Creating an online business, like any business, requires a strategy followed by tactical solutions. Many who fail in this space don’t have a documented strategy to drive their business forward. We struggle to create marketing campaigns that actually engage an audience and produce a reasonable return.
One step we can take in thinking like a strategic marketer is to obtain information about an intended product, quantify the associated risks, and then compare our options is a meaningful way that allows us to rank our options.
In an exercise to find a supplier for aviator sunglasses, we searched Alibaba.com for possible suppliers. I used the filters for supplier location, stability and reliability to find a few possible suppliers. In comparing them, I created a few criteria on which I would measure them, and weighted each criteria based on their importance to me. I narrowed my choices based on variety of product, minimum order required, pricing, and days to ship.
The next step was to establish my relationship with the supplier. Would I follow an affiliate model or a drop ship model?
Drop shipping is one way to run an online storefront whereby you have no inventory and you don’t ship products. You sell product through your storefront and collect money just like a regular store. However, instead of you doing the packaging and shipping, you place an identical order with your distributor at a wholesale price and the distributor takes care of shipping the product to the end customer on your behalf. Your profit is the difference between your selling price and the wholesale price.
Affiliate marketing occurs when you refer a customer to another business and take a commission when the customer makes a purchase. Your website does not collect any money either. Instead, payment is made on the referred site. The affiliate business is responsible for paying you a commission once a sale is made.
Our assignment this week was to source acoustic guitars and determine which method of product sourcing we would follow. The significant differences between the two models, drop ship and affiliate programs are:
- When working with an affiliate partner, we receive a commission on the retail sale price. Profits obtained working with a drop shipper is the difference between wholesale and retail price, less expenses and overheads.
- The commission on affiliate products is around 10% whereas the profit potential working with a drop shipper is 50% on large items to 100% on small items such as guitar straps.
- Although the high profit margins with a drop shipper appear to be attractive, there are a few concerns we should be aware of. These include a membership fee for the drop ship company, the requirement of additional ordering and accounting processes whereby we have to order what our client orders from us and keep track of payments.
- In some cases, your drop ship supplier is also supplying your competition.
In my research for acoustic guitars, I compared a number of affiliate companies with each other, and then and compared my high ranking companies with Wholesale Music Warehouse, a drop shipping company based in California. I kept two affiliate companies in my research because I also wanted to compare two popular affiliate programs, LinkShare and Commission Junction.
The important factors for me in my comparison was that there would be a large variety of products, a reasonable commission, and that I would be working with a stable company. These had heavy weights applied in the ranking calculations. Other less concerning factors with lower weights included whether the company provided training to ensure that I was properly linked into their systems, requirement of membership fees, and the number of days to process an order.
At the end of the day, I suspect that it doesn’t really matter which program I use in my online business. It all depends how much effort I am prepared to put into it. For a passive income I would probably choose an affiliate program and be content with the commissions received. However, drop shipping has the potential to provide a greater income but it requires more ambition and a greater time commitment