If you’re looking for a lower barrier to entry to the ecommerce world, dropshipping vs. affiliate marketing is a question that is bound to come up.
Dropshipping is where customers order items directly from your website, with the entire transaction, including payment happening on your site. However, once the order is placed, it is fulfilled and shipped by a supplier, meaning you don’t have to hold and ship inventory. You receive a portion of profits on each sale.
Affiliate marketing is where you promote products via an affiliate link on your website (or anywhere else where you have an audience). If a customer chooses to purchase, they click on the link and are taken to a supplier’s website to complete the transaction. The supplier then ships the order and you get an affiliate commission for the sale.
Both of these strategies are popular ways to enter the ecommerce world as they don’t involve heavy investment in inventory or in personnel for fulfilling orders. You just need the three keys to ecommerce in place: a platform, a product, and an audience.
So, if you had to choose between them, is there one best solution? Let’s take a closer look at each, and their respective advantages and disadvantages:
Dropshipping and affiliate marketing are both relatively easy strategies to take advantage of, but there are tradeoffs. For example, an ecommerce company that sources, warehouses, and fulfills orders on its own products has the potential to make much more profit per sale. Those businesses set their own margins and don’t have to accept a percentage, as is the case for both dropshipping and affiliate marketing.
However, the flipside of this is a strong advantage for both dropshippers and affiliate marketers. Buying inventory is risky and expensive. You have to purchase it ahead of time and, if you don’t already have your own space, you need to pay for warehousing. Order fulfillment and shipping requires people in place to take care of them, another cost. To top that off, what if your inventory doesn’t sell? You’re left with money sitting on the shelf, costing you more money the longer you store it.
If your decision is to avoid the financial risks associated with storing your own inventory, here are the relative pros and cons of dropshipping and affiliate marketing:
Let’s start with the bottom line - we know that’s realistically what many people look at first! Dropshipping tends to pay greater returns for your business than affiliate marketing does. To be clear, the amount you get per product sold may come down to supplier agreements. If your home DIY website dropships tools from a popular brand, that brand will often want some sort of agreement around how you price products. They’ll want to protect the integrity of their brand.
You might turn to dropship marketplaces where you can effectively choose how you price products, but these marketplaces can also have a downside (which we’ll get into).
Another advantage of dropshipping is that you as a retailer tend to have better access to suppliers. This allows you to be closer to the standards or quality of the product via your own supplier relationships. In some cases, you may even be able to reach agreements on custom design or exclusive relationships. This can help you to be more competitive and offer more unique products.
Dropshipping also allows you to build your own, branded asset. Your customers come to your own website and complete the purchase process without leaving your site. As far as they’re concerned, you’re the entire face of the product and own the relationship with them.
This leads to another advantage - the fact that the customer stays on your site to finish the transaction. In the ecommerce world, a general rule of thumb is that the more steps a customer takes to get to the point of purchase, the more chances there are to lose them. Clicking away to make a purchase (such as through an affiliate link) risks losing the customer.
Dropshipping also allows you to use marketing techniques such as retargeting, which you can’t do effectively with affiliate marketing because you’re sending the customer to another website, where you have no oversight.
One disadvantage of dropshipping is that you still need to take care of any customer service issues. The customer doesn’t know the product came from somewhere else (and they don’t care); your business sold it to them and you need to take care of any issues or queries. For example, you’ll need a process in place for any returns.
You don’t necessarily have complete oversight of product quality, or even issues in the fulfillment process. If the supplier has faulty products, or if for some reason they can’t keep up with orders in a timely manner, it’s your reputation on the line, and your responsibility to sort all of this out for customers. However, in our experience, suppliers want to support the relationship with their dropshippers and good suppliers will work hard to maintain standards.
We mentioned earlier that dropshipping marketplaces can lead to some disadvantages. The main thing is everyone has access to these marketplaces and products can be very similar. This can lead to a glut of similar products across competing stores. It’s important to consider your product catalog as carefully as a dropshipper as you would if you were buying inventory yourself.
If you find yourself in a position where many competing sites are selling similar products, you can end up in a race to the bottom in terms of pricing. This can drastically cut your profits and may make dropshipping not worth the effort.
Affiliate marketing offers a wealth of opportunities. You just need to sign up with a vendor’s affiliate program, and you can start promoting their products via your own, unique link. You hold no inventory risk - you just need to drive traffic to those affiliate sites.
Generally speaking, affiliate marketing can be done with low, or even no cost. You don’t actually need to have your own website, you just need a way to promote affiliate links. For example, many YouTubers insert affiliate links in their videos.
In terms of customer relationship management, the vendor generally owns the relationship with the customer. They’ll have to provide customer support and any associated needs, including product returns. You’d generally lose a commission if a product is returned, but you won’t otherwise have anything else to do with it and there’s less customer back and forth for you. Your income can truly be passive.
One of the big disadvantages of affiliate marketing is that you as a retailer will leave money on the table when compared to dropshipping. Affiliate commissions are generally a lot less than what you can earn as a dropshipper.
You’ll also find you usually have no control or negotiating power over product pricing. If a vendor decides on a big price drop, your commission totals take a dive with it. You’ll also have much less say over product quality and service level agreements - the vendor is in charge of all of that.
It can also be viewed as a disadvantage that customers are redirected from you to the vendor to make a purchase. They now own the relationship with the customer and may or may not maintain it. This can create variability in terms of the customer experience. A vendor may not always provide the level of service that you’d like your own brand to promote.
The bottom line is you have a lot less control over how things work in an affiliate relationship than you do with a dropshipping arrangement. This might suit some sellers, but others will want more control, and the ability to earn more for their marketing efforts.
Is either dropshipping or affiliate marketing best? There’s no one correct answer here. The solution for you will be a function of the level of customer management you’d like to take up, versus the returns you’d like to see.
Dropshipping offers you better returns, but more management of the customer relationship. You have more control over product choice and quality, and options in terms of managing the supplier relationship.
Affiliate marketing can be done with next to no investment or customer relationship management. The trade off is that you must accept commissions, and these may be a lot lower than what you can make on dropshipping sales.
Which interests you?