Assuming you have a job right now and you want to generate another stream of income, you might be looking to start a side business. The first question you will want to ask yourself is “should I start a service-based business or should I sell a product?” While both can be lucrative, there are major differences to both approaches.
Service Based Businesses
This is the cheapest service to start. If you have a skill like accounting, marketing or consulting, you can easily start a side business and work nights or weekends for extra income. The key here is to come up with a service that requires a monthly fee so you can bring on clients and compound those clients with new clients and generate a steady flow of income that is consistent. This is key because you will know exactly how much consistent revenue you can generate each month to put into different passive income investments.
My web site design business normally just includes me creating web sites for other people. They are typically one-off projects that start and end. Once a web site is up, most people don’t change their sites very often. So, how did I turn that business into something that could generate monthly income? I added three services:
- Web site hosting
- Web site maintenance
- Web site marketing
Every single web site has to be hosted on a computer somewhere and the service requires that the computer host be connected to the internet 24/7. When someone types in the web site name, a signal goes to the hosting computer and tells it to show the web site to that person. Well, if the hosting computer goes down, guess what? The site goes down. I outsource the hosting service and purchase servers from companies who have 24/7 tech support and who have servers all over the United States and where the computers are connected 24/7. I then resell that service to my clients. A typical server will cost me $85-$100/month. My clients pay between $30-$40/month and I can get about 40 clients on one server. So, 40 clients x $40/month is $1600/month and my cost is approximately $100/month. As long as the server is running, I have passive cashflow from that one server of $1500/month. Is this completely passive? No. Every once in a while a server might not work for a period of time or we have a web site that gets hacked in which case we restore a backup and make updates and monitor it so it doesn’t have issues. While it’s not completely passive, I would estimate about 5-7 hours a week for over 300 sites.
When I started the business, I was charging $20/month for hosting and have since doubled this rate. In addition, I added a new service called hosting + 1 hour of changes to web sites per month. This means we will make text changes (like new staff or adding new projects to a site) and we will manage their web site every month. This service includes hosting and costs $75/month. You would be surprised at how many people sign up for this service and do not make changes to their site. I would estimate about 70% never make changes to their sites. So, the added benefit to the clients and on demand changes added another 80% to the monthly fees and requires little to no work.
If you are starting a service business (like accounting), you can get 2-3 clients per month and possibly generate an extra $500/month just by doing company’s accounting. For other services like marketing, you can charge more and bring on less clients. The beauty of service-based businesses is that your overhead is next to nothing and you are simply spending more time to do it. When you put all of that extra money into passive income investments, you can start replacing your income from your job and business.
What you need to get started:
- Company name
- Company bank account
- Basic web site for marketing
- Accounting software (like Quickbooks online) to track your income and expenses
PROS AND CONS OF A SERVICE-BASED BUSINESS
The following are pros and cons of a service business:
PROS
- Easy to start
- Easy to scale
- No overhead needed (just a home office)
CONS
- Time intensive – you will need to find the extra time to do the work
- Value of the company is low since the value is solely based on you. You could sell the client list to another company but it would be low value
- If something happens to you, the revenue could go to zero (unless you have passive services like above
Product Based Businesses
This one is a little more complicated because you need more overhead to start. Your first question would be whether or not you have a product that everyone “needs” vs. what everyone “wants.” There are quite a few options when it comes to selling products. Are you selling a product that is unique? Are you targeting a specific market? If you are selling a product, my suggestion is to find a product that ONLY appeals to a specific audience. What does that mean? If you are selling ladders or jewelry, there are already hundreds of companies that sell generic items like that. It will be very hard to compete. However, if you are selling leather jackets for bikers or comfy mats for yoga studios, it’s easier to find groups that you can market to and you can charge more for your product.
For example, if there is a huge yoga institution and your company becomes the “preferred comfy mats product for the Yoga Institution,” people will go to you for their yoga mats. There are hundreds of Yoga groups on Facebook you can target as well as other magazines, conventions and marketing methods you can use to target that group. The more targeted your group, the easier it is to find those people to sell to.
What You Need to Start a Product-Based Business
You need to come up with:
- A brand for your company (you will want a professional logo)
- Determine who your target market is going to be
- What’s your background story? More people will buy your product if they can buy into an interesting story
- An E-commerce web site to sell your product online
- How are you going to produce your product?
- How are you going to store inventory?
- How are you going to ship and fulfill orders?
PROS AND CONS OF A PRODUCT-BASED BUSINESS
The following are pros and cons of a service business:
PROS
- If the product in its category is heavily needed, there will be higher demand
- The value of a product that creates a brand can be extremely valuable
- A subscription based model can create recurring revenue
- It’s easier to market to a large audience of people in your target market (vs. Business to Business where there is a much smaller client base)
CONS
- There is much higher start up costs required
- Ongoing costs include: shipping, inventory, staff and more
- Creating a brand that sticks with consumers can take a lot of investment capital
