In the world of passive income, not all online storefronts are created equal. These three can help achieve the profits you want.
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5 min read
The opinions expressed by the entrepreneur's contributors are their own.
The following excerpt is from Nightingale-Conant's book The Power of Passive Income: Making Money Work For You. Buy it now on Amazon | Barnes & Noble | Apple books | IndieBound
There are several types of passive ecommerce business models that are quick and easy to get up and running: drop shipping, wholesale and storage, and white labeling and manufacturing. And it is no accident that the three options are listed in that order. Why? Because they are listed in order of complexity. If you are new to ecommerce and want to start with the simplest model, start with drop shipping.
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Drop shipping is when you sell items on your website that are made, fulfilled, and shipped to your customers by someone else. Generally these relationships are established between you and a manufacturer or wholesaler who has a warehouse of the items that you want to sell. Once the appropriate arrangements are made, the manufacturer or wholesaler will send you pictures of the products they want to sell along with the prices. You then put those items up for sale in your ecommerce store. Your job is to sell the items and the manufacturer or wholesaler will fulfill the orders and ship them to your customers.
One of the perks that people love most about the drop shipping model is that there is very little upfront investment. You do not buy any of the products until one has been ordered from you and paid for. Once your foundation is set up with a sales platform and your relationship with your drop shipping partner is established, your primary focus will be on bringing targeted buyers into your store and delivering an amazing customer experience. Once the sale is complete, pull money out of your pocket to pay for the item sold. This is a low risk, high reward model. No need to stock up on inventory or deal with the headache of order fulfillment.
Some of the downsides are that you have no control over shipping and fulfillment, and sometimes your suppliers let you down. If a supplier chases after or forgets to give you a tracking number, it increases your responsibility for customer service. Since you don't keep an inventory, you don't always know if an item is running low. You could be unknowingly selling something that is out of stock. Then you need to look at the customer service and reputation implications.
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The good news is that it is pretty easy to get out of a drop shipping contract if you don't think the supplier you choose meets your standards. Your wealth is completely digital. Switching to an ecommerce business that uses drop shipping as a fulfillment model is a lot easier than having a warehouse of items already made for you.
Wholesale and storage
In this model, products are bought in bulk and stored somewhere in a warehouse. Usually, people who prefer this model sell products in bulk. People use this most often in a business-to-business (B2B) market as opposed to a business-to-consumer (B2C) model.
This model gives you better prices because you buy in bulk instead of making one-off purchases like you would in a drop shipping store. If you buy in bulk and sell the items to consumers one at a time on your website, you'll also have better margins than dropship.
However, if you are like most of the lower margin users of this model, you are selling in bulk to companies selling to consumers. In most wholesale businesses, you need to create enough sales volume to make up for the lower margins. This model also requires a high upfront investment to purchase and house the product.
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White labeling and manufacturing
When manufacturing, you pay to have the items created for you. With white labeling, you don't manufacture the product, but your license agreement allows you to put your name or brand on it as if you were the manufacturer. In this scenario, you are either manufacturing products overseas or importing them from overseas and putting your brand on them. You are at the top of the chain at this point.
If you import or manufacture overseas, your margins will be much higher. You can create the product at a lower price and then sell it online for a much higher price. You also control all of the shipping and fulfillment yourself. While this is more work, it has many benefits too. You can control the entire cycle and always know what is going on with the product. At this point, you can also use wholesalers and dropship providers to sell your products for you.
This model is not suitable for the commitment phobe. There is no easy way to end a manufacturing contract. You had the products made, you imported them into your country, and you have them in a warehouse somewhere. You also need to develop a process to monitor and maintain quality control. This is definitely an advanced model for making passive income online. A large cash investment is almost always required upfront, so you will need a financial plan.