Growth in online spending has vaulted online stores to the top of passive income myths but how much work is involved?
Growth in online spending hit $20 billion last year and shows no sign of slowing. Expectations for online shopping to reach nearly $44 billion over the next few years has people pushing to get in line for their share of the profits. As part of that frenzy, one of the greatest passive income myths has been born – all you need to do is put out the sign on your online store and wait for the masses to give you their money.
This post is the second in a series where I will look at the four most popular investments for passive income potential:
- Income Investing
- Real Estate
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Passive income is technically an income you receive on a regular basis that involves little effort on your part. You get paid every month, quarter or year but do not participate in management or contribute work in the investment. Few investments offer absolutely passive income since you have to work for the money to invest in the first place and you likely will want to keep updated on the investment, but some income is more passive than others.
We looked at the myth of passive income from blogging earlier in the week, finding that developing your own online property is a lot of work and likely to never become truly passive income. Running an online store can be part of your blog, adding an additional revenue source, or it can be a stand-alone source of income.
Like blogging though, online stores may be a poor source of passive income.
Passive Income Online: Myth and Reality
The graphic below, courtesy of eMarketer Research, shows total U.S. retail sales as well as ecommerce sales for the two years through 2014 and then expectations through 2018. While traditional (offline) retail sales are expected to grow about 12.5% annually over the five-year period, online retail sales are expected to jump 23.4% over the same period.
Besides the faster growth in online spending, e-tailers don’t have the high start-up costs of opening a brick-and-mortar store. There are no rental leases or utility bills for an online store. You don’t have to get up at the crack of dawn to open the door, hoping that someone finds your shop.
Just as with blogging, the success stories have helped perpetuate the myth that riches await through your online storefront. The idea that, “even normal people can build successful six-figure income, mom-and-pop online stores,” fuels dreams of sandy beaches and early retirement.
By selling affiliate products, you don’t even need to create something of your own to sell! Just post a picture and a link of a product and let the money roll in.
The reality of an online store, as we saw with blogging, is that they are easy to set up but success takes a bit more work. In fact, your online store is likely to provide even less passive income than blogging.
Let’s look at the two ways you make money from an online store then how to set one up.
Affiliate Sales Online for Passive Income
Affiliate sales are a lot like the advertising we saw in blogging but you only get paid if someone actually buys a product or service. A lot of companies offer commissions on sales of their products. To take advantage of this, you sign up directly on the company’s website or through an affiliate network like Flexoffers or Amazon Associates. Looking for programs directly with a specific company is usually as easy as a Google search for “[company or product name] affiliate program.”
Once you’ve signed up for the program, you get a special URL link and images of products. Whether on your blog or in your online store, you place a picture and a description of a product along with the URL link from the affiliate program. If someone clicks through the link and then buys the product, you receive a flat-fee or percentage commission on the sale.
While pay-per-click advertising normally pays just pennies or a few bucks per click, affiliate sales can pay hundreds of dollars on each sale. Of course, the drawback is that affiliate sales happen much less frequently than do clicks on advertising banners.
If you figure only about 1% of the pageviews to a webpage result in a click on an advertisement or an affiliate ad, and maybe 3% are actually going to buy the product from the ad, you would need 3,333 pageviews to get one affiliate sale! (3,333 pageviews * 1% * 3% = 1 affiliate sale)
How much you make for affiliate ads varies quite a bit depending on the types of products and the network. Amazon pays between 1% and 10% on sales of products from people you send over through an affiliate link. That isn’t much if someone is buying an ebook or some electronics gear. I’ve seen other affiliate programs, especially those for loans and website hosting, pay $100 or more for each sale.
Using an approximate of $50 for each affiliate sale and 3,333 page views for each sale leads to estimated earnings of $0.015 per page view. That’s pretty close to the amount you can expect to make per page view through advertising on your blog.
To improve their chance at an affiliate sale, most bloggers will write an article reviewing the product. This is really just a combination of the sponsored post and advertising strategy we saw in the previous article on passive income through blogging. Writing specifically about the product is more likely to attract visitors from Google search that might be interested in a purchase. It is also a good way to give readers more information about a product than simply flashing an advertising banner on the screen.
A benefit to affiliate ads on your blog compared to per-click advertising is that they take relatively less space and are less intrusive than ads. An affiliate ad might be a single blog post that could lead to hundreds of dollars in sales while you would generally place advertising space on every page and post.
