Affiliate Marketing Vs Dropshipping

A reader of the blog contacted me to get my opinion on these two topics. For this blog, let’s assume we’re only talking about affiliate marketing of physical products. As with the digital products, the comparison is like apples and oranges.

I prefer dropshipping over affiliate marketing for a variety of reasons so let’s compare the two.

During both affiliate marketing and dropshipping, you’re often creating very little value outside the revenue generated right there and then. However, affiliate marketing, in my humble opinion, is an even lower hanging fruit than dropshipping and I consider dropshipping itself to be a pretty low hanging fruit.

The reason why I think that is because in dropshipping you control the offer end to end. You control the sourcing price of the product. You can play with the quality of the product to increase or decrease the sourcing price. You control the sale price of the product. So, if you’re able to sell the products but unable to make a profit, you could always increase the price and make it profitable for you.

With affiliate marketing, your hands are tied. You only get certain commission per sale. The commission is determined by what the goods cost, how much they are sold for, and how much does the offer provider want to pay you after keeping profits. If your advertising costs are higher than your commissions, then your only option is to optimize advertising. You can not play with the sourcing cost of goods and the sale price to make a profit.

In addition, in affiliate marketing your access to data about the customer is very limited and restricted. You can often not reach out the same customers again to generate more sales in the future without adding additional email capture steps in your funnel. You may also not be able to use the customer data to create lookalikes on ad platforms to target similar customers due to lack of access to customer data.

When dropshipping, you have a much better lock-in with your customers, and a better access to data. While lifetime value often stays low in both cases, you still have better control with dropshipping.

You could also copy anyone’s offer as almost all products are available for sourcing in China and recreate a dropshipping store using the same product, similar landing page etc. So it’s not that difficult at all to use someone else’s offer to create your own dropshipping store.

In addition, for dropshippers just like affiliate marketing, there’s very little to no work that needs to be done with regards to shipping and handling of the products as there are plenty of Chinese vendors who can make this process very seamless for you.

In the end I’m not too fond of both the models, but if I had to do one, I’ll definitely go after the dropshipping model.

Facebook Driven Dropshipping Vs Amazon FBA

Facebook driven dropshipping & Amazon FBA are two completely different ways of conducting e-commerce.

So different, that even the choice of products are almost always exactly opposite of each other.

On Amazon, while selecting a product to sell you make your best effort to avoid selling a fad, craze or a trend. You look for years and years of history, up-to 5 years, and only then make a decision if the product is worthy of the launch. You’re looking to keep the review ratings up, returns low, and ideally you want to sell the same products for several years. You spend one time to rank your products, and then rely on getting a return on your investment with organic sales over a long period of time. Due to this, you can often also sell your listing or store for up-to 3 years of net profit.

With dropshipping, most sellers plan to do the exact opposite; selling a fad or a craze. You’re ideally looking for something that has a lot of wow factor. Ideally it shouldn’t be a trend before and is some new kind of gimmickry. You plan to sell $1 million worth of it in the first month, or first the quarter, and once that’s done, no one ever talks about the product again. Fidget spinners could qualify as one of the best-selling dropshipping products and of course they were a fad. Because you make all the money right there, you store often flips for nothing. There’s often no or little lifetime value of the customer outside of the first sale.

Dropshipping needs no inventory and you can make a ton of mistakes. Wrong product selection costs you $100 in Facebook ads. You can test 30 products, lose $3000, and make it all back on your 31st product on your first day. With Amazon FBA, you can’t make any mistakes. You are pre purchasing inventory with hundreds of units to avoid going out of stock and to satisfy minimum order quantity requirements. You’re often risking tens of thousands of dollars with each product launch.

Dropshipping will often better suit those who are cash-strapped and have smaller appetite for risk. Amazon on the other hand is for big boys.

This Seems Relevant Today

This could have been me had I stopped yesterday which by the way I wanted to.

This is me instead because I hung around longer.

I spent the past couple of days trying to optimize a new product launch. All metrics looked great. Every step of the funnel just as I wanted. I had low CPM, high CTR, low CPC, low CPATC, low CPIC, but.. also low conversion rate. For those who don’t know what am I talking about, I had low cost for everything, but the number of users purchasing were also low which was something I really didn’t expect to happen.

Due to this my cost per acquisition was higher than where I wanted it to be. Instead of making money, I was losing money until I launched the retargeting campaign.

For those who don’t know, retargeting is reaching warm audience or potential customers again. People who showed purchase intent but didn’t purchase. My retargeting campaign brought me really cheap sales. So cheap that it offset all the loss that other campaigns caused. Not just that, it turned the overall campaign around and made the product launch profitable.

This showcases two things. 1) Retargeting is really really powerful. 2) When you’re thinking of giving up, hang around just a little bit longer.

Here’s How To Lower Your Product Cost By Up to 10%

Most drop-shippers start off by fulfilling the orders by placing them on AliExpress. As they progress with the journey and are able to do larger volumes, they use tools like Oberlo or Dropified for auto order placement on AliExpress.

