What is drop servicing?
Drop servicing is a business model where you sell a service to a customer and then complete that service by contracting out to a third-party. Your profit is the difference between what you charge the customer and what you have to pay to your supplier. When drop servicing the perceived wisdom is you should avoid the customer realising that the service had been outsourced.
Drop servicing is similar to drop shipping but you are selling services rather than physical products.
Some people would refer to the process as “service arbitrage”. Arbitrage is the process of exploiting the difference between what an asset is worth in different markets. The difference is the profit you make.
Outsourcing projects to subcontractors is pretty well established in many industries. The term drop servicing is a new way of describing it.
Some people seem to think that the drop servicing model might be morally questionable.
It is best practice to make sure that the client is aware that you have a team of freelancers that actually do the work. You will be responsible for final delivery. It would be better for your business long term to be transparent about such a fundamental part of the process.
In an ideal world you should inform the person providing the service that you were considering them as a potential subcontractor. The danger of doing that is they decide to up their prices to the point where the venture is no longer viable.
If they are already advertising their services for a fixed price then it shouldn’t matter whether you are selling the service to a client for a fee.
Given the number of industries that use some form of subcontractor to actually do the work, I don’t think in reality this is much of an issue. Property developers for example. They do not have enough tradespeople to complete the work on every property they build. Because of the nature of the business it makes more sense to hire contractors as and when needed for the particular trades.
In the same way a company might use freelancers to complete work that their in-house employees are unable to complete.
When I was employed as a computer programmer I was sometimes sent out to client sites. The company I worked for charged the client between 6 and 10 times what they were paying me. I’m pretty sure they never felt guilty about that relationship.
Advantages of drop servicing
Let’s suppose you wanted to start a business creating blog articles for websites. There are only so many hours in the day and so only so many articles that you could write. This gives your business a ceiling above which you would never be able to expand using your own labour.
By leveraging the work of other writers you are able to produce much more content. Therefore you can increase your earnings over and above what you could earn by writing yourself.
If you are able to completely automate the service you are providing then that would solve the moral question.
If you have managed to automate the process is it actually drop servicing then? I don’t suppose it matters along as the client is happy and your business is profitable.
Disadvantages of drop servicing
Arguably the biggest problem with drop servicing is the lack of quality control. In order to maintain good relationships with your clients you need to produce high quality work. Using this business model means you have to take great care in the selection process when looking for freelancers.
If you hand out work to the wrong provider you could end up spending a lot of time fixing the work to meet the standard required. I suppose in a worst-case scenario you might even need to get the work done twice to satisfy the client. At the very least you would be wasting time and eating into your profit margin if your chosen contractor didn’t perform to the required level.
Drop servicing Examples
Creative industries tend to be heavily into “drop servicing”. Freelancers are often used in areas such as graphic design, video and audio production, copywriting and web design.
What should you drop service?
As with any business you are best advised to stick to things that you understand. So if you’ve been writing blog content for a while and have a good idea of what represents good quality then that is the service you could offer. On the other hand don’t start selling SEO services if you have no experience in actually doing it yourself.
You should do some market research to determine if your chosen service is actually in demand. You could look at Google trends for example.
Actually getting clients is likely to be the hardest part of the process. Try to pick a service that clients might come back to you time and time again. If you go for a service that they are only likely to need to use once then you will be always looking for new clients. It’s a lot easier to get more business from people you’ve dealt with in the past than to continually generate new business.
Take a look at some of the services available on Fiverr.com. Do you have any particular areas of expertise that would make a particular niche more relevant to you?
Once you have settled on the type of service that you are going to offer you will then need to find contractors to fulfil that service.
Where can you find contractors?
Any of the freelance marketplaces would be a good place to start.
There are two ways to proceed:
- Search through the profiles of the contractors to select a pool of talent.
- Post the jobs directly and see which freelancers bid for the project.
Here is an list of places to look for talent:
- The Creative Group
- Design Hill
- Hub staff talent
Bear in mind that some of these sites might only deal with freelancers in a narrow niche. For example if you are setting up an SEO drop service agency then it’s no good looking for subcontractors on Writeraccess or ProBlogger.
It is best to focus on marketplaces that have rigorous refund policies. If you happen to receive substandard work you need to be able to quickly resolve this. If necessary you may need to get a refund so that you can get the work done by a different freelancer.
If you already have experience in the niche then you may already know some reliable contractors. If not then try to pick a small pool of likely candidates and then assign them a test project.
Try to find multiple contractors that meet your standards then that gives you greater leeway when you are assigning work in the future. It is likely that the best contractors on any platform are likely to be the busiest and also the most expensive. You don’t want to rely too heavily on one person since they may end up with a large backlog of work so would be unable to fulfill your client requirements.
You also need to allow for the fact that people will require holiday or sick leave. If you want your business to work for the whole year then you would need to have more than one option.
A possible option with less headaches would be to outsource the work to a “white label” partner.
What is a “white label” agency?
A white label agency is a business that will provide services to your clients while using your brand name. This method removes any issues with regards to the morality of reselling the service. The white label agency is offering to sub contract in your name.
