ut of all of the various business models that exist, dropshipping and affiliate marketing have emerged as being particularly suitable for beginners. This is because both dropshipping and affiliate marketing are simple, profitable, and don't require much investment to get started with. However, even though they have some similarities, there are some fundamental differences that make them different from one another. In this article (dropshipping vs affiliate marketing), we will compare and contrast both of these business models and leave you with our take on which one is more suitable for beginners.
What is Dropshipping?
Dropshipping is a business fulfillment model where one party (the merchant) advertises products that are owned by another party (the supplier). When a customer places an order for the product, the merchant takes their money and, in turn, places an order with the supplier. The supplier then ships the products directly to the customer.
The customer benefits because they might have never found the product without the merchant's advertising. The supplier benefits because they just made a sale without incurring the marketing costs that usually accompany it. Finally, the merchant benefits because they are able to keep the margin (sale price minus expenses) as profit. We have a complete guide on how dropshipping works available here.
What is Affiliate Marketing?
Affiliate marketing is a business model where one party creates some sort of content that advertises the products/services of another business. Typically, the party that owns the products (the supplier) provides you, the affiliate, with a unique link. When clicked, this link will bring the user to the supplier's website, and will recognize you as the person who referred them. If the user purchases something while on the supplier's site, you receive a % of the sale as commission. (Note: the customer's price does not increase due to the commission).
Affiliate marketing is beneficial to the customer because they get to hear about a product that they might like, and they get to hear your opinion on why they should like it. Affiliate marketing benefits the supplier because they receive highly-qualified leads, and only pay out a commission when a purchase is made. This is an ideal form of advertising since you only pay when you are seeing results. Lastly, you (the affiliate) benefit because you get paid the commission for simply highlighting the benefits of a product.
In practice, affiliate marketing can be done in several different ways. What you're looking to do is create online traffic, and the closer it relates to what you are selling, the better. For example, you could start a website based on longboarding, teaching people how to longboard. Then, you could add affiliate links to products you recommend.
.ou can start a youtube channel or podcast on a certain topic and advertise products that your audience would enjoy. Or, you can create a review website where you compare the best products in a certain niche, such as home improvement tools or software. Because your commissions are relatively small, you'll likely want to stick to organic (i.e. unpaid) traffic sources like search engine optimization (SEO), content creation (videos, blog articles, etc.), or whatever else works.
Similarities (Dropshipping vs Affiliate Marketing)
As we mentioned above, dropshipping and affiliate marketing are often compared because they have several aspects in common. The major similarities between them are as follows:
- Both have low start-up costs (as low as $100-200 if desired)
- Dropshipping and affiliate marketing both have high earning potentials
- Both require a similar set of skills (managing a website, driving traffic, copywriting, etc.)
- They are both relatively low-risk business models (low-investment, not much innovation required)
- Both can be started immediately (you don't have to wait for anything)
- Neither business model requires you to hold inventory or ship products yourself
- Both business models can be automated with the right infrastructure (turning them into passive income)
Profitability (Dropshipping vs Affiliate Marketing)
When it comes to profitability, both dropshipping and affiliate marketing are capable of making good money. In dropshipping, your profit will be equal to your sale price minus your expenses. If you charge your customers $100 for a product that costs $60, this leaves you with a gross margin of $40. This is the margin that you will be able to apply to your shipping expenses, your marketing expenses, and your overhead expenses (Shopify plan, subscriptions, etc). Dropshipping can be highly profitable if you are able to find an efficient marketing strategy. There are many success stories floating around the internet of people making >$1,000,000 in revenue per store.
Affiliate marketing, on the other hand, has lower margins and lower expenses. Since you are directing traffic to a third-party store, you won't have to pay for the products or their shipping. Affiliate commissions vary depending on the program. Amazon, one of the biggest affiliate programs, pays affiliates between 0-10% depending on the category (view the rates here). Clickbank, another affiliate site with more informational products than physical ones, can pay over 80% commission based on the product. In order to make some real money with affiliate marketing, you need to find a way to get qualified traffic for cheap. This is usually done through content creation (e.g. blog articles, podcasts, videos) and distribution (SEO, social media). You want to create informative content (like best shoes for longboarding, etc), distribute it, and monetize it.
Since dropshipping has higher margins and can be scaled with advertisements, we see dropshipping as having a leg up in terms of profitability.
Ease of Getting Started
To get started in dropshipping, you need a supplier and an online storefront. While you can also dropship on marketplaces like Ebay or Amazon, most people choose to create their own online store through Shopify or WooCommerce. Assuming this is the strategy that you'll be pursuing, getting started is relatively easy. You'll need to sign up for a Shopify subscription ($29/month). You can also choose to register a domain name (~$15/year) and sign up for product sourcing software like DropCommerce, but this isn't mandatory. You can select a free Shopify theme, and then it won't be long before your store is up and running.
Affiliate marketing is even easier to get started with. Because you're primarily using links to direct your traffic to products, you can even get started on social media. However, most people will choose to start a website where they can focus their content on their chosen topic. Wordpress is the most widely used platform for starting a blog or website, and currently powers over ~39% of all websites on the internet. It is free to use, and all you'll need to purchase is a domain name (~$15/year) and subscribe to a hosting service (~$30/year or more). As for affiliate programs, they are usually free to join and will welcome anyone looking to highlight their products.