Although we have been working with a private supplier for a few years now, we were able to reduce our product cost by a significant percentage while we placed orders via AliExpress.

AliExpress has an affiliate program that you can sign up for using AdmitAd. Once you’re in the program, you’ll get an affiliate code that you’d need to pass on to Oberlo or Dropified by contacting support.

By doing so, on each order that you’ll place using Oberlo or Dropified, your affiliate cookie will be dropped earning you up-to 10% cashback on your COGS (cost of goods sold).

At average, we have received 7% cashback. Since product is usually 33% of your gross revenue, you can increase 2-3% profit margins which are significant in an e-commerce business.

Capturing Attention With Cheap Prices & The Art of Upselling

In the summers of 2016, I saw an advertisement for Dewan motors. They are the authorized sellers of BMW CBUs in Pakistan since BMW is not assembled in Pakistan. The 4 million Rs price tag for their 3-series caught my instant attention.

This was cheaper than any other German car brands available in Pakistan for similar compact sedans. Audi A4 prices began from 6 million Rs while Mercedes C-class started from 8 million Rs. BMW obviously caught my attention. So I visited their dealership in Islamabad.

After discussing the car further with the dealership, I realized that my attention has been captured by a cheap price but the dealership has no intention of selling it cheap to me. The 4 million Rs 3-series came with absolutely no features. It was a manual transmission, without climate control, sunroof, or even a cigarette lighter/power outlet. There wasn’t even a paint selection option and the car was offered to be shipped as “Alpine White”. It was a Corolla XLI equivalent of BMW.

The automatic transmission alone was for 1 million Rs. Adding other basics to the car, raised the price up by another million. At this point, I realized that the 4 million price point was advertised only to get me to the dealership. I didn’t buy the car, but I learnt a bit about sales.

In e-commerce, some sellers advertise “Free + Just Pay Shipping” offers. The obvious intention is to sell $1-2 goods for for $0 + $10 for shipping. The same product can also be advertised as $10 with free shipping. However, a split test will prove that the Free+Shipping offers convert better. Because we’ve never been interested in $10 price-point, we’ve never advertised F+S offers, but we do play with this particular area of human psychology in order to get the best value. Let’s explore this further.

If you want to sell something for $25, you could offer it as $25 with free shipping, or for $19.95 with $5 shipping. You’d still get the same $25, but your conversion rates will vary. While there’s no rule of thumb here, but we’ve often seen that it’s better to offer $25 + free shipping to customers in US as they feel entitled to free shipping, and one can advertise $19.95 + $5 shipping to customers outside of US without hampering conversion rates since they are conditioned to pay for shipping from a store that’s not operated in their country.

However, my favorite example is the “Dollar Shave Club”. It was advertised as such that no one should ever need to spend more than a dollar to buy a razor. Except that their cheapest offering which is $1 razor called “humble twin” shipped for $3 including the shipping while they offered free shipping on their other, more expensive blades.

They also called their cheapest blade as “humble”, and others fancier names terming their mid option also members’ favorite. But all of this was only when they had just launched. In the present state, you’re bound to spend 10s of dollars, and that too on an on-going subscription basis. Let’s have a look at what they’re doing today

What is advertised as Dollar Shave Club, now creates a “personalized” basket of goods for you after taking you through a “quiz”. Instead of $1, they attempt to upsell to $42, and bill that every 2 months.

What I Absolutely Hate About Dropshipping

Although dropshiping is just a fulfilment method and there’s nothing wrong with this fulfilment method given that there is a good process in place. But the dropshipping that I commonly refer to on this blog has some shortcomings. I’m going to list a few below.

When you’re fulfilling orders only and only from China, and shipping across the globe, there will be delays despite using e-packet only shipping method. Delays result in angry customers and angry customers aren’t repeat buyers. It’s more challenging to have repeat customers, subscriptions, or higher lifetime value if you’ve 1 fullfilment center in China responsible for your global shipping.

I dislike this about dropshipping and my team does everything in their power to resolve this as much as possible. This can be resolved to some extent using 3PLs once you have a proven product. Like I said, I dislike this but I wouldn’t go so far to say that I hate this about dropshipping.

What I absolutely hate about dropshipping is that there are many many stores that use the same or similar creatives, copywriting, landing pages and scam customers in the end. The customers, who are often very naive, can not even differentiate between two or more stores running ads for 1 identical product.

Moreover, most customers can not understand that they were scammed by someone else. Our support inbox is often full of queries about orders that the customers never placed with us. These are the nicer emails. The other types of emails are accusations and abuses also intended for someone else, but sent to us. Our ads on Facebook get flooded by unhappy customers, who also aren’t our customers.

I wouldn’t say Facebook doesn’t do enough. They run surveys targeting the people who bought from Facebook ads and penalize sellers based on the feedback. But such sellers move from one LLC to another, one domain to another, one theme to another, closing everything behind.

In the end honest sellers suffer. Facebook will obviously crack down even harder. The honest sellers will lose their accounts even more. This is what I absolutely hate about dropshipping.

