Affiliate marketing is a multi-billion dollar business with a global reach. According to Mhojhos Research, the global market size of affiliate marketing amounted to over $17 billion in 2020. However, there are still a lot of misconceptions about affiliate marketing. One of the biggest misconceptions about affiliate marketing is that it is sometimes confused with drop shipping. The two fields are somewhat different, but they do have certain things in common.
In this article, we will look at the differences between affiliate marketing versus drop shipping and the similarities between the two.
What is affiliate marketing?
To get started, let us look at what affiliate marketing is and how it works. Affiliate marketing is a unique performance marketing model where an affiliate or publisher promotes a product or service of a brand or company (merchant) and gets a commission whenever a referral completes an action such as signing up with or making a purchase from the merchant. The affiliate achieves this by generating traffic or leads for the merchant using a variety of marketing and advertising techniques.
With a market size worth billions of dollars, affiliate marketing is an integral part of marketing for thousands of businesses globally. The merchants typically do not deal directly with their affiliates and this is managed by an intermediary known as an affiliate program or network. The merchant may choose to set up and manage the program internally or outsource it to companies that specialize in affiliate program management.
How does affiliate marketing work?
An affiliate finds a product or service (offer) through the affiliate program that they believe will be useful to people and proceeds to market and promote them. The promotion can be done via blogging, social media marketing, podcasts, and plenty of other marketing channels.
Through the affiliate program, the affiliate is able to generate unique referral links that allow the affiliate program and the affiliate to track their performance including things like clicks, leads, sales and other pertinent metrics. Based on the performance of the affiliate, the program pays the affiliate commissions.
The affiliate marketing process can be described in the following steps:
- Find a product or service that would be wanted or needed by a certain audience.
- Register to be an affiliate with an affiliate program or CPA network for the products and services you intend to promote.
- Generate unique referral links and promote the offer on your website, blog, social media and other advertising platforms.
- A customer follows the link and purchases a product from the company.
- The affiliate program tracks and records the transaction.
- The affiliate receives a commission for their efforts.
Keep in mind that the commissions you will receive differ depending on the product or service you choose to market. There are various commission models but 2 of the most popular are revenue share, which pays a % of the sale value, and CPA (Cost per Action), typically a once-off flat fee for a specific action taken by the consumer, such as a purchase.
Benefits of affiliate marketing
Some of the benefits include:
- Work from home – With affiliate marketing, you can work from home or anywhere you have internet access. Your requirements include a computer or mobile device, active internet connection and referral codes to promote the offers.
- Passive income – Affiliate marketing is an excellent passive income model. You can do the initial work and potentially make ongoing money for months or sometimes years. As long as your marketing channels continue to send traffic to the merchant, you can continue to earn commissions. However, successful affiliates continuously create fresh content, test new channels and keep optimizing their campaigns.
- Low barriers to entry – As stated above, it doesn’t take much to get started as an affiliate marketer. You don’t need huge amounts of capital or need to rent office space or hire employees like most traditional businesses.
- Performance-based rewards – The more effort you put into promoting a product or a service, the more sales you will generate and the higher your commission.
What is drop shipping?
Drop shipping is a marketing model where a seller i.e. you, sets up a website and sells products that he/she doesn’t keep in stock. This means that the seller advertises and sells products owned by others. As such, the seller serves as the middle person in a transaction.
When a buyer orders from the website, the seller sends the order to a third party, which in this case is the manufacturer, retailer, or wholesaler. The third-party proceeds to ship the goods directly to the buyer.
In drop shipping, the seller adds a markup to the price of a product which is their profit to keep.
How does drop shipping work?
The drop shipping process can be described in the following steps:
- As the drop shipper, you will build a website or operate an online store on an eCommerce platform like Shopify.
- You choose the store inventory from various drop shipping suppliers, set your desired price, and sell the products on your own website or eCommerce store.
- A customer places an order on your website or store and pays for the product.
- You proceed to order the product from the supplier, and the item is shipped directly to the customer.
- You pocket the profit from the transaction.
Benefits of drop shipping
There are lots of advantages to being a drop shipper. Some of them include:
- Low risk – As a drop shipper, you don’t have the physical items in your store. Hence, you are limiting the risks involved with them, such as damages, theft, and other fixed overheads associated with traditional business models. This means that it carries a far lower risk.
- Low startup cost – Similar to affiliate marketing, it doesn’t take much to get started as a drop shipper. You don’t need millions of dollars to manufacture the products or set up a company, logistics or staff. You need to only set up your website or open a store on Shopify or other eCommerce platforms.
- Decent profit margins – Since you get to set your own prices and have limited overhead costs, you stand to make good profits with drop shipping.
- Offer a wide range of products – You can sell as many products as you want on your website or store. Hence, allowing you to offer your customers a wide range of products.
- Build a brand – You can build a brand as a drop shipper. With hard work and commitment, you can be known as a trusted seller in certain niches.
Differences between affiliate marketing and drop shipping?
Now that we have defined what affiliate marketing and drop shipping are and how they work, let us look at their differences.
- With drop shipping, you set up a website or a store and sell a product directly from your website. However, as an affiliate marketer, the customer is redirected to another website (merchant) via your affiliate link, where they will purchase the item or pay for a service.
- You are in charge of customer service when it comes to drop shipping. As an affiliate, the manufacturer handles the customer service issues and not you.
- You get to set your own prices as a drop shipper. With affiliate marketing, the merchant determines the price and how much commission they will pay you as an affiliate marketer.
- You will receive payment as soon as a customer places an order with drop shipping. With affiliate marketing, you have to wait for a few days or weeks to receive your commission.
Which is better and more profitable?
This is the question most people ask when comparing affiliate marketing and drop shipping. Affiliate marketing is a multi-billion industry, and so is drop shipping. Both business models can be highly profitable, can be scaled, and duplicated.
The difference in profitability between these two ventures depends on how much work you are willing to put into it.
Affiliate marketing and drop shipping are both excellent ways to make money online. Many people tend to confuse the two. Even though some of their activities align, they are not similar in terms of operation. Both of them can be highly lucrative, and you can get started with little capital.