Much like sponsored content, you have to be careful with content around affiliate promotions. If the product or service is of poor quality, you risk alienating your readers by writing a glowing recommendation. There are plenty of affiliate programs out there in any niche, so there is really no need to push a specific product. Most of the bloggers I know insist on trying the product first and then decide whether they want to endorse it through an article.
Selling your Own Products Online for Passive Income
Selling your own products or services through a blog or online store is arguably the best way to make money online. You are only making a slim cut on advertising after the advertiser and the ad network have taken their share. The same is true for affiliate sales and sponsored content but selling your own product puts you first in line for profits.
Unfortunately, selling your own products or services means you need something to sell. Manufacturing a product can cost thousands in upfront expenses. Creating a book could take months to write and will cost money to edit and finish. Even selling consulting services means you have to establish yourself as an expert and then spend the time consulting.
How much you make on your products can vary. Books are relatively easy to sell but do not make much money for each sale. I spend an average of $2,250 in editing and production for each book I produce and most sell for between $4.99 and $7.99 per copy. That doesn't include time spent writing the content. Sales through your own website will net you the full list price while those through Amazon or Createspace (for print-on-demand) will net you between 40% and 70% of the list price. About a third of my book sales by number of copies comes from the online store on my site with the other two-thirds from Amazon.
I know several bloggers that have created educational courses that they sell through Udemy or directly on their website. Prices range from a few dollars to hundreds depending on the length and detail of the curriculum. Udemy offers a fairly easy to use platform and will even promote the course for 50% of the sales.
You can be successful selling just about anything related to your niche. The Moms Make Money blog made $2,452 on selling sewing patterns just during the month of January 2015, of course it was on traffic of 445,298 visitors to the blog.
My own experience and talking with other bloggers is that product sales generally earn between $0.005 to $0.03 per page view. While you may get more money for each sale of your products, like affiliate ads, the percentage of sales to page visitors is extremely low.
How to Setup and Manage an Online Store…but not for Passive Income
While a lot of the bloggers I know sell affiliate products or their own stuff through their personal blog, you can also sell through a separate online store. The dream of passive income riches has led to an industry of platforms that make it quick and easy to put up your own digital storefront.
We’ll look at the process for setting up an online store on the Shopify platform here though other platforms like BigCommerce are similar.
Shopify is an online retail hosting platform, a website that offers the ability to host your own website on top of its system. Think of Shopify as Amazon meets WordPress. With Shopify, you can create an online store as well as a full website or blog with your own domain name.
The process of creating an online store through Shopify is fairly simple. You choose a theme from one of the 100+ templates including themes designed for specific industries like fashion, jewelry or electronics. Just as with a blog, the theme is the layout of the website. You can customize themes with different colors and fonts as well as adding your own logo.
Shopify is integrated with payment processors like PayPal and Authorize.net, which makes payment processing easier. If you are setting up an online store on your own blog, you’ll need a merchant account and an SSL certificate to process payments.
There are three monthly subscription levels on Shopify from $29 up to $179 for the unlimited features. The professional and unlimited plans offer a few extra reporting and tracking options but most new store owners do just fine on the basic plan. The only reason why most would need the higher priced programs would be for file storage.
From the administration area on your Shopify account, you will add products and manage inventory. Adding products is a matter of uploading images and writing product descriptions. Professional quality pictures are a must for products so you might want to, at minimum, invest in a camera that can take high resolution pictures. You also want to write detailed and keyword-rich descriptions of your products. Not only will it help convert visitors to buyers but it will help get your store found in search results.
Besides selling your own products, you can also sell affiliate products through a Shopify store. To sell affiliate products, you upload an image and description just as you would your own products. You can include your affiliate link so buyers click directly and make the purchase.
Products on Shopify are grouped into categories called “collections” that can be automatically grouped or can be grouped into “smart collections” according to your design. Creating smart collections offers a good opportunity to highlight and market products. Create eye-catching collections like “Under $20” or “Great Father’s Day Ideas” or “Just for Her.”
If you do not already manage your own website or blog, Shopify offers the opportunity to create webpages and a blog right on its system. The site integrates with Google Analytics and offers its own analytics so you can see how people are finding your store.
While setting up an online store is quick and costs next to nothing, the dream of passive income from an online retail operation is far from reality. Much like we saw in blogging, an online store without something to drive virtual customers isn’t going to make any money. You need to give people a reason to visit your store. With only a fraction of the visitors likely to actually buy anything, you need a lot of people to visit your store to make any real money.