The 1/2 Rule For E-Commerce Metrics

Although there’s no standard for e-commerce metrics, you should still aim to hit certain floors for your metrics in order for you to have a working funnel. I call this a 1/2 rule.

When a user lands on your product page, you need to track the progress between the different steps he needs to go through. A large or unexpected drop at any step should make you want to investigate that particular step of the funnel.

After landing on the product page or landing page, the user may have to add the product to cart. After adding the product to cart, user would land on the cart page. At this point, user would need to initiate check-out to land on the check out page. The user then needs to input his shipping and billing info in order to place the order.

While what percentage of users reach on each of these pages will largely vary depending on the type of products, price of products and the source of traffic, for typical dropshipping stores selling products between $20-$100 I recommend to at least watch out for the 1/2 rule.

The 1/2 rule suggests that if 20 people added the product to cart, at least 1/2 of them should initiate check-out which should lead 10 users to the check out page. And if 10 made it to the check-out page, at least 1/2 of them should purchase giving you 5 purchases in the end.

Landing page optimization is very important and I recommend that you use heatmaps to optimize your funnels. If you get your advertising, creatives and product selection right, but there’s a problem with your landing page, cart page or check out page, you’ll end up wasting all your efforts.

After all a chain is only as strong as it’s weakest link.

What to Realistically Expect From Your Drop Shipping Business

If you’ve read this blog before, you may have read some of the content that I’ve already written on dropshipping thus far. While e-commerce and dropshipping are very profitable in general, they are not as simple as most people market them to be.

I wanted to share my experiences with dropshipping so far to give you a more realistic overview of the journey, instead of the flashy end-result that you often see.

We launched our first store in Sept 2016. Our first sale happened in the first week. But it wasn’t until Feb 2017 that we were profitable. So it took us 5 months, 68 unique products in testing, and $10,000 in ad-spend before we figured out how this was going to work.

We targeted primarily english-native markets hence the competition was higher. It was also our first attempt with sales of any kind so we were inexperienced. But collectively we had over 10+ years of experience of running various internet businesses mostly related to content. So we weren’t completely inexperienced either.

From Feb 2017 till May 2017, we had achieved the flashy status that you often hear about. The margins were 40% initially but after scaling, came down to be about 23%.

Since then we’ve launched many stores targeting many different industries but drop shipping as a whole has gotten way more tougher. This is due to the obvious: more competition, higher ad costs, and lesser margins.

But it’s also because that in addition to ads getting more expensive, Facebook ads machine learning has gotten more advanced too. What it means is many marketers are now able to achieve results with little to no targeting options. Many times strategies have gotten as simple as running a broad ad with no targeting.

Since there’s lesser room available to outperform your competition with ad strategies, the competition now lies in creatives and product hunting. If you’re able to create better video ads than your competition, you stand a much higher chance of winning.

Over all, in the next few years, it’s going to be best product/creative takes all kind of game. Facebook ads are going to dumb down to just budgets and optimization goals.

What I’ve written above is related to my e-commerce experience in international and primarily english-speaking markets. Others may have had better or worse performances. In addition, e-commerce in developing and under-developed countries including Pakistan, has much lower competition and related ad-costs.

In summary, Pakistan is a much more potent market for early-stage entrepreneurs for e-commerce. We choose to work in global markets for a bigger scale although it comes with much larger set of challenges.

Chinese Are Eating The World

Everyone knows it. You may have already read other variants of this article. A different angle through a different lens. May be in terms of One Belt One Road initiative. But I’m only interested in how they are doing that in tech, and most specifically in the e-commerce industry.

When we first got into dropshipping, there were nearly no Chinese in the industry. They were mostly just suppliers of the goods. Dropshipping in essence began with AliExpress. Chinese would just host products there and fulfil on behalf of other dropshippers.

In the following year, Chinese learnt that they are being duped. For every $5 they get in gross sales, the dropshipper gets $20 in gross sales. The first change we saw happen was the prices went up at least 100% on AliExpress. They needed an equal share in the dropshipping business.

By following year, many new dropshipping stores popped up that have now become some of the largest in the world. Chinese didn’t just want to fulfil orders, they mastered the business end to end. From advertising and sales to fulfilment. They replaced most dropshippers.

A similar trend can be seen on Amazon FBA as well where most new and top sellers are based out of China.

Scaling Digital Businesses is Piece of Cake

Yesterday, I sat down with my friend whom I’ve learnt a great deal from, Zeeshan aka ZSM. He runs a restaurant in the heart of Islamabad called Khyber Dodai.

A few weeks ago they shot an ad for one of their food items and it just took everyone by the storm. The result in the following weeks, they started to get a lot of business.

But they didn’t have the space to host all the customers that showed up. What Zeeshan said to me afterwards, I found very assuming and true. He said this isn’t like your cloud. We can’t instantly scale to accommodate more people. This isn’t like your dropshipping either. We can’t sell what we don’t have, and have a vendor take care of shipping, handling and fulfillment on your behalf. This is different and it has its limitations.

I found his comparisons very interesting and so I want to reiterate to all of you the power that digital businesses hold. It’s the ability to sell what you like to 3 billion+ potential customers.