Drop Servicing 101 – All about the business model (Best for 2022)12 min read

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Drop Servicing 101

Drop Servicing Business is also known as service arbitrate. In this article, we will help you to have a better understanding of drop servicing by explaining how it differs and is similar to dropshipping.

We will also go through the drop servicing value chain and its advantages and disadvantages.

Drop servicing is one of the ways to generate passive income.

You can always skip ahead and take our video course instead.

Take our Drop Servicing Course

Learn more about drop servicing through our video course.

What is drop servicing?

Let’s start by saying that you will probably fall into one of two groups. The first is the group that knows about drop shipping, and the other is the group that does not know anything about dropshipping.

If you are in the first group that knows about drop shipping, then this should be relatively easy for you since the business model is pretty much the same. If you have not heard about dropshipping, it should be easy to understand the drop servicing business model.

So, let’s start by explaining how drop servicing works.

In simple terms, drop service is the business model where you market a service then pay someone else to do the actual job.

To expound a bit, you sell a service on your website. However, you purchase the same service from someone else offering it at a lower price, and you keep the difference between what you charged and what you paid for the service.

Another name for drop servicing is service arbitrage.

You earn money as a middle person in a transaction where you are delivering services. You shop on freelancing websites where you can pay for services on-demand and market these same services to potential businesses or clients who need 3x to 5x the price you pay the freelancer.

Whenever you get a sale, you hire the freelancer on the on-demand website to deliver the work on your behalf.

The Drop Servicing Business Model - The end-to-end process that would happen in a typical drop servicing agency.
The Drop Servicing Business Model – The end-to-end process that would happen in a typical drop servicing agency.

Who is drop servicing suited to?

Drop servicing is perfect for you if you have at least two or three of the following:

  • Have no skills that you can sell or market as a service.
  • Have skills that you can sell, but you prefer to hire to be higher up the value chain and hire freelancers to do the actual work for you.
  • Feel confident to sell or market services that others offer.
  • Have excellent customer service or project management skills and can manage the quality and delivery of the services by other individuals.
  • Need an income without putting in as many hours as it would take to do the actual work.
  • Want to run a service-based business as a side or part-time business that doesn’t require a lot of time and capital to set up and run.
  • As a first-time entrepreneur, drop servicing is a great business since it has low cost, and typically, there is minimal time involvement on your end.

Now that we have checked that you are up for the challenge of becoming an excellent drop servicing agent, let’s proceed to further dissect the business model.

You can always skip ahead and take our video course instead.

What are the similarities and differences between drop servicing and dropshipping?

Drop servicing and drop shipping are pretty much the same concepts. Let’s start with how the two are similar.

  1. In both cases, you are a middle person marketing something that another business or individual fulfills. Think about yourself as a sales agent finding clients for the individual or company and you get to markup the price for a neat profit.
  2. Both drop shipping and drop servicing are low-cost business models that you can start. You require very little capital since you do not need to invest heavily in any actual products or services, machines, or other heavy investments.
  3. You can learn on the fly. It is pretty easy to get your drop shipping or drop servicing store up and running. And with each passing day, you can make minor tweaks based on the data available to make your store better and improve your sales.
  4. Both drop servicing and drop shipping are low-risk business models that you can try out. With little effort and cash investment to run the business, there is minimal risk in this business.
  5. You can pivot (change) your business offerings based on new trends and customer needs with ease. You do not hold any inventory and do not need to make huge investments before introducing new products and services. It is, therefore, pretty easy to add new products or services as the trends dictate.

Differences between drop shipping and drop servicing

The main differences between drop servicing and drop shipping are:

  1. Drop servicing involves selling services, while drop shipping is about selling physical products.
  2. In dropshipping, as the seller, you do not touch the physical product as this is directly shipped to your client by the wholesaler or retailer you from who you purchased. However, you have to receive the finished product/service from the freelancer in drop servicing and then send it through to your client.

Pros and cons of drop servicing

Let’s look at some of the benefits you will gain when you start your own drop servicing business.

Pros of drop servicing

The World Is Yours To Conquer - Growzania
The World Is Yours To Conquer – Growzania

1. Low startup cost

To start a successful drop servicing business, you do not need to invest in any skills. You need a basic appreciation of the service you are offering, and you are good to go.

You also do not need to purchase any high-value equipment or invest in any products. Your only startup costs are the website that you build. This can be as easy as a single-page website. The second is the cost of advertising to get you started.

2. Higher value per sale

This is one of the best things about drop servicing. Because you are selling services, these typically have a higher price per item than everyday products.

Typical service bouquets go for between $99 – $249 to the right audience. Therefore, a single sale nets you a decent profit depending on the cost of the freelancer.

In an upcoming article, we will go deeper into the profit and loss equation for drop servicing.

3. Recurring income

With drop servicing, it is effortless to make the income recurring. With most services, the clients would need to keep ordering to keep running their business.

Think about services such as social media design or content marketing services. Most clients are likely to keep you on a monthly retainer to provide these services to them.

