Affiliate Vs. Drop Shipping

Have you ever gambled? The game of Blackjack is pretty simple. Each player is dealt two cards (It may be just you and the dealer). The objective is to get the sum of your cards as close to 21 as possible without going over. In order to achieve this objective, you can either hit (take an additional card) or stay (refuse and keep the current sum). When you stay, if your cards are closer to 21, you win. If yours are lower than or tied with the dealers, than you lose or if you go over 21 then you lose. EVERYONE wants that perfect combination that adds up to 21. It’s a safe, sure bet. But how often does that happen? More often than not you’re sitting at 17 trying to figure out if you should take the risk and take another hit. But that’s part of the game. High risk means there’s likely to be a high reward.

It’s the same in business. It’s not very often you find a product or business model that offers you that perfect 21, a plan involving a minimal amount of risk and a high rate of return. That just doesn’t happen. Typically what you will find will be low risk, low reward (and slow developing) or high risk and high reward (fast developing). Now I’m not saying all business models are a gamble, but I want to emphasize that when you fully commit to a business you are putting financial assets, valuable time, and resources into what your are doing and all of that could possibly be lost. In that sense it is similar.

Now how does this fit in with what I learned this week? Well we have two different business models to look at. Each has its benefits and risks, but first let’s talk about what they are.

Affiliate Marketing: This method of business focuses on advertisements for other companies. Typically these are pay per click advertisements that direct traffic to other websites. Meaning every time you click on a link in a blog or a side banner on a website, the host of that website gets paid X amount. It could be just a few cents per click.

The problem most startup companies face with affiliate marketing is actually driving enough traffic to their site in order to make any significant amount of money. If this method ever pans out, it typically does so over a long period of time. There really isn’t much risk to this business, only the investment of say a few dollar and a few minutes of your time to create the blog posts. However, this is typically a low reward business model. Low Risk=Low Reward

Drop Shipping: This to me was interesting, I had no idea it existed until a week ago. Drop shipping allows an individual to create an online storefront company, advertise and sell a wholesaler’s products, all the while never storing or even touching any inventory. The customer enters your site, fills an order, and you then transfer the same order to the wholesaler who ships it directly to the customer. You charge the customer a higher rate than the drop shipper charges you and as a result you make a profit. AND you don’t have to actually pay the wholesaler until the order for the product is filled.

Now this method seems great but there are some heavy costs and risks. Although it does eliminate the risk of overstocking and managing an inventory, you may take the hit when it comes to a customer return. As the middleman, you may be stuck eating a loss if the wholesaler doesn’t accept the returned item. Also, in such cases where the product is poor quality or there was a poor interaction with the customer, your company’s reputation may take a pretty big hit and you could possibly go belly up. Now this involves a higher risk than affiliate marketing, but it also has a much higher rate of return.

Are you ready to gamble? Which one would you choose? Me, I think I might do both.