Dropshipping and affiliate marketing are the two most popular ways to make big money online. These are also the most affordable and easiest to implement.
If you want to be an online entrepreneur, how should you decide? Should you do affiliate marketing or dropshipping?
We will help you find out. Today, you will learn the benefits of both and how each business model works. By the end of this article, you should have in-depth knowledge about the pros and cons of each business model, and how much effort is needed to build each one.
What is Dropshipping?
Dropshipping is a business model where you sell someone else’s products. These products are physical products that need to be shipped. However, you do not ship these items yourself. Instead, the supplier is going to ship the items for you.
What happens in dropshipping is that you build your own website, and then post someone else’s products there. The manufacturer of the product is called a supplier, and you are called the dropshipper.
In dropshipping, a customer would order the product from your website, not knowing that it is not you who creates these products.
If you have even seen one of those home TV shopping channels, dropshipping works similarly. If you call the hotline, someone is going to process your order, but it is not the TV company that would ship it, but the manufacturer.
How to process orders in dropshipping
As a dropshipper, you have what is called a dashboard that is linked to the supplier’s system. Once a customer places an order on your online store, you will see this order in your dashboard. The next step is to process the order, and then the supplier will ship.
In a nutshell, the process goes like this:
- Customer pays for the product
- You receive that money on your payment processor
- You order the product from your supplier from your dropshipping dashboard
- You use your own money to pay
- The supplier will ship the item to your customer
- You withdraw the money from your payment processor to your bank
As you can see, you need to be active in fulfilling orders. Once a customer placed an order and paid for it, you need to complete that order within 24 hours. After the payment is made to your supplier, only then will the supplier pack the item and ship it.
How to get service customers in dropshipping
In the dropshipping business, a customer believes that you manufacture what you sell. The supplier will not have any involvement with the customer, except that the supplier will ship the item to your customer.
If a customer received a bad product or did not receive it, the customer expects you to deal with it. You cannot tell the customer that it is not your fault. Technically speaking, you are the seller, not the supplier.
In dropshipping, you also need to be knowledgeable about the entire business process. Customers expect you to know what materials the products are made of, when they will be shipped, how long they will take to ship, and if there is a warranty. In dropshipping, you are in charge of all customer relationships.
How to make money in dropshipping
The profit you make in dropshipping is the difference between the supplier’s price and your price, minus all your taxes and business expenses.
For example, a supplier may be selling a coffee mug for $20 plus $5 in shipping. If you sell that product on your website for $30 plus $5 in shipping, the price difference is $10, which is your profit.
From the $10, you need to subtract your expenses. Let us say that you sold 100 items in a month. Your total gross profit is $10 X 100 = $1,000. If your tax is 10% of $1,000, then you pay $29 monthly subscription if you built a store in Shopify, your total cost per month is $100 + $29 = $129.
$1,000 minus $129 is $871, which is your monthly net profit unless you have other expenses like advertising or payment for virtual assistants.
How to get customers in dropshipping
To get customers on dropshipping, the main method is direct marketing. You need to advertise online on many channels like Facebook, Instagram, Google Ads, and YouTube.
In these ads, you are trying to attract a potential customer to click on the link that takes them to a product page, and then hope that they buy.
The other method is the free one, which can be done by blogging or the use of social media. You can build followers on Instagram, YouTube, Facebook, and other platforms. Once you have built a following and you are an influencer, it would be easier to push your products to your target market.
The other method is to pay influencers to do the marketing for you. It is like a sponsorship program where they can say good things about your products, and tell their followers to go to your website or product page to buy.
What is Affiliate Marketing?
Affiliate marketing is a business model where you endorse someone else’s products, but you are not selling them. It is easy to learn how to do it.
It is like being a model or influencer and then telling your followers that the products you endorse are the best out there. If your followers buy these products you recommend, you receive a commission.
In this business, you are called the affiliate. Before you get started, you need to find a company that has what is called an affiliate program. You sign up for this program, and once you get approved, you will receive a link.
