You have probably heard a lot about the perks of running an online business. The flexible hours, direct control over your workload, and opportunity to make some real money are all serious draws.
If you are looking into building your first online business, you are probably trying to figure out what strategy is the best for you. Two of the most popular and lucrative options are affiliate marketing or creating a dropshipping e-commerce site with Shopify.
In this blog post, we’ll take a closer look at each of these options - with sites we own as a case study - so that you can make an informed choice on what will be the best use of your time and resources.
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Making a Profit
The first thing to consider when making a choice between affiliate sites and ecommerce is the bottom line: how will you get paid.
Affiliate Websites: Lower Commission
An affiliate website pays out when someone comes and clicks on your referral link, leading them to an external site where they can make a purchase. In return, you get a portion of that sale for directing traffic to that site.
By far the most popular affiliate program is Amazon’s, so let’s take a look at their commission rates. For every sale that is made through your affiliate link, you will currently get around 1-10% of the average order value. Amazon occasionally changes their pay structure, so that amount could vary over time. In fact, recent changes rolled out in the UK, so a new pay structure could be on its way to other markets as well.
This is one of our newer affiliate marketing sites for the past 30 days. As you can see, we've only earned $732.40 for $13,909.13 in sales. This is around a 5.2% margin.
Dropshipping: Higher Margins
If you own your own ecommerce site, you’ll be seeing a higher margin on each sale. Good dropshipping suppliers will bring in margins of 10-50%.
In a side-by-side comparison of the pay structures of each model, dropshipping is the clear winner. You will see more of each sale returned to you as profit. In addition, dropshipping gives you more control over the customer pipeline, which is something we will explore more fully throughout this article.
On the other hand, we earn around 15%-20% margin (after ad-spend) from this particular store which means that this one store earned about $25,000 in the last 30 days from $167,101.69 in sales. We give a range because it fluctuates depending on each product and cost per conversion.
- The main benefit of higher margins is the fact that it allows you to buy traffic and make money much faster than using a physical products affiliate program like Amazon's.
- If you decide to make a website dedicate to making money from a specific affiliate program, you're also at the mercy of their changes. you have little to no bargaining power when it comes to deciding your commission rates with companies like Amazon.
The biggest difference between the two models is where the traffic comes from in the first place. Let’s take a closer look at these differences and what it means for you as you start your business.
Affiliate Websites: Organic Traffic
You cannot buy traffic directly to your Amazon affiliate link, and buying traffic to your website to then get clicks on the affiliate link is just not a good use of your resources.
There is a bridge that customers have to cross to go from your site to the affiliate site to an actual purchase, and you will lose many customers at each step in that process. In addition, purchases must be made within a short window of time (24 hours in the case of Amazon) to count for your commission.
Since the commission rate is so low, you just cannot justify paying directly for traffic to your site in the hopes that enough people will click affiliate links and make a purchase within the time frame.
All of this means that you need to rely on organic traffic if you are going to run a successful affiliate site, and that means you’re at the mercy of SEO. If you want to get any real traction, you are going to need a commercial-related keyword (something people are actively typing into a search engine) to rank on the first page (preferably the top three links) on Google.
Getting that kind of ranking can take six months or a year. You have to create high-quality content, get links to it, and get ranked through Google’s algorithms.
With the same example of this newer affiliate site we own, it took nearly a whole year (started February 2018) before we started seeing any real traffic and commissions. This image is from ahrefs which is an SEO tool.
Dropshipping: Paid Traffic
If you run an e-commerce site dedicated to high-ticket items, you can easily justify the cost of paid traffic. We prefer selling high-ticket products that are at least $500 and sell some products that cost up to $10,000. This provides more room to buy traffic because even if you spend some money getting traffic to your site, your profit for each sale is high enough to cover the cost.
Another benefit of paid traffic is that it happens instantly. When you pay for a Google placement, you are on the front page immediately, and you do not have to wait months or a year to get noticed.
As an added bonus, you can do SEO on your e-commerce sites and benefit from two high-converting traffic sources.
If you can rank at the top of Google by paying them (and still profiting) it makes more sense because you can do it instantly. You can see two of the spots you can pay and get the same day in the image above.
- SEO-based traffic is free and passive once you get to the top of the rankings, but it can take a very long time to get there. If you're in a prime-spot for a commercial keywords, you're also likely to be raking in the dough.
