Investing in websites is appealing for several key reasons. The first is the return on investment. High quality websites sell for three times annual earnings which means they are generating 33% profits each year. That’s pretty good right?
You are your own boss when you own a website. That means you have the flexibility to work when you want and as hard or as little as you want.
And finally, there is a pervasive narrative that websites can be passive sources of income. That begs the question:
Can Websites Truly Earn Passive Income?
Cash flow from websites will never be as passive as opening a savings account at a bank and seeing interest from your deposit year after year without lifting a finger. On the other hand, there are many web businesses that run with limited owner involvement because they use tools and methods to reduce or almost eliminate the workload. One of my websites takes no more than three hours per month of effort and consistently earns over $3,000 per month.
In this article I will tell you what to look for if your goal is to buy a passive website. Then we will discuss what you can do if you already have a website which isn’t passive now but could be in the future.
What to Look for in a Passive Website Investment
What Does the Seller Say?
Always look at what the seller has to say about how much work is involved to operate the website, but never believe it.
Is that a bit harsh? Only a bit.
A few sellers may actually remember everything they do and accurately estimate how much time it takes them to do it… but not many of them, I assure you. People are bad at estimating and worse at remembering.
Sellers may have skills and knowledge you don’t have. That means it will take you more time than it takes them, at least at the beginning. On the other hand, I often buy websites where I have skills the seller doesn’t have and end up saving time because of it.
Nevertheless, talking with the seller about what they do, how they do it and how much time it takes is one of the most important things you can do. Not only will you get a much better idea of what the important tasks are, you will also begin to learn what it would take to make the website truly passive.
Hands-Off Transactional Websites
Many web businesses make their money one transaction at a time. When you are evaluating the business model of a website it is important to look at the steps involved in a transaction. Take an eCommerce jewelry site for example.
A customer visits the site, looks around at different products, adds one to their cart, goes to checkout, enters their contact information and payment method, and then waits for the product to show up at their door. All of that is what the customer does.
Whether that transaction is passive or not is dependent on the process and tools the website is employing. Here is a near worst case, least passive example of what could be happening behind the scenes:
The owner of the site hand makes the jewelry himself and keeps inventory in his home or office. If the jewelry is custom made, the scenario gets even worse.
So when the customer places their order, the owner packages the product for shipping, prints out a label with the customer’s address (or writes it, God forbid), applies postage, takes the package to the post office for shipping, comes home and emails the customer with a tracking number, orders more materials, inventory and shipping supplies to replace what was used, follows up with the customer some time later by email and who knows what else.
However another site might handle the same transaction in a completely automated fashion. The customer places their order in exactly the same way but:
The order gets automatically sent by the website to a manufacturer or distributor. The distributor packages and sends the order to the customer and also sends an email with a tracking number for the shipment. A system generated email is sent to the customer asking for a product review a few days after shipment.
Drop-ship isn’t necessarily more profitable than self-ship, but it is certainly more passive.
When you evaluate a website to buy, think through the steps involved to fulfill a transaction. Who performs each step? Are they automated? Can they be? This is a critical component of your due diligence, whether for an eCommerce site or any other site where a product is purchased one transaction at a time.
What About the Techy Stuff?
Look for sites that are running on industry standard platforms like WordPress, Joomla or Drupal. Many sites require very little technical support after they are setup. However, when something does need fixed or improved, it will be much easier and less expensive to find someone to do it if the site is built on industry standard tools. Beware of sites that say they were “custom built” unless you are prepared to pay to have it maintained. I’m not saying custom built sites are bad investments. They may have a unique differentiator that puts them ahead of the competition, but that does not mean that they will be passive plays.
Marketing and Promotion
In some unusual situations, sites have stable or growing traffic without much additional work. I mentioned earlier that I have a site that just seems to keep growing without much help from me. That is rare but I’ll tell you why it doesn’t take much support.
The site was old, almost 15 years old now. It is a content site with long and well written informational articles. The articles are linked extensively one to another. The original owner didn’t do any external link building, so all the authority from the site came naturally. Much of the content is interesting enough to attract comments from the visitors.
The site doesn’t do anything to make Google unhappy like having plagiarized content, paid links from other sites, too many ads, bad formatting for mobile users, old technology or manipulative keyword techniques.