That link is personal; it is the only way that the company can track if the buyer came from you or not. You will use that link in all your promotions and marketing efforts. If a website visitor clicks on that link, he will be taken to the company’s website, not yours.
From that website, he will complete the purchase, and the company will record that purchase as your sale. Usually, you get paid the commission every month.
Usually, the products you endorse in affiliate marketing are digital products, like eBooks, e-courses, or software. However, you can also endorse physical goods, like those that are found in Amazon.
How to process orders in affiliate marketing
You do not process the order in affiliate marketing. It is the company’s business system that processes it. The company will take the customer’s credit card details, and it is the company that ships the item or delivers the electronic goods to the customer.
How to get service customers in affiliate marketing
In affiliate marketing, you do not service your customer. The company who makes the products are the ones who would service tour referral. If the product is bad, they need to contact the company or the seller, not you. However, your reputation can get damaged if you sell bad products.
How is this going to happen? Well, your referrals who bought the item based on your recommendation would go back to your blog or YouTube channel and say that the product is bad. If other viewers see this, they will not buy, and our affiliate sales will get impacted.
How to make money in affiliate marketing
The money you make on affiliate marketing is the commission. Because of that, you have no control over it. Each company has a different commission rate. Amazon ranges between 4% and 10% per product, while many software companies offer 30% or more.
There are also two types of commissions. The first one is flat, and the second one is recurring. If the commission rate in a flat type is 10%, and the product costs $100, you will receive $10 as a commission and nothing more.
In a recurring commission, you will receive commissions monthly for as long as the customer is paying. For example, you may have sold software where the customer has to pay $50 per month. If the commission for that product is 30%, or $15, then you would receive $15 monthly for as long as that customer is subscribing to that product.
How to get customers in affiliate marketing
The most common way to get customers in affiliate marketing is through blogging. You write hundreds of blog posts and put your links in there. The most common type of endorsement is a product review. For example, you can write a listicle or a product review of the five best aquarium filters.
In that review, you put the links to the aquarium filters. If the customer clicks on these links and makes a purchase, the company that sold the aquarium filters will pay you a commission.
Another common way to endorse products is though YouTube. Here, you can do product reviews, software reviews, and gain a huge number of subscribers. Once your subscribers want to buy the products from your links, you would get a commission.
The thing about affiliate marketing is that you need to be credible. You should be an expert in your field, and this would make you believable. For example, you can create a YouTube channel that is all about aquariums. In it, you can talk about how to set-up one, how to take care of certain fish types, and so on.
Once you have gained a massive following, you can start endorsing products that are related to the aquarium hobby, and then you get a commission if they buy.
Benefits of Dropshipping
Let us take a look at the main benefits of dropshipping.
You are in control
In dropshipping, you are in control of your prices, and you are in full control how you want to market your products. You can change the photos, edit them, and make them look better than the original ones. With dropshipping, there are almost no rules that you should follow, like compliance with FTC standards. You are also not forced to disclose that the products you sell are not yours.
With dropshipping, you can price your products the way you want. You can also do white label services where the products you offer are branded as yours.
You choose the products you sell
There are thousands of products that you can sell with dropshipping. You can sell clothing, mugs, carpets, desks, cabinets, drones, and a whole lot more.
In affiliate marketing, you cannot choose the product you sell. You are limited by the products that affiliate programs offer, and you are stuck with those products. You cannot create bonuses or freebies, but you can do this with dropshipping.
Dropshipping also opens up many opportunities for you to get on a trend. For example, there was a time when fidget spinners were the craze. If you are dropshipping, you can sell fidget spinners and make a lot of money.
You deal directly with customers
With dropshipping, you are in control of how you want to deal with your customers. You can talk to them and build a relationship with them. You can right what is wrong, and convince them to be loyal to you. You can build loyalty, programs, coupons, discounts, and other marketing campaigns.
Benefits of Affiliate Marketing
What about affiliate marketing? Does it have benefits? Below are some of the things you may like about it.