- But getting there takes money and time, and beginners usually have neither. It also takes some guesswork and you may never actually get the rankings you desire. You're at the mercy of the Google algorithm.
- High ticket dropshipping lets you justify the cost of buying traffic because you can get profitable returns extremely quickly.
Earnings Per Visitor
We’ve talked about how much you can make per sale, but another consideration is your earnings per visitor. The difference between the affiliate and dropshipping approaches is really a trade-off in this area. Let’s take a closer look.
Affiliate Websites: Lots of Visits, Fewer Sales
Affiliate websites will often get a lot of traffic once they are established and doing well. These sites will see a lot of clicks to the affiliate page, and eventually, they will get some sales. If you are getting people to your site organically, that’s going to turn into sales, and those sales add up.
However, the types of items people are going to buy quickly through an affiliate link (in order to meet that 24-hour window) are limited. Most people take time to research and make a high-cost purchase, so you won't be seeing many huge commissions roll through. It's more of a volume game.
That same affiliate site has gotten 12,741 sessions in the past 30 days. Considering the earnings above, this means that every session was worth around $0.057. This is also a pretty high converting site!
Dropshipping: Sales Pipeline Control
While dropshipping sites may see fewer overall site visitors (it depends on the site) than an established affiliate link site, the earning per visitor is much higher. With an affiliate link, you only have a short window of time to get the sale.
If you have an ecommerce site of your own, you can get the customer’s email address and retarget them. You can also capture them with a pixel or remarketing code and serve them ads around the web or on social media. Essentially, once you have their information, they’re yours to market to pretty much indefinitely. You gain full control over the sales pipeline.
This control allows you to sell high-ticket items that will require more in-depth research and increased customer confidence. You have the time to build that trust and make an expensive sale.
Here's the same 30 days for the Shopify store that profited around $25,000 (on the low end after adspend). With 32,032 sessions, each session was worth around $0.78.
That's ~13X more than the affiliate site.
- You'll need hundreds or thousands of visitors a day coming from Google before you start earning a livable income.
- Many of those visitors won't click over to Amazon which means they're basically lost forever.
- Selling products yourself via dropshipping lets you market to visitors indefinitely by using cookies and even capturing their e-mail address.
- You can do this stuff with an affiliate site too, but the low margins hardly make it worth it.
- Also Amazon rules state you cannot use your affiliate links in e-mails or serve them to users via paid traffic.
Best for a Beginner’s Budget
If you are just getting your start in launching your first online business, you probably want to know how you can stretch your budget and see the most return on your investment. Let’s take a closer look at how each option stacks up when it comes to working with a beginner’s budget.
Affiliate Websites: Low Money Cost, High Time Cost
A lot of people are attracted to affiliate marketing as their initial business endeavor because it can have a very low upfront cost. If you run a website where you create all of your own content, the upfront cost can be virtually nothing.
However, it’s a lot harder to really grow a sustainable business through affiliate websites than you might think. Producing high quality content takes a lot of time and effort. You have to produce continuous, meaningful content. In order to make sure it is web-ready, you may need to hire an editor. You also have to polish up the formatting and find (or buy) usable images.
Most people who launch their own businesses do so with their goals set fairly high, as they should. If you are looking for the kind of success that allows you to quit your job and to make a decent living, you need to be bringing in consistent, dependable income.
If you start a blog with affiliate links and are writing an article a day to populate it with high-quality content, that’s a lot of time you are committing to the project. Considering that it will likely take months to see any real return on your investment, what is the likelihood that you will continue long enough to make your goals a reality?
Chances are that you will get burnt out and decide to quit long before you see the pay off.
Dropshipping: Quick ROI
Getting access to products you can sell at a high margin costs almost nothing. A Shopify store has a free trial and then costs only $30 a month. As far as purchasing paid traffic, Google offers $100 for new clients who spend $50. If you invest $80 ($30 for Shopify and $50 for $150 worth of paid traffic), you will likely see your first sale within that month.
If you have selected a high-margin product, you will see a return on your investment immediately. You can then take that money and fold it back into your business.
The concept of cash flow becomes very important. You have to consider the long-term strategy and make sure that you are setting yourself up for ongoing success. With an e-commerce site, you will see the cash flowing in much more quickly. That profit translates into increased energy and confidence, giving you the boost you need to stick with it long enough to see real profits.