Tip: Look for sites that are completely compliant with the rules of the big players they are dependent on. Content sites are dependent on Google. Amazon affiliate sites are dependent on Amazon. Others may require ClickBank, Instagram or ShareASale for their survival. This doesn’t mean they will always stay in good graces with their benefactors because those big companies change their minds several times a year. However, starting on the right foot by following the rules puts the business ahead of the vast majority of its competitors.
Many sites operate on a business model that requires manual work. Product sites may get their traffic from PPC that requires campaign management. Services sites may require someone to answer the phone or chat in a chat box. Content sites may require social media promotion. Sales may be dependent on a steady stream of emails or newsletters. Despite these mandatory activities, a site may still be relatively passive as an investment if the tasks are outsourced to an existing team.
Phone numbers and chat boxes on websites are tell-tale signs that a human is at work. Sites that ask you to fill in a form and request a quote probably have to have a real person responding to that quote request. Be aware of those elements of the business model and ask the seller how those tasks can be outsourced or automated.
Growth or Stability?
Keep in mind that it takes less effort to maintain the performance of a site than it does to grow one. There are very few web businesses that will grow without active effort on your part. The trick is to automate, systemize and delegate as you grow. I’ll talk much more about that later on.
Don’t make the mistake of thinking you can buy and then completely ignore a website. Like any business, if it isn’t growing a little, it will ultimately decline.
Summarizing What to Look For
- Manual tasks are outsourced or delegated and the resources are willing to continue working on the site after you buy it.
- Sellers who understand their business model very well. Smart sellers have usually automated or at least documented the key activities of the business.
- Sites that use industry standard platforms like WordPress or services like Shopify.
- Sites that have integrated their systems with their suppliers, providers and partners.
- Sites that have end-to-end self service processes for their customers.
- Sites that don’t require extensive marketing or promotion to grow. User generated content, intelligent automated referral systems, long standing promotional mechanisms like permanent referral links and cross promotional agreements are examples of methods that reduce the need for manual marketing or promotion activity.
- Simple business models like content websites that earn revenue from Adsense. Note that driving traffic to content sites may be anything but simple.
- Sites that have automated maintenance tasks like new product uploads, comment moderation, credit card expiration notifications, etc., etc.
- Sites that are less depend on customer communication in the pre and post-sale process.
There are many others, but you get the idea.
What if I’ve Already Purchased a Website, and it is NOT Passive Income?
If you are a dismayed owner of a website that requires more effort than you care to exert, you have a few choices.
I bought a site that sold software and, surprise, surprise, the customers expected the software to work, to be supported and to be upgraded from time to time. It was profitable but it got tiring pretty quick. I sold it after a year and a half.
It might be hard to sell to people who have read this article unless they have a particular interest in your niche or business model.
Delegate or Outsource
If your business has enough margin to cover the cost, almost anything can be delegated to an employee, outsourced to a freelancer or contracted out to a service agency. Many tasks may not be as expensive as you think, particularly if you go the freelancer route. Do this with your eyes wide open and choose your resources carefully or you could generate more stress than you avoid.
Change or Tweak the Business Model
Consider changing business models entirely or modifying the model. Consider these ideas:
- Move from a self-ship to drop ship, or send your inventory to Amazon and let them manage fulfillment with their FBA service.
- Instead of selling and servicing your own products, pivot and sell some or all products as an affiliate so they take care of customers for you.
- Replace physical product sales with digital product sales.
- Eliminate services or replace with simpler ones.
There is a plethora of amazing, readily available software that can make your life much easier. Finding, installing and configuring the software may be a chore, but ultimately well worth it. Even these activities can be outsourced if you spend some time looking for the right help.
I can’t begin to list the thousands of painful tasks that can be performed with a little automation and system analysis. Just search for “automate ________” and fill in the blank with your pain point like Facebook Posting, email management, order processing or ad creation and see what Google suggests. Talk to people running similar websites or at least visit their site and become their customer to see how they have automated processes.
Passive income is a Holy Grail that we all seek and are willing to pay a little more for. Tell me your experiences with passive and non-passive website investments in the comments below!
Jeff Hunt wrote The Website Investor: The Guide To Buying Online Website Businesses For Passive Income. In addition to running his own portfolio of websites, Jeff helps entrepreneurs buy and optimize their web businesses. Learn more at www.OwnOptimize.com and www.HeckYeah.org.