For many people a residual income business opportunity seems like the holy grail of income streams. They believe that once they find that ONE magic residual income business opportunity that all of their money problems will be solved…forever.
But if you look at some of the popular passive income opportunities all may not be as rosy at it seems. Let’s take a look at a few:
1. Affiliate commissions on recurring membership sites
Generating affiliate commissions on recurring membership sites is often touted as the holy grail of affiliate income streams. But what almost NOBODY seems to consider is the average retention rate of those sites.
Personally, all other things being equal (especially conversion rates) I’d rather make a one-time commission of $50 on a product with a % refund rate than a recurring 50% commission of a $30/month membership site with an average retention rate of 3 months – especially if I am BUYING traffic. i.e…
- ($50 x 100 units) x .95 = $4,750
- ($15.00 x 100 units x 3 months) = $4,500
It’s business math 101, but it is strangely not talked about much.
2. The Multi Level Marketing (Network Marketing) home based business opportunity
Of course many network marketing (MLM) companies have touted themselves as the ultimate passive income home based business opportunity. And time and time again that has been proven to NOT be true (note, I am NOT anti-MLM, but I AM against many of the ways network marketing companies are promoted as residual income business opportunities).
- Lack of focus on retail sales – The most common problem is a huge lack of focus on retail sales. Without an emphasis on product sales any MLM organization will naturally implode from the bottom up. This is one of the reasons for what’s commonly known as “the 70 percent rule” which requires that distributors are not reordering until they have sold or personally used at least 70 percent of previously purchased products (see Jeffrey A. Babener’s article here on the 70 percent rule)
- The focus on “leveraging time” by “leveraging the time of other people”. Conceptually this sounds great, but as anyone who has ever managed people knows managing people is HARD work. So what do you have typically in network marketing? You have a lot of people with little or no management experience attempting to manage people with little or no business experience. Sounds like a recipe for disaster, doesn’t it?
- You do not truly own a network marketing business in the traditional sense of “owning a business”. While, obviously any business can fail or go out of business, there are two things unique to the network marketing residual income business opportunity – you have little or no control over how the entire company does AND most network marketing companies have distributor termination clauses (when’s the last time you heard of a business owner firing him or herself?)
3. Generating Passive Residual Income Through Real-Estate
One of the big sales techniques of the Real Estate seminars of the 70s and 80s would be for the presenter to ask the following 2 questions in a room full of people:
- “How many of you know a traditional business owner who lost their shirt in business”? (a lot of people would raise their hand)
- “How many of you know a real estate investor/owner who has lost their shirt”? (almost nobody would raise their hand)
Of course it’s possible that less people know real estate investors/owners than business owners. But even if that isn’t true, I think it’s fair to say that there have been many examples (especially recently) of people losing a lot of money in real estate.
And despite slick real-estate seminar “gurus” trying to convince you that finding and managing tenants isn’t a big deal…for most people it WILL be.
4. Earning Residual Income Through High Yield Investment Programs or HYIPs
As Lynndel Edgington of Eagle Research Associates pointed out in this discussion of the recent PTVPartner HYIP:
“THERE ARE HIGH YIELD INVESTMENTS, BUT THERE ARE NO HIGH YIELD INVESTMENT PROGRAMS THAT ARE LEGAL. Every one is a scam or Ponzi. It just depends on how it is set up that determines if it is a scam or Ponzi.
Real investments don’t use payment processors so they can stay below the radar of government agencies. That statement alone is proof this is a scam. No legal investment has to stay below the radar of any goernment agency, anywhere in the world. The moment you hear those words, alarm bells should be going off warning you this is a scam or Ponzi.”
5. Generating Residual Income Via Royalties
It seems to be the dream of many aspiring authors and musicians to get signed on with a big publisher and generate residual income from the sales of their books or music.
Best-selling author David Copeland explodes that myth in this great video presentation on how to publish a book.
6. Residual Income Business Opportunity Systems Based On Buying Traffic
There have been many affiliate marketing training programs that promise that the holy grail of residual income is to BUY traffic through Pay Per Click marketing, Pay Per View marketing, Banner Advertising or other types of media buys.
This was a favorite promise of many questionable PPC training products.
What almost ALL of them fail to mention are the following aspects of buying traffic:
- Managing bids (this is why bid management software exists)
- Managing campaign creation (this is why so many campaign creation tools exist)
- Managing offers (this is why products like OpenX exist)
- Managing email lists (remember an email list is a list of PEOPLE)
- Building landing pages (this is why expensive automated landing page builders exist)
- Analyzing conversion statistics (this is why tools like Amish Shah’s Magic Bullet, StatsJunky, etc. exist)
All of the tools mentioned above AUTOMATE tasks that take a lot of time. And why do those tools exist? Because generating residual income through Pay Per Click marketing and other means of buying traffic is NOT “hands-off”.
That’s not to say there isn’t a lot of money to be made by buying traffic. There is. But most people decide to take the plunge into buying traffic for all the wrong reasons and are surprised when they lose all their money or it isn’t as easy as they were led to believe.
7. Residual Income Opportunities Based On Search Engine Optimization
I think systems like Niche Blitzkrieg do get a bit closer to what some might consider passive income. However, there are still downsides to a system like Niche Blitzkrieg:
- Unless you learn to outsource and automate you’re income is typically capped at a much lower level than systems that focus on buying traffic.
- You have to be organized enough to monitor your site’s rankings and income and tweak the sites from time to time.
- It can be fairly easy at times for someone to figure out what all your niche sites are and use that information to attack the same markets (this is surprisingly rarer than you might expect, but it is a real concern).
8. The Hard Truth About “The 4-Hour Work Week”
Tim Ferris’ popular book does drive home a lot of important and interesting points. But as many people have pointed out he seems to have the attitude of “it worked for me so it will work for you”. And when it comes to the skill of outsourcing and even automation this is definitely NOT true. There is a ton of money spent by both large and small companies to learn how to effectively outsource, so the idea that it is the holy grail of passive income seems patently absurd.
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