Passive Income

Subscription model business or bust.

This article was published on February 24, 2010.
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I had lunch last week with Dave, Danny, Shawn, and Andrew (who was graciously visiting us from Canada) and the topic of passive income came up. All of our startups grew out of running consulting companies — Andrew is still in the midst of one — and all agreed that passive income beats the ad sales and consulting world a hundred times over. Below are a few of the topics we talked about.

Passive Income

What are the advantages?

Although running a subscription based startup has its own share of stress — and it doesn't necessarily get any easier as the business reaches profitability — it's a different kind of stress from the worry about where the next dollar is coming from and whether or not you can make payroll. Ad firms and consulting companies are constantly fighting for rich contracts to keep them in operation. It's a real stomach churner.

The financial crisis of 2008 and 2009 led to a lot of consulting and ad revenue based companies having to cut their employees, because they wouldn't be able to make payroll otherwise. I have personal ties to a few consulting firms that dropped nearly 75% of their staff. They're all in the midst of re-hiring now, but 2009 was a real scare to their business model. When the financial times are good, they're great, but when they're not, they're a little sketchy for anybody depending on them.

The advantage of passive income from a subscription model is clear: Once you've been in operation for a while, you can accurately predict where you're going to be over the next six months, year, two years, etc. You don't want to rest on your laurels, but it's likely that you're never going to take in less revenue next month than you did the previous one. There's typically an upward trend, no matter how slight, as long as you calculated correctly in the first place and your market is out there.

The knowledge that, say, you made $50,000 in subscription revenue last month lets you sleep at night. As long as you keep your server infrastructure up and your product alive and kicking, you'll hit new revenue highs every subsequent month. That's totally unlike the consulting business or ad sales business where every month is a gamble. Talk about being Stressed Out.

What are the disadvantages?

The only disadvantage I can really see in creating a subscription-based model that brings in passive income is when you want to scale to something huge like Google. Recently Aviary, for example, did away with their paid subscription plan in order to reach more people.

It's true that putting in a pay wall means that fewer people will use your product, because there are a lot of cheapskates out there who won't pay for Internet goods. I'll refer you to David McClure's article The Internet does NOT want to be FREE... It wants to GET PAID on Fucking Friday. A brilliant piece by the former Director of Marketing at PayPal.

But there are other ways to reach scale. You can have a free version that brings in the masses and just upsell the unique features to paying customers. You can explore other verticals, as I suggested in Building Blocks. Whatever you do, as long as you have passive income you can buy time to build out the scalable pieces of your business and live with fewer stress related "where's the revenue going to come from?" nightmares.

How can you start getting passive income?

To get passive income, you need to build a subscription-based business or sell some type of Internet good — maybe it would be themes, like WooThemes, or virtual goods, like Zynga. Something that's tangible, something you can create once and then perpetually sell. You need to create a product that doesn't require you to feed it resources (e.g., written articles) or increase your pageviews to make more money. It's as simple as that.

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