Throughout my business career I had a philosophy that sustained me whenever I made a stupid, read costly, mistake. My first year I lost out on about $20,000 because of a carelessly worded agreement. The client terminated it after I had solved his problem but before I reaped the benefits of my hard work.
So I told myself I had just bought a semester at the Wharton School. I don't know why I chose this eminent business school. But over two decades of entrepreneurship, I lost enough to pay for a MBA. Still, I gained practical knowledge that helped me become more successful in the future.
Like many new entrepreneurs, in the beginning, I was perpetually short on capital. I feared to ask for too high a fee thereby losing a client. Through experience, I learned that limits on my income were self-imposed.
The 3 Business Models
Whether you want to be a solo-trepreneur, also known as a freelancer, or build a business, you can make money in three ways:
1. Fixed Fee: I started with this arrangement. It works a couple of ways. In real estate typically you get a percentage of the transaction price, whether a sales price or an amount of income generated by a lease or from managing a property. Numerous other businesses such as plumbing and auto repair operate on a fixed fee. Retail businesses and restaurants are also fixed fee enterprises. Whether a job takes you four hours or 40, the fee does not change.
To be successful you have to be good at estimating the amount of time it will take to handle a job. In the beginning when you have little experience you may have to charge a lower fee to undercut your competition while also learning how long different tasks take and gaining efficiency. Start counting the classes you could have bought at Wharton.
2. Hourly Fee: After a few years of paying my accountant and lawyer by the hour I realized they had something. If they misjudged how long a job would take I paid more. So I added consulting to the services I offered. If you are a solo-trepreneur this fee arrangement will eventually limit your income based on the number of hours you can work and the hourly rate above which you price yourself out of the market.
3. Passive Income: While most of my income came from the first two categories I had a few projects that generated passive income. In this arrangement, you make an initial investment of time and resources and the venture generates income thereafter with little additional work. Many types of investments fall into this category.
So does intellectual property. A training company asked me to do a video class on real estate appraising. The preparation and shoot took about 20 hours. Thereafter I received a royalty every time someone watched it. About every two or three months I had to answer a question from a student who had seen it. The checks came every three months until I joined the navy.
None of these is better than the others. Each has positive and negative aspects. The key: Understand the model into which your idea falls and the details of how to apply it.
Look for more on this topic over the next couple of months.
What other income models are you aware of?
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