If you get a strong ROI coming back from your e-commerce site, you can then take some of that money and roll it into creating affiliate websites as well, but you will then have the budget to outsource some high-quality, well-formatted content creation to help make it sustainable.
- If you want to start an online business, you need to make money quickly if you want to stay motivated and get off the ground. You don't want to wait for Google to rank your affiliate site.
- Using dropshipping for quick cashflow is a great strategy because it allows you to reinvest that money back into the business. It also provides a momentum and confidence boost.
- You can even use that cashflow to diversify and invest into affiliate websites down the line (which is what we do).
Ultimately, your goal is to set yourself up with a source of passive income so that you can have a reliable stream of money coming in. Passive income allows you maximum flexibility in your schedule while securing you the lifestyle you want to live. Let’s take a look at how these options compare when it comes to passivity.
Affiliate Websites: More Passive in the Long-Run
Affiliate marketing has the potential to be the most passive option overall. While writing and editing high-quality articles takes a long time to get started, the content remains active for a long time.
Once you have a high-ranking site that appears at the top of search results, you will continue to generate sales without having to do much else.
Dropshipping: Ongoing Work that Can be Outsourced
Dropshipping comes with some upfront work to get your site up and running, but then the levels of work balance out. However, there will remain many day-to-day tasks that need to be accomplished in order to keep the site operating.
Handling customer service, POs, and tracking numbers takes some daily oversight, but that doesn’t mean that you have to be the one to do it.
Many of the tasks of a dropshipping business can easily be outsourced. Since the profit margins are so much higher on these high-ticket sales items, you will have more room in the budget to allow for outsourcing of the day-to-day tasks you’d rather not do.
When you think about passivity, you need to think about the layers of work. After all, many highly successful people passively make money from businesses that are not passive at all.
Warren Buffet, one of the richest men in the world, owns Geico (through his company Berkshire Hathaway), which is not at all a passive organization. There are thousands of employees working every day to make the company operate, but it is still a source of passive income for Warren Buffet.
Passivity is about the systems that you build to control and manage your workflow, and both affiliate marketing and dropshipping provide opportunities for passive income.
- Affiliate sites can be passive after months or years of work. Once you get that top spot in Google then life is good. You don't have to do much once the article gets there.
- But dropshipping sites can be made passive quickly as well, but requires a bit more ongoing maintenance because the systems are slightly more complex.
- Because of the quick cashflow, a dropshipping site can be made passive much quicker, especially if you're on a budget.
Selling the Site
We’ve mentioned thinking long-term several times so far, and one of the long-term goals of your online business includes considering when to sell the site. If you do choose to sell the site, which of the two options will get you more overall?
Affiliate Websites: Higher Valuation
Affiliate websites, at the moment at least, get higher valuations. Typically, an affiliate website that’s a year and a half old will sell for 27 to 30 times its monthly profit rate.
We actually recently paid 37X for an affiliate/ads website because it was well-aged and had a great organic traffic track-record. It was over 10 years old. Great multiple, but a super long time to wait!
Dropshipping: Lower Valuation, but More Potential
Drop sales sites currently sell for around 25 times their monthly profit rate when they’re about a year and a half old. While this is slightly lower than affiliate sites, you have to consider the potential and what can be accomplished during this time period.
It can take up to a year to get high enough rankings on an affiliate site to see substantial organic traffic. In the time that it takes to build and sustain a successful affiliate site, you could have grown 3 or 4 dropshipping sites.
Ultimately, when you consider the sales price, you need to consider your time (a limited resource) as part of the equation.
We sold this Shopify dropshipping store on Empire Flippers for $133,000 after around a year and a half.
- Affiliate sites sell for more than dropshipping sites once they're earning money.
- However, you can grow multiple dropshipping sites by the time your affiliate site is earning any money.
Ultimately, you have different options available to you when you decide to start your first online business, and each has their own benefits and downsides.
If you are looking to get started quickly and begin bringing in money that you can then roll back into your business, beginning with a dropshipping site makes the most sense. Affiliate sites can be an excellent addition to your portfolio as you grow and diversify your business over time, but getting quick cashflow is key to building momentum and the success you desire.
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