Since dropshipping on Shopify will cost a bit more to get started with, we'll give affiliate marketing a slight advantage in this regard.
Winner: Affiliate Marketing
Marketing Potential (Dropshipping vs Affiliate Marketing)
In both dropshipping and affiliate marketing, you will be marketing products that belong to another business. For dropshipping, you have many different options for marketing. You can use search engine marketing, display advertising (e.g. Facebook ads), influencers, email marketing, or combine these somehow. Because you have a larger margin available (i.e. you aren't just making a 2% commission), you can play around with your advertising budget a bit more. Fortunately, when you find something that works you can scale it up by reinvesting your profits into marketing.
For affiliate marketing, your marketing options are a bit more limited. Since you are only making a commission per order (i.e. a 5% commission from Amazon), this doesn't leave much margin for any forms of paid advertising. You're better off focusing on creating some sort of content and them marketing that. The most popular way of distributing content like this is through SEO because it is free. This could be a blog, a podcast, a Youtube channel, or anything along those lines. As long as you are creating value for people, they will visit your site, and then they might purchase something through one of your affiliate links.
Due to the fact that dropshipping can be scaled quickly with paid ads, we believe it has a clear advantage.
In order to maintain a successful dropshipping store, there are several activities you'll need to do on a regular basis. You'll need to continue your marketing efforts, and get your store out there. You'll need to process orders as they come in (unless your product sourcing software does this automatically - hint: DropCommerce does). Third, you will need to keep your product offerings up-to-date. If your supplier runs out of a product or discontinues it, you'll want to stop promoting it. Lastly, you'll need to provide your customers with support. Every time an order is delayed, or a tracking number doesn't get updated, someone needs to be there to tell the customers everything is going to be okay. Because they will definitely be asking.
Maintaining an affiliate marketing business is much easier. Although you'll still need to generate traffic, you won't need to obsess over your ads and ad-spend. Since you are not selling anything, you will have no orders to process and no customers to support. You will still have to make sure that your products are kept up-to-date, but this isn't hard to do either. If a customer clicks-through to an Amazon product, Amazon will pay you a commission on anything they buy for the next 24 hours. So if they click on your link advertising a snowblower, and end up purchasing a new office chair, you still make a commission. Maintaining an affiliate marketing business is more about creating new content to attract/engage users, and these websites can often be left idle for months at a time while still generating income.
As you can tell, affiliate marketing businesses are much easier to maintain than dropshipping businesses as long as you can handle the content creation.
Winner: Affiliate Marketing
Long-Term Growth Potential (Dropshipping vs Affiliate Marketing)
Okay, so we've covered what both of these businesses look like when you get started. But, what about in the long-run? Well, dropshippers can take a couple of routes. First, they can continue to grow the business by scaling ads and growing the audience. Second, they can choose to automate the business, turning it into a largely passive income source. Third, they can also choose to develop the brand and create their own products (with better margins). This avenue can be extremely lucrative when done correctly. A fourth option is to sell the business, which you can do through marketplaces like Flippa or the Shopify Exchange. According to Flippa, your website can be worth anywhere between 1.8x to 3.2x your annual net profit.
As for affiliate marketing businesses, your options are a bit more limited. First, you can continue to create more content and grow your audience. Second, you can begin to offer your own products or services (as long they mesh with your brand). Third, you can leave it on autopilot by sourcing content from other people or by stopping your own content creation. This will continue to make you some income for months or years, depending on your niche. Lastly, you can sell your website. Again, the multiple of 1.8x to 3.2x your annual net profit is what you can expect.
Because dropshipping has higher quality options for long-term growth than affiliate marketing, we'll score this factor in favour of dropshipping.
The Verdict (Dropshipping vs Affiliate Marketing)
Both dropshipping and affiliate marketing are viable ways to start an online business, but the one that is best for you will depend largely on your skills, your ambitions, and your desired lifestyle.
Both of them are profitable, but dropshipping is a bit more lucrative since you can scale products quicker and more effectively than content. The margins are also much higher.
Both of them are super easy to get started with, and you can begin working on them immediately (as in today) if you wanted to. However, affiliate marketing only requires a source of traffic, so it is a bit easier to get started in than dropshipping.
In terms of marketing, dropshipping has a lot more potential than affiliate marketing. The margins are bigger and allow for marketing, whereas most successful affiliate marketers don't have high enough margins for paid advertising. Instead, they focus on finding organic traffic through SEO and content.
As for maintenance, affiliate marketing is easier to maintain than a dropshipping business. With dropshipping you'll need to process orders, support your customers, and keep up-to-date with inventory changes.
Over the long-term, both business models are viable, but dropshipping has more options available. Because you are playing with bigger margins and physical products, you will have more cash flow to invest in the business. You can keep things steady, automate it (as much as possible), invest in creating your own products, or sell the business. You have similar options for affiliate marketing, but they are limited because it is more difficult to scale content creation.
While we can't do much to help you get started with affiliate marketing, we can definitely help you get started with dropshipping. Our company, DropCommerce, has a network of North American suppliers that offer tens of thousands of products for dropshipping. We started our company because we saw that dropshippers had few options other than selling low-quality products from overseas. We wanted to give people a higher-quality option with faster shipping times, and allow people to small local businesses at the same time.
If you want to give DropCommerce a try, or just see what products we have available, then sign up here. We also offer a 14-day free trial for when you are ready to take the next steps.
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