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Tag: LTV

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.

Why You Should Start A Business In Recession

One of the advices that seems to come from everywhere with regards to recession is to lower your customer acquisition cost because the lifetime value of the customer is going to be lower than before. Of course this makes sense. There will be behavioral changes in the purchasing patterns as well as cut in spending. This will make your customers less valuable for you than before.

However, when the customers are spending less, and the businesses are paying less to acquire them, it makes customer acquisition cheaper for all businesses. Sure, they are cheaper to acquire because they are less valuable, but you are being given a one off opportunity when it’s over-all cheaper to start your business.

The cost to start a new business is significantly lower during a recession.

If you’re not VC funded but bootstrapped like me, this means a great deal. We’re already planning some e-commerce stores and hoping to schedule the launch right when the markets are in deep turmoil.

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.

Why Lifetime Value (LTV) Is a Survival Game

As the ad costs to drive sales keep going higher, at some point you’ve to understand and work on the lifetime value of your customer. Otherwise, you’ll not stay competitive and will be crushed away.

You pay Facebook or other platforms a certain amount to display your ads to people who are interested in a certain “interest or a keyword”. At some point you realize that the cost per acquisition has gotten so high that after paying for acquisition cost, cost of goods sold, and other infrastructure costs such as fee for shopify/server and other plugins etc, you’re losing money.

Sometimes after optimizations of all kinds on the ad level as well as on the landing page, you’ll realize that you’re still losing money. How can that happen? How could your competitors by bidding so high? How can their business model work if they are spending higher than you to acquire customer. The simple answer lies in LTV: Lifetime value. And LTV should always be higher than CPA (cost per acquisition).

If your business model is designed such that you acquire a customer who would pay you once only, your revenue model is limiting you to compete. The reason why that happens is because your competitors are now betting on the lifetime value of a customer. They are interested in recurring purchases, subscriptions, and in summary to acquire user once, and monetize him again and again.

Other buyers of ads are bidding higher in order to purchase data that they can use later to either bring the bids lower, or use it elsewhere to generate revenue.

To conclude, in this day and age, if your business doesn’t account for the lifetime value of the customer, you’re simply not competitive.