Is drop servicing profitable?
The answer is it depends. Like drop shipping, there are many hidden customer service costs in the business model. The fact you’re drop servicing doesn’t magically eliminate the challenges of build a competitive business.
You’ve got to play to your advantages.
Positioning: Advantages of Drop Servicing
When assessing “is drop servicing profitable” it’s helpful to line up your drop servicing business against a traditional agency. A few key trends become apparent when you do this.
Advantages of Drop Servicing:
- Can quickly add / reduce staffing
- Easy to hire “less than full time” roles
- Can staff outside the local market
- Easier to “shop for deals”
Advantages of a Traditional Agency
- Employees are lower cost & stay longer
- Face to Face meetings are easier
- Easier to control service quality
- Easier to keep trade secrets confidential
Now, split your target market up into groups of potential clients and assess who would be better off under each service model. You’ll start to see some notable differences.
Does the client want a lot of face-to-face time, especially for a high touch service? That’s going to be hard for a drop servicing business. The advantage goes to the agency.
On a similar note, if you’re repeatedly doing the same thing across clients, it is often easier to hire a permanent employee to do the work. They’re usually cheaper than an equivalent freelancer and you can train them to do things “your way”. Especially if “your process” is the secret sauce. You’ve got a much better chance of keeping trade secrets and client information confidential among your own full time staff.
On the other hand, service arbitrage works great if you’re able to easily pass the work to another team. You can sell in a high cost market and fulfil orders in a low cost area, taking the difference to your profit margin. The same applies to a digital service and purely online business. The drop servicing business model works great when you can limit the level of client interaction.
A word of warning: be wary of drop servicing ideas which are “too smooth”. You want there to be enough friction and specialized knowledge required to run the business to deter competitors. For example, I’m not a fan of “generalist” content agencies for affiliate marketing and online store support. There are too many people selling the same basic product: you’ll get undercut on price. Niche down into something more specialized, especially if you can demonstrate how your twist on the idea outperforms a generalist business. For example, a content agency that specializes in selling table top gaming supplies….
Building Value Into The Offering
We’re past the point where you should be starting a random service arbitrage business, selling anything to anyone.
Start by focusing on the client, your target niche and the service package you intend to offer them. How does your service bundle compare with their current providers? Can you create a competitive advantage, in terms of either cost or capabilities, which will allow you to win new client business?
Calling an opportunity a drop servicing business doesn’t magically transform it or give it super powers. At the end of the day, you still need to offer more value (or a better price) than your target customer’s next best alternative.
That being said, it is worth thinking about how you intend to create value as a middleman, since your business should be designed around that. There are a couple of obvious paths:
- Convenience: It is easier to outsource the job to you than manage it directly; you’re selling the ability to find the right freelancer or a reliable supplier and manage the work.
- Process Integration: The service you’re selling requires managing multiple vendors and linking their work together. There are often efficiencies you can find along the way, which will provide you with a cost advantage.
- Templates / Automation: If you’re doing the same work on a repeated basis, why not set up some standard templates and automate portions of the process? Pocket the savings.
- Efficient Sourcing: Various forms of “buying in bulk” and “aligning requests”; you’re able to consolidate purchases from many clients into a single provider to get a much better rate. The savings is your profit.
- Optimization: For the analytics experts, you have a way to adjust the specifications of the work to make it more effective. This could be things like tweaking a blog post so it is more likely to rank on Google or convert visitors. This may mean you can charge higher rates.
Here’s a pro-tip: try selling services to real business owners before you invest effort in building up your supplier base. Potentially even before setting up a drop servicing website or investing in paid advertising. Use LinkedIn or Upwork to approach a business owner in your target market. Pitch a project, deliver it yourself. You’ll learn a lot through this effort.
Once you’re able to reliably win business using a high touch channel like personal selling or gig job boards and doing the work yourself, start looking at how to grow.
Growth happens in two parts. First, building an effective customer service infrastructure with reliable suppliers behind it. Next, scaling up high volume channels such as paid advertising and social media marketing.
Playing Defense: Customer Service & Quality
The first cause of death for a drop servicing business is failing to generate a steady stream of customers. We’ll assume you’ve got that handled.
The second cause of death is landing too many customers, to the point where you can’t service them appropriately. This is similar to the drop shipping gotcha where you discover that US customer’s don’t like waiting three weeks for product to ship from China… You need to have a plan to get customer service under control before it eats you alive…
This is a process challenge. You need to build a very clearly defined process for the following:
- Confirming customer requirements
- Selecting a supplier or freelancer
- Placing orders
- Checking Status
- Quality checks vs. customer requirements
- Getting paid
You need to consider not just cost, but available service capacity as well. How fast can you bring new freelancers on board? How much will it cost? Bear in mind a certain fraction of vendors and freelancers most likely won’t work out (or won’t perform well), so you need to add that to the plan.
Beware of losing the costs savings from your drop servicing business model to four factors:
- Higher service costs (due to hiring who is available to hit a date vs. selecting the lowest cost option)
- Higher client management costs (cash or time), along with generating stress and drama
- Credits, Refunds, and Rework due to quality issues
- Loss of future business due to quality issues; this includes both losing repeat purchases and getting bad reviews
If the math still works, congratulations. You’ve managed to build a small scale drop servicing business. To reap the full reward, however, there is one more step…
Scaling Up Customer Acquisition
If you reach this point, you’ve managed to build a self-sustaining drop servicing business. The value received exceeds the cost of providing the service. You’ve hopefully figured out how to get a steady stream of business.
The challenge is: growth. How do we magnify this?
This is how you turn a $1000 per month side hustle into a $100,000 per month empire.
You’re going to need to build a customer acquisition engine, a method of reaching out to large volumes of prospects and converting them into buyers. This means investing in paid advertising or social media marketing. Those have the scale to build a large business.
There are two critical metrics:
- Addressable market size, in terms of prospects you can reasonably convert
- The amount by which your lifetime customer value exceeds acquisition cost
The details of both are specific to your opportunity and imagination, in terms of how you bring that drop servicing business to market. But that’s the path.
So the grand answer is yes – you can make money drop servicing.
But it requires a lot of math and strategic thinking along the way!