There are some other advantages to using a white label agency:
- Convenience: you will likely have to deal with just one person at the agency and you can build up a relationship with them over time. This is unlikely to be the case if you use freelancers. Over time you are likely to have to change if people decide to put their prices up or to stop freelancing.
- Transparency: there is no issue with you reselling the services that is what the agency exists to do.
- Staff availability: an agency will have many staff working for them and so should be able to handle the work that you send to them. Individual freelancers may need time off for illness or vacation.
The big disadvantage to using a white label agency would be the cost. They are certainly going to be more expensive than your typical Fiverr contractor due to their additional overhead.
Whether you decide to use freelancers or a white label agency will depend upon types of service you have decided to sell. Also the target market you are aiming at.
How to sell your service
The most simple way to offer your services would be to create your own entry on one of the freelance sites. I don’t think this is the best option however since you would be competing directly with many other providers. Depending on the platform they could also be undercutting your price significantly.
The best option would be to create a form of drop servicing ‘store’. The simplest option would be to customise a Shopify store to promote your services. A slightly cheaper option would be to use a WordPress website with some form of payment processing addon.
The advantage of using Shopify is that you get pretty well everything you need in one package for one monthly fee. If you decide to go the WordPress route then you will need to be a little more technically minded. You could of course pay for someone to set up the website or indeed pay for a ‘done for you’ Shopify store.
Managing client expectations is likely to be the biggest issue you have with a drop servicing business. You need to take care to avoid overpromising and under delivering. Don’t offer 24-hour turnaround for your blog writing service if you only use one contractor. You are setting yourself up to fail.
If you decide to go the Shopify route then their most basic plan should be sufficient at $29 per month. You will also have to pay for a domain name. If you decide to go the WordPress route then you would need to pay for hosting and domain name which could be as little as $3 a month. I wouldn’t go for the absolute cheapest hosting though. There will also be a cost associated with the payment processing.
You could try to market your business using SEO. You may find it difficult given that you are unlikely to want to create lots of articles or wait for the articles to rank in Google. You may have to grit your teeth and stump up some money to pay for advertising.
Obviously you need to target your adverts as much as possible. It’s pointless advertising a blog writing service in a Facebook group about personal finance!
Another option, at least at the outset might be to try word-of-mouth recommendations. Reach out to your friends and family saying that you have started such and such agency and if they know anyone who might be in need of that service.
Just try to drop it casually into your conversations. Don’t be pushy since you don’t want to be selling to your friends and family.
It will probably be a lot easier to secure one or two clients from personal recommendation than from cold advertising. Once you have successfully delivered these initial clients you can ask them for testimonials. Add them to your website to give you additional credibility.
How much should you charge?
As a minimum you should charge at least twice as much as you are paying your suppliers. This gives you a decent margin to cover advertising and other ongoing costs.
How do you increase your revenue?
A simple way to increase revenue would be to follow the fiverr layout. Offer a three tier pricing structure. Have a basic service without any bells and whistles for a minimum price. Then have a standard service where you Offer a better value for money service but at a higher price. Finally have your most expensive tier where you throw in various extras. This will be significantly more expensive than your value offering but some people will still go for it simply because they like to buy the best.
You could then have the option of rush delivery at an extra cost and also offer a variety of upsells. You need to make sure that your supplier is able to deal with any rush delivery requirements before starting to offer such a service however.
Is this business model right for you?
Before starting any business there are a number of things to consider.
- Do you have an entrepreneurial mindset? Unfortunately not everyone is cut out to be a businessman. Some people are just better suited to being an employee rather than an employer.
- Organisational skills. You will need to keep track of orders received, who you have outsourced to and payments. You will be responsible for checking any work received and passing it on to your client.
- Sales/Communication skills. This isn’t a business model for introverts. You are going to have to deal with clients from the sales process to delivery. Any contractors you are using will need to have the appropriate instruction and at times you are going to have to ask them to do rework.
What is Drop Servicing: Conclusion
While there is no such thing as a zero risk business, online businesses do come very close. It is a lot easier to start a business now than it has ever been. Drop servicing is a business model that would allow you to start a business with little or no capital and few, if any skills. If you would like to start earning money online then it is definitely an option that you should investigate further.
Is drop servicing legal?
Of course it is. Outsourcing tasks to freelancers or subcontractors is a time honoured business model. Only the term drop servicing is relatively new.
Is drop servicing better than drop shipping?
I don’t think one model is better than the other each has their own advantages.
With drop servicing you don’t have to deal with returns. However you might still have a client that is unhappy with the quality of the work provided. So essentially this is still the same problem.
As with drop shipping you will still need to deal with suppliers, although you aren’t dealing with physical products.
With any business the fundamental issue is you need to be supplying something that customers are willing to pay for. You need to be providing the right quality for a price people are prepared to pay and you need to market your business to attract clients.
Is drop servicing easy?
I don’t believe any business model is easy. It can be argued that drop servicing is easier than most others particularly businesses dealing in physical products.
Is drop servicing profitable?
While it would be nice to subcontract a project to someone on fiverr for $5 and then sell that to a client for $100, the reality is likely to be very different.
Drop servicing can make for a profitable business but you need to pick the right service to drop ship and the best way to fulfill the orders.