You have recurring commissions
Many companies that have affiliate programs offer recurring commissions. What this means is that it takes only one customer to get a consistent source of income on a monthly basis.
If you think about it, you can earn $15,000 per month if you manage to convince 1,000 people to pay for a recurring monthly subscription for a software. If the commission is $15 per month, and you have 1,000 people who bought the item, then you would earn $15,000 per month.
And we are only talking about one product. What if you endorse several products that pay the same? You would earn so much money than selling products per piece.
You get support for marketing
In affiliate marketing, the company whose products you endorse create many marketing materials such as banners and even blog articles. You can use these articles and banners on your website, and you do not have to create your own.
The wonderful thing about these banners is that they are proven to be high-converting. You place these banners on your website with your affiliate link, and then you let these banners do the job. It is like advertising where you get paid for every successful sale.
You earn passively
Affiliate marketing is a passive income where you can earn money while you sleep. Once you have published a blog post or a YouTube video, that content is already there for people to see. And once they see it even if you are sleeping, and they decide to buy, then you earn a commission.
Affiliate marketing is great because you are not actively looking for customers unless you want to go through the advertising route. It is like having a hobby where you just write about things that interest you. In return, you get paid a commission if people bought your endorsed items.
Disadvantages of Dropshipping
Before you jump into dropshipping, you have to understand that there are some disadvantages, which we will describe below.
It is an active business
Dropshipping is an active business; you need to watch over your orders and make sure that you fulfil them on time. If you do not do this, the shipments will be delayed, and your customers will be unhappy.
You also have to watch the trend. If a drone product is no longer the trend, you need to stop selling that and look for new products to sell. As an active business, it is like being self-employed. The business is not going to work if you have no active participation.
Also, you need to be on the lookout for customer complaints. You need to be able to answer their inquiries and address their problems. If you do not do this, you will have a bad reputation. You will lose customers, and they will not recommend you to friends and families.
You have no control over quality and shipping
Because you are selling someone else’s products, you have no control over the quality of these goods. Unless you order these products, you will never know if they are of high quality or not.
As far as shipping is concerned, you also do not have control over it. Even if you place the order within 24 hours, your supplier may take three business days to ship it. This is called processing time. Some suppliers, especially those who are in China, have massive warehouses, and they need to manually look for these products before they can ship it to your customers.
You lose money on refunds and returns
If a customer asks for a cancellation, you can longer get black the money that you spend on shipping. That money is lost. This can happen if your supplier is keeping its commitments, or of the shipment takes too long.
For example, you may be selling products from China, and it would take 60 days to deliver. One that shipping fee is paid and your customer demands for a refund, you already paid for that shipping, and you cannot ask your supplier to pay you back.
Disadvantages of Affiliate Marketing
Affiliate marketing also has disadvantages, which we will describe below.
The company can stop the commissions
Some companies will stop the commission any time they want, or reduce the commission cost depending on their financial health. If the commission stops, then you just out in a lot of hard work that will no longer pay.
You have lots of competition
You are not the only one endorsing the product, which means that you should give your followers a good reason why they should buy the products from you. What this means is that you need to shine and stand out as the most credible influencer in your niche to be able to sell.
You have no customer base
As an affiliate marketer, you really have no customer base. For example, you may be endorsing aquarium filters. Most of the people who see your YouTube videos are not going to be your repeat customers. After all, they only need to buy one aquarium filter. These customers may have just randomly seen your website, and this is why they bought your recommended product.
What is better: Dropshipping or Affiliate Marketing?
The better option depends on what you want. If you want a passive income, then affiliate marketing is the best choice, especially if you do not want to deal with customer returns and complaints.
If you want to be in control of your marketing, and you want a customer base who would repeatedly buy from you, then dropshipping is your best option. You can create your own loyalty programs, and you can also add and remove products from your store at will.
Summary
Both business models require a little amount of money to get started, and both require a lot of hard work. Between dropshipping and affiliate marketing, it is much easier to dropship because people want to buy products that they can touch, feel and use. On the flipside, affiliate marketing can be great, too if you are looking for a passive income.