Business owners across the globe place a high value on residual income streams—income that comes in reliably month after month without a lot of additional input. (Who wouldn’t?) But according to Joseph Kenney, founder of 316 Strategy Group and a nationally recognized speaker on small business, residual income isn’t “gravy”— it’s a necessity for long-term success of any business. Mr. Kenney answers a few questions below regarding how residual income works and why it plays such a key role in an effective business strategy.
Let’s talk about what residual income means in a business context. Can you elaborate?
From a strategic standpoint, residual income is a cornerstone for any business. Whenever I consult with a new client, this is the first stream of income we discuss. In effect, residual income is revenue that is earned on an ongoing basis without a person necessarily having to do work each time they get paid; or at the very least, it is income business owners can count on from their clients when looking downstream. I challenge every business we work with to find streams of income they can count on month in and month out.
So are we basically talking about passive income? Kind of like residuals from a commercial?
Not necessarily. Passive income is one type of residual income, but it’s not the only one. By residual income, I don't necessarily mean income that you don't have to do any work for it; I mean income that your customers commit to paying over a long period of time. Another way of putting it might be “committed” income.
Can you give some examples of the difference between passive income and committed income?
Passive income involves doing the work one time and getting paid for it again and again. Intellectual property can be a great source of passive income. For example, if you write a book or a song, you can generate ongoing passive income through sales and royalties. Or if you develop a software application, you can license it to users via a monthly subscription fee. You continue to get paid without doing any additional work (except maybe for updates and light maintenance).
It’s a great way to make money, but it obviously doesn’t apply to every business model. However, most businesses can find ways to generate revenue via the other method—committed income. For example, a bakery might contract with area coffee shops to deliver a certain number of pastries every week. A life coach or fitness trainer might set up a members-only site providing regular tips, videos and other content for a monthly subscription fee. A heating/cooling company might offer maintenance contracts with homeowners and business owners to inspect their HVAC units twice a year. Basically, any service or product you can offer to customers on an ongoing business can be structured as committed income.
Ah! So it’s like when a theater has subscribers who will purchase a year’s worth of tickets upfront versus ticket sales for individual shows. Why is it so important for businesses to have residual income streams?
Because it’s difficult, sometimes impossible, to increase profitability without them. We only have so many hours in the day, and if every hour worked results in the exact same amount of revenue, the only way to make more money is to put in more hours of work. You can hire more people to help you, and you might even scale your business that way, but you won’t necessarily improve your profit margin unless you raise prices or reduce expenses. Plus, you have to spend time constantly marketing your business instead of creating your product or performing your service just to keep enough customers coming through the door.
When you start to think in terms of residual income streams, your profitability starts shooting up—more money for fewer hours worked. When you have committed income, you don’t have to spend as much time or money on marketing as long as you keep your customers satisfied. For passive income streams, the profit margins are even higher.
Is residual income the primary goal, then?
No, it’s only one facet. Any table needs a minimum of three legs to have any stability. Residual or committed income is certainly the first and most important stream of income, but I push our clients to develop at least two additional income streams, if not more. Even with committed income streams, you’ll always need to put in some effort to maintain and innovate your services so your customers feel like they’re receiving value and aren’t tempted to move over to your competitors. And you’ll always need some marketing in place to replace clients who eventually drop off. Think of residual income as a main root, a reliable base income source, and your other services as offshoots to provide additional stability and support. That way, you’re never relying on just one income stream.
Share Your Insights Below?
Have you ever considered creating a committed income for yourself or your own brand? What have you seen work? Share your insights in the comments below!