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4. Little skills required

To start your drop servicing business, you need a basic appreciation of the services you are offering. You do not need to know how to do the actual service. However, you need to know what is possible and how much is the going price.

The best thing is you can learn this on the job.

Another way to look at it is that if you are not confident to talk about the technicalities with your clients, you can hire a virtual assistant who has the knowledge to handle this for you.

5. No shipping or logistics risk

With drop servicing, you do not need to worry about the costs of shipping and any logistic hassles. Because you are offering a service, you can deliver these via the internet, and no physical products to handle.

All you need is to know how to manage the quality of the work you receive from your freelance. 

Cons of drop servicing

If you were expecting me only to tell you the good things about drop servicing, then you were wrong. I will come clean and let you know that drop servicing is not exactly a bed of roses. Here are some of the cons of drop servicing.

In this blog, we will tackle each of these cons as business challenges and make sure you can reach your goal of earning $1,000 in your first month as a drop servicing entrepreneur.

1. Freelancer workload varies

In drop servicing, you will be working with freelancers who are not dedicated to you thus may have varying workloads, and delaying your project delivery.

To minimize this risk, you would need to add a buffer timing to the freelancer’s delivery timeline.

2. Dealing with customer satisfaction

When drop servicing, the most essential aspect you will have to deal with is customer satisfaction. This can be a challenge since you do not want your client to know that you outsource the work.

Therefore, you must only use reputable freelancers with good ratings.

In an upcoming article on choosing the right freelancer, we discuss in detail how to hire the best freelancer and how to make sure they are providing quality work and meeting deadlines.

Why drop servicing is better than drop shipping

Now that we have spoken a lot about the similarities and differences between drop servicing and drop shipping, we need to discuss why drop servicing is better than drop shipping.

Allow me to illustrate drop shipping and drop servicing using the red ocean and blue ocean concept as captured in Figure 2 below.

Red Ocean (drop shipping) vs. Blue Ocean (drop servicing)
Red Ocean (drop shipping) vs. Blue Ocean (drop servicing)

Look at it this way, dropshipping has been the hit for the last couple of years, and there are many drop shippers out there.

Would you rather compete to be a great drop shipper, or would you instead start a business using the same business model, however, in a relatively new and untapped market?

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The second advantage of drop servicing is that with drop servicing, you can build a reputable service agency and even hire freelancers on retainer or as full-time employees of your agency once you have a significant workload.

This can cement your authority as a provider of these services to your clients and build long-lasting business relationships.

The last advantage that drop servicing has over drop shipping is that it has much better margins. If you have ever read up about business, the most important thing in a business is margins.

Whether you try to make your $1,000 by selling 100 items each worth $10 item vs. selling one $1,000 item, the effort required is usually the same. Therefore, the most important thing is to maximize your profit by taking the route that delivers the highest profit margin.

With drop servicing, you often have higher margins, and once you build your agency and have a lot of clients under your belt, you can even charge higher as you start limiting yourself to higher-value clients.

The drop servicing value chain

I am sure you are wondering why it is crucial to understand the drop servicing business value chain. To put it simply, as a business owner, the higher you are on the value chain, the less expendable you are.

Therefore, you need to know where you are in the value chain to aim to be as high as possible to make yourself more irreplaceable to your clients.

To explain the value chain, let us first take a typical business like a simple online retailer (very similar to a drop shipper).

The retailer often takes the goods from a wholesaler, who has sourced the goods from a manufacturer. The manufacturer also uses raw materials from different sources to make the product that they sell (see figure 3 that illustrates this).

In this example, it is pretty hard for a retailer to own the product’s value chain. If the client decides to reach out to the wholesaler directly, it is pretty easy.

Alternatively, the client can also find another retailer offering the same product and request a discount or other additional value that the retailer may offer.

The Value Chain for Drop Servicing
The Value Chain for Drop Servicing

On the other hand, as a drop servicing agent, you own the complete value chain to deliver the service.

This is because you own the relationship with the client directly, and only you know the freelancer who delivers the services you offer your client.

No client would dare try to find a freelancer directly because there may be a risk to the output quality. It also takes a long while before a freelancer gets to understand a client’s needs. So the client would not be willing to start explaining how they like their work to be done to someone new.

Therefore, provided you keep the quality output of your output high and deliver in a timely fashion, you can be sure you will maintain your client for a long while.

Final thoughts on drop servicing

We firmly believe that people learn through action. We often forget ¾ of what we have learned within 6 days if we do not put it into practice.

Therefore, to get the best out of drop servicing, make sure you follow each step and do the proposed activities on each step. This will help you learn through action and get the most out of this drop servicing guide.

Michael G

I love investing in people! Michael is on a mission to help organizations and individuals become better. Michael has had a distinguished 10-year career spanning through non-profit and the corporate world. Michael's life purpose is in helping to simplify complex problems to define actionable solutions, which is why through public speaking, Michael is focused on inspiring and impacting people towards the right personal growth formula and generating sustainable business growth.

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