentially adding an important revenue source to my business which will help it survive as a full-time income source. And I’d rather have full-time income with imperfect scaling, doing what I love, than a perfectly scalable business and still need a job.


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17 Responses to “Why You Should Ignore Passive Income”

  1. I think in a way passive income is boring. It’s great to automate something but you will always want to come back and provide some more value. Who wants to just automate income forever and then forget about it? Not me!

  2. Colin Wright says:

    I tend to agree, though I’m still experimenting with ways to do both. My main business and moneymaker is my branding studio (which allows me to take such a la-de-da approach to passive income generation), but I do think it makes sense to try and have a few different revenue streams so that all my eggs aren’t in one basket (and so that if I ever want to take a break from one, the others are there to keep me going).

  3. Hi Scott.

    I like what you bring up here about scale. That worry about potential scalability is actually a good feature, because then time is worth more funds from customers, as you said there. This is an important mindset to take into the process before starting, or else we might get worried that we are going down a path where we will end up overloaded, which isn’t the case, as long as we set limits, and put out as much supply as we would like to fit the demand.

    Good call pointing out that people like things with limited scale. I will keep that in mind.

  4. Scott Young says:

    I’m not arguing that passive income is bad, or undesirable, simply that it isn’t something people who aren’t already earning decent incomes should worry about. Making your business more passive is step 3 when you are still struggling with steps 1 and 2.

  5. RJ Weiss says:

    Great point Colin. I think it’s more important to develop multiple streams of income rather than passive income.

    The reason I started an online business wasn’t to automate my income 100%, it was to create something.

  6. Scott Young says:

    RJ Weiss,

    I completely agree. Scale is sometimes touted as being a higher goal than the original reasons for starting the business–namely, love of creating something that matters.

    -Scott

  7. I like the balanced approach that you present here. You aren’t saying passive income is bad, just that you should not put all your eggs in trying to make things passive before you have completed some of the foundations of your business. However, at the same time, the scalability models are good to look at when expanding your business.

  8. Pat says:

    Hi Scott! It’s my first time here. Awesome blog, and great article. You make some fantastic points about scale.

    However, I wouldn’t go as far as to say that because of the nature of scale we should ignore passive income. To ignore is to completely refuse to acknowledge something, which I think is a mistake.

    Indeed, scale should not be the primary purpose behind building a business. However, scalability is something that I think all businesses should be aware of and plan for, because that’s what and growth and expansion are all about. I would think that we all want to grow and expand our businesses. A person can only do so much with an unscalable model, which is why many people start to look for services and outsourcing to free up their time, and make things more passive.

    For some types of businesses, lack of scale is a good problem, like you said. It means there is work on the table. However, what if that work is work that detracts from time that could be spent doing something more productive for the business. If I sold a book that required me to print, package, drive to the post office and ship everytime an order was placed, I’d almost be afraid of selling too much because of the work that would be required as a result. However, if I sold an eBook and its delivery was automatic (using services like e-Junkie), then I could sell a million copies and I wouldn’t have a problem. Yes, I won’t sell a million copies, but I can use the spare time that I have not going to the post office each day optimizing my conversions to get there.

    Lastly, you mentioned that rejecting scale helped your business sell out in 36 minutes (which is totally awesome, and congrats on that!). I don’t think it was so much rejecting scale, as it was injecting scarcity, which is a whole other topic in itself.

    I hope you don’t find my comments as an attack against you or your article. I simply hope to justify why passive income should not be ignored.

    All the best Scott! Cheers!

  9. Scott Young says:

    Pat,

    My point isn’t that scale should have no weight whatsoever, just that the primary goal of any business is to make money, not to scale. If it isn’t doing the former, don’t invest more energy trying to do the latter.

    This article is dually inspired by the Signals team who advocate against scale worries in software development, because scale is a good problem to have, and Ramit Sethi who has recently advocated against passive income because it neglects the bigger wins you can make through active income first.

    Passive income isn’t bad, just a later step that most newbies haven’t reached yet.

    As for scarcity, where did it come from if not for the lack of complete scale. If scale were perfect, then the scarcity would have to be a lie.

    -Scott

  10. Pat says:

    Ahh, I sort of see your point regarding the bigger wins, however the extra time from earning a passive income can be used to diversify and make bigger wins in other arenas. I’m a huge fan of Ramit’s, and I always tell people I know to always go for the bigger wins.

    I guess it’s the name of your post that threw me off guard a bit.

    Anyways, I enjoy your posts. All the best to you! Cheers!

    -Pat

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  13. It’s helpful for me to understand where you are coming from, Scott. And I would agree that the foundation of the business needs to be worked on before trying to earn passive income all at once. Too often, the word passive income becomes a way that too many ‘newbies’ buy into one guru after another without doing the hard work of coming up with a business plan, understanding what they are going to sell, why, to whom, and what systems they are going to put into place. But, that may be a stage many need to go through before they get down to work on the business of business.

  14. Duff says:

    The “passive income” pitch is a con, playing off of people’s greed and laziness. You hit it on the head–if you are charging a significant hourly rate (as in freelancing, coaching, or consulting), making your income passive is a problem you only run into when you’re already making bank.

    The main people making passive income are those who are selling the notion of making passive income. It’s a classic get-rich-quick-without-effort hustle.

  15. Shaun says:

    It makes sense to me, I love passive income, but it is easier said than done. I believe true passive income comes after creating a business to a level where you find out that you don’t really need to do anything more with that business for it to grow/maintain itself and that is where you ultimately want to be as an entrepreneur.

    I believe most businesses can get to this level, but only after a lot of hard work.

    After that state you have passive income and can then just move on to the next thing in your life without having to worry about it anymore. It isn’t boring because you’re simply moving on and finding something else to do. Some new advanture in life.

  16. Simone says:

    In theory I like the idea of passive income, and I have tried to learn about it, but at the end of the day, it’s not something I am passionate about. Or I haven’t found a product that I could create that I would be passionate about. I don’t know I figured out I am a tactile person, I like making things, creating things, designing thing and people are able to touch it and use it on a daily basis.

    I do have the same kind of thinking as Duff above “The “passive income” pitch is a con, playing off of people’s greed and laziness.”

  17. Cristina says:

    It might be better to think of “Passive Income” as “Leveraged Income”. Or a better ratio of time and effort input to income output.

    I find most home owners can learn an easy lesson about passive wealth by looking at their home. If you’ve owned a home for 3 or more years you’ll notice that your mortgage owing is substantially lower. Hopefully you also notice that houses in your neighbourhood are selling for more than you purchased your home. If the reduction in your mortgage is $10,000 and if your home is worth $20,000 more than you paid for it, then that is $30,000 that you earned passively (more or less). You realize this wealth by refinancing or selling the property.

    To earn more passive wealth you can build a portfolio of rental properties where the monthly rents cover the monthly expenses. Then take a look at the mortgage paydown and equity appreciation after 5 or 10 years.

Debate is fine, flaming is not. Pretend that this comment form is a discussion taking place in my house. That means I enjoy constructive criticism and polite suggestions. Personal attacks, insults and all-purpose nastiness will be removed especially if it is directed at other readers.

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