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How to add passive income streams to a freelance business

Written by Tom Ewer on 10 June 2013

Freelancing is a wonderful business model. It requires little up front capital investment and can be scaled from taking just a few hours of your time per week to becoming a full time endeavour. However, the irony of freelancing is that its limitations only begin to surface as your success grows. You will soon come up against two road blocks: your available time and the maximum rate you can charge. Once you have maxed out those two factors, you essentially hit a brick wall. It's happy problem (by this point you are probably making a very healthy income) but if you're anything like me you're not one to rest on your laurels and settle for a stagnant long term income. There are a few different steps you can take beyond the conventional freelancing business model at this stage, but in this post I want to focus on just one: passive income pursuits.

What is Passive Income?

In my opinion, there is no satisfactory sole definition for "passive income" - the phrase means many things to many people. In literal terms, one could define passive income as income that requires literally no work. Examples of this might be a managed investment property or stock portfolio. Wikipedia defines it as "an income received on a regular basis, with little effort required to maintain it." I don't think that definition is suitable for our purposes. When I talk about passive income I mean asset creation - creating something that will earn you an income in the long term. It could be a product or a service or it could be residual income from affiliate marketing or advertising, and it could require some ongoing upkeep work, but the common denominator is that you build it once and reap the rewards for an extended period of time. So how does a freelancer develop passive income streams to their business? I have two suggestions.

1. Outsource Your Business

Strictly speaking, a freelance business is one person performing a service. We've already discussed the limitations inherent in that business model. The next obvious step is to transition from creating the service yourself to managingthe service. Hire contractors (or employees) to carry out the work that you have been doing and charge a premium on top of their wages to clients. This allows you to scale your business limitlessly (in theory). There are potential issues with expanding your business in such a fashion. Inviting other people to become partly responsible for your business can be a somewhat unsettling prospect, not to mention the fact that you have to find people who are (a) reliable and (b) capable of offering a service equal to or better than your own. In a perfect world, this would leave you in a position where your contractors/employees are your assets, and you simply sit at the top of the pile and direct operations on a macro level. You no longer fight in the trenches, you strategise from behind the front line.

2. Commodotise Your Service

If the thought of entrusting the fate of your business in the hands of others frightens you too much, this second option may be more appealing. It can also be a lot less complicated and arguably offers greater prospects for growth. The principle is simple - you find a way of making your service something that can be packaged and sold, as opposed to always requiring your direct input. An obvious example of this would be a web design firm creating their own premium themes for people to purchase. Another example would be a freelance blogger selling a "How to Blog" guide that could empower people to create their own content. This is true product creation, the only difference being that you are creating an electronic product. There are no stock worries or cashflow issues and the profit margins are relatively large. Best of all, as a freelancer you already have a targeted audience for your product - your potential and existing clients. While some clients are more than happy to pay a premium for you to do the work on their behalf, many others will be enticed by the prospect of the relatively low-cost D.I.Y. approach. And best of all, the ongoing maintenance of product sales will require very little time at all.

Play to Your Strengths and Grow Slowly

I am an advocate of both of these strategies, but it is fair to say that they suit differing personalities. However, the beauty of them both is that you can test them out on a small scale and grow slowly if you experience success. For instance, you could bring on a low-cost contractor for just a few hours a week to assist you in more menial tasks, then hire others as you become more comfortable with that way of working. And as for turning your service into a commodity, you can start with a very simple product available a low cost, gauge the response and act accordingly. Either way, a conservative approach to building your business through either means represents the gateway to far greater income than you are currently earning.

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