Visualize Your Income Potential

I recently discussed a potential business with an enterprising friend. She wants to sell handcrafted products on Etsy as a source of alternative income. Personally, I am not the kind that discourages any type of income, but this story will highlight some of the intricacies and pitfalls that you may face on your income streams building journey.

earning potential

Photo by C-Monster via Flickr

The Scalability Issue

In our conversation about her business, I asked her how long does it take to create one of her $20 widget. Her response was about one per hour. I quickly visualized a scenario where her business does so well that she could sell an unlimited number of widgets. Let’s assume that she can make 12 of these a day, 365 days a year. Her potential income (not profit) is $87,600 a year. Not bad, but I wouldn’t want to work 365 days a year, would you?

You may say “so what? $87,600 is not so bad”. There are three problems:

She’s trading a lot of her time for the money. In this case, her income is basically the same as someone making $20 per hour but without benefits and overtime (not counting the cost of raw materials).
It takes away her ability to develop other income streams. As she spends more and more time with this income stream, it also robs her of time that she could be spending on something else.
There’s a limit on how much she could earn from this income stream. The minute you are trading time for money, you are limiting yourself to a finite potential.

As you embark on your alternative income journey, it’s a useful exercise to imagine yourself being extremely successful with whatever you’re doing and visualize the bottlenecks that could stunt your potential. In this case, it’s time.

The Scalability Solution

Of course there are several options that my friend has to solve her business scalability issue:

Choose a different business altogether. It’s not the best or the worst option, but it’s an option. She could always find something that’s more passive, or consume less time.
Outsource the work and become the middleman. She could try to outsource to someone who’s willing to work for less. For example, if she could outsource the work for $10 per widget and sell it for $20, that’s a $10 profit margin per widget. Her time investment is now tied to managing the outsourcing relationship, marketing, and sales. Now she’s only limited by how many she could sell and how fast her vendor could produce the widgets.
Increase her efficiency. If she doesn’t want to outsource, or couldn’t find someone to do the work for less, her other option is to find a way to reduce the amount of time it takes for her to create each widget.

Does your income stream have a limiting factor? Could you reduce or eliminate the bottleneck?

This article was featured in:

The Carnival of Personal Finance #171 at Sound Money Matters.

8 Comments

Curt
September 15, 2008, 11:33

Excellent article. Scalability is important when considering a business model. But building a customer base with a predictable income stream is more important when starting out and should be your first priority.
A good strategy is to create a business model with a vision for exponential growth, while focusing on first building a customer base that can support your business when you expand.
Lauren@LifeStyler
September 15, 2008, 12:11

What about the price of supplies? How much does it cost to buy the supplies for one $20 widget? When you factor that in, she’s making even less money.
I still think it could work though. Say her supplies cost her $5 for each $20 widget. If she outsourced 50% of her work for $10 a widget, and her and her employee are able to put out 15 widgets a day (estimating that she does 10 widgets herself and her employee constructs 5), she’s incurring $75/day in supply costs and $50/day for employee costs totaling $125 in expenses per day. But, if she sells off all of her inventory, she’s bringing in $300 a day – netting $175 per day.
Translate that into a year of work (estimating that they follow the typical work calendar – and have 6 weeks off per year/ 46 work weeks), she’s still netting $40,250 before paying taxes. Depending on where she lives and what her living situation is, that may still be doable.
Sorry for all of the calculations – I’m a big ‘ole nerd and I love computing numbers.
Data Entry Lady
September 15, 2008, 13:27

Good read – to me future potential for your hard work is a biggie!
Pinyo
September 16, 2008, 0:15

@Curt — The point I’m trying to make is that you should look at the potential and determine if it’s even worth it to enter the business in the first place.
@Lauren — The cost is low, you could assume $5 a widget. I agree that it could work, and the outsourcing solution is definitely worth exploring. Also $40,000 a year is better than what many people are making. My goal was to show here some of the nuances.
Anyway, I like nerdy
passivefamilyincome
September 16, 2008, 6:54

Pinyo – Nice post. This is something I try and think about every single day when building my passive income streams. I try and think how I can do each and every task more efficiently so I have more time to develop more and more income streams. Thanks for the tips!
Pinyo
September 18, 2008, 10:11

@PassiveFamilyIncome — Thank you and you’re welcome.
BTGNow.net
September 22, 2008, 18:22

My income stream has the same limiting factor as all blogs: time. As a single contributor blog, BTG gets as much time out of my day as I can muster after taking care of my other responsibilities. But there’s only 24 hours in a day, and ever so much to do in terms of content creation, and marketing. I think time management will help my bottleneck, but will only be able to help so much.
Pinyo
September 22, 2008, 20:08

@BTG — You’ve seen my article about Blog Exit Strategy. I think turning a popular blog into a multi-author blog with some sort of revenue sharing arrangement could work in the long run to break income barrier.