Getting People to your Online Store is far from Passive
Drawing people to your online store is either through organic promotion, through blogging and Google search, or through external promotion.
We covered blogging in the earlier post in the series so will focus on external promotion. External promotion of your online store is marketing through other blogs, direct advertising or through social media. You can do this without managing your own blog but a lot of people combine the two methods, using external promotion to get things going until their own blog builds momentum.
Guest posting on other blogs is a great way to draw visitors to your own blog and can be helpful in bringing people to an online store. While many bloggers will accept a guest post from another blog, they might charge a fee for a guest post that links directly to an online store. If you do find blogs that let you post and link to your online store without a fee, it could be a great source of traffic without the constant management of your own blog.
Social media is the most popular way of promoting online stores, both through direct advertising and through free outreach to followers. Building a following large enough to drive traffic to your online store usually means a few years of developing a social network. Becoming overly promotional to your store risks alienating those friends and fans pretty quick so a lot of people create different accounts for their store and for their personal lives.
Most online stores can be exported directly to your Facebook page. This makes it even easier to let your FB fans checkout the products in your online store and you can reach a wider audience. Use Facebook and other social networks to talk about your products, but avoid overt promotion. Talking about the products in a more indirect way about how they fulfill a specific need is a lot like the content marketing used in sponsored posts for blogging.
Encourage a few in your closest network to share your posts and pictures from your online store in social media. As long as they are quality products, you shouldn't have too much trouble asking people to support you through sharing every once in a while.
Paying for online advertising is another option for your online store. After some testing, you should be able to figure out how much it costs for each sale. If you can offer multiple products in your store and reach out to customers for repeat purchases, it may make sense to do some advertising even if it costs more to gain a customer than you make for that initial sale. Test out advertising campaigns on Facebook, Google+ and Twitter.
True Passive Income Potential: Online Stores
With some minor differences, online stores are very similar to blogging and the passive income potential is nearly identical. Blogging offers the advantage of being able to place advertisements and sponsored content on your blog. You will still have to respond to customer questions and emails with an online store but ongoing management may be a little easier compared to a blog since you are not constantly creating content articles.
Online stores are generally inexpensive to set up and manage but costs can build quickly if you focus on external paid promotion rather than blogging or using your social network. A basic Shopify plan will cost $29 per month and includes everything you need to get started including a hosting plan.
Like blogging, online stores are a poor choice for truly passive income. While you do not necessarily need to spend the amount of time drawing people to your online store that you would spend blogging, you still need some way to attract people to the site. This usually either means paid advertising or some kind of content marketing. If you can find other blogs or websites that are willing to host a guest post that links to your online store without charging a fee, this is probably you best source for traffic. You benefit from the established traffic on the blog and do not have to manage the ongoing work. In return, the blog owner gets a continuous stream of content to publish.
The problem with online stores, relative to blogging, is that once you stop promoting the store through paid advertisement or content, traffic declines immediately. The lingering traffic from search for a blog does not apply to an online store unless you have a blog associated with it. This means that online stores may be an even poorer choice for passive income unless you earn enough to outsource promotion of your store.
The scale below presents my passive income potential for an online store not associated with a blog. For the passive income potential of a blog, refer back to the previous article. Each of four factors is scaled in reverse with 1 being the worst or the most unfavorable to a true passive income investment. Since start-up costs are relatively minor for online stores, it receives an 8 on the scale.
Time commitment is slightly lower for an online store compared to blogging but still high relative to other passive income investments in the series. Income momentum and continuity are both extremely low for an online store relative to other passive income strategies. There is almost no momentum from previous sales unless you can convert prior customers to repeat buyers and the store will require continuous promotion to generate new sales.
Overall, online stores are a poor source of passive income though they can be good sources of active income, especially when combined with a blog. Online spending is increasing and running a virtual storefront is much cheaper than managing a traditional retail establishment. Combining an online store with a blog allows you to take advantage of four different streams of revenue through advertising, sponsored content, affiliate products and sales of your own products.
In the next article in the passive income series, we will examine income investing through three different strategies: dividend stocks, master limited partnerships (MLPs) and using stock options for income. Income investing is the most truly passive of the passive income strategies in the series and we’ll develop a framework for how to set up the strategy.
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