Drop Servicing: How To Make Money With Service Arbitrage
What Is Drop Servicing? And how does contractor arbitrage work?
Drop servicing (service arbitrage) is a form of eCommerce providing services fulfilled by a third party. A drop servicing business uses the same principles as retail arbitrage to make a profit. As a service retailer, you arbitrage the cost of outsourcing and how much the customer believes the service is worth.
Contractor arbitrage is buying services from a contractor, freelancer, a white label service provider, or agency to resell them for profit. This business model allows you to make money as a middleman, but someone else does the work. You ensure the third-party provider delivers services according to customers’ requirements.
Starting a drop servicing agency is a viable alternative to drop shipping that can make you a full-time income with little to no investment. Customer middleman arbitrage allows you to build an online business while focusing on your marketing strategy and ways to scale.
Depending on what you offer, you may use freelancing platforms or white-label services to complete orders.
Drop servicing is a business model based on a three-step process:
- Acquiring customers
- Outsourcing the tasks
- Ensure that customers have the services they pay for
For example, you can make money with graphic design arbitrage by reselling Fiverr gigs or other infographic service providers. If your customer is willing to pay $35 for a website banner, you can find a freelancer that creates it for $15. Drop servicing businesses make money using a primary principle of commerce: buy low and sell high.
How to Start a Drop Servicing Business: A step-by-step process
Building a business is not complicated, but it does require some planning. A business plan would be extremely beneficial, even if it is a simplified one-page one plan. Here are x steps to creating a drop servicing business.
Step 1: Find a niche and a product suitable for service arbitrage
Since you will be selling service, you need to find a niche with demand for service that is not too saturated. You can use social media, forums, Google trends, and keyword research tools to find and validate your niche and products.
Be specific with your offers because it will help you in your marketing campaign. For example, if you are in the make money online niche, you can run Google ads for small businesses.
Step 2: Find where to outsource and refine your order fulfillment process
You can use freelancing platforms, outsourcing services, and white-label products to fulfill drop servicing orders. Factors like product quality, costs, workforce availability, and delivery time can influence your choice.
You can access a variety of services at competitive prices by using freelance marketplaces, crowdsourcing, virtual assistant services, and outsourcing platforms to provide the services. You can also lower costs by finding workers in countries with low average incomes.
Here are 12 platforms to consider to fulfill the orders of your service arbitrage agency:
- Hubstaff Talent
- People Per Hour
- Time etc
Independent contractors and virtual assistants are accommodating since you can hire them regarding your current needs. At least, in the beginning, you may not have the means to hire a full-time employee.
Another possibility is to use white-label services. Another company provides the services but agrees to sell them under your terms and brand name.
In this business venture, you partner with a white-label company. For example, to make money with PPC arbitrage, you can partner with the digital marketing agency White Shark Media.
As the reseller, you can rebrand the products created by the white-label providers. For example, by offering packages and bundle services. White labeling gives you more control over your business and helps you build your brand.
It is important to vet and check the skills of your future collaborators. You will have a list of potential collaborators after checking feedback, prices, offers, and reviews. Free some time to read the guideline and rules of each platform to decide if it could be a good match.
Then, it would be best to place a sample order to test the overall service quality. You must have 2-4 platforms to work with to ensure your business runs smoothly.
Step 3: Check legal requirements for eCommerce businesses
Like any e-business, you should follow the legal requirements for eCommerce websites before making money with drop servicing. Specifically, check what federal or state laws apply to your service arbitrage business. Although business registration is not always mandatory, it provides many benefits and protections.
But remember, if you don’t register your business, you could miss out on personal liability protection, legal protection, and tax benefits.
Here are some common elements required to make money legally from online service arbitrage.
- Article of Organization (if you file for an LLC)
- Business Operation License.
- Business bank account.
- Business insurance.
- Cookies Policy.
- Disclaimers or disclosures.
- Doing Business As (DBA) License.
- Employer Identification Number (EIN)
- GDPR, ADA & WCAG Compliance
- Home Occupation Permit.
- Intellectual Property Protection.
- Occupational License.
- Operating Agreement (if partnerships)
- Partnership agreement.
- Payment gateway.
- Refunds Policy.
- Sales Tax License.
- Seller’s Permit.
- Trademark registration
- VAT/Sales Tax Registration
- Warranty Policy
You may not need to apply everything on this checklist but do your research to understand your needs for a specific company. I recommend starting with government websites like US Small Business Administration and the IRS Website.
Now, You may have the money to invest in an all-in-one solution for creating your start-up’s legal documents. In this case, companies like Rocket Lawyer and LegalZoom can help you save time and avoid the hassle of doing all the research.
Step 4: Create a business budget
You can start drop servicing on a low budget compared to a traditional brick-and-mortar store.
You have two types of investment, the one-time fees (or start-up costs) and the monthly cost related to running an e-business. The overall cost of starting service arbitrage varies depending on the type of business entity you choose, the state, and the trademark option.
If you have a low budget, I recommend starting a sole proprietorship and using WordPress to build your online business. Here are two examples of estimated start-up costs to build a drop servicing agency in the US.
You can expect start-up costs from $441,09 to $911,09 if you include everything initially. You can also lower the cost of building your entire drop servicing business by delaying trademark registration. It is perfectly fine to start as a sole proprietorship and to be the only person working in your business.
Then, you need to refine your monthly budget for running your drop servicing business on a day-to-day basis by including:
- Cost of outsourcing
- How much you pay for tools and software
- Virtual assistants and eventual employees
Step 5: Create your service and a sales funnel
Your content and services should focus on solving a specific issue that your buyer persona may encounter. As a marketer, your primary role is to find potential customers and show them how your services will help them grow by solving their pain points. The goal is to convert leads into paying customers. For example, you can offer to create a chatbot that improves customer service.
Here are a few ways to create your drop servicing agency:
- Kartra is a powerful sales funnel builder for creating websites to sell services online.
- Combining WordPress and WooFunnels is a powerful way to create customizable service arbitrage businesses.
- ClickFunnels is among the most popular and effective ways to sell services online.
Having copywriting skills will help you create a digital marketing funnel to boost your sales and get a better return on investment.
Like any other business model, drop servicing can be profitable if you focus on providing value for your ideal customer (take the time to define a customer avatar or buyer persona). Your landing page and content should appeal to your client’s avatar or spark his interest.
Step 6: Traffic generation and customers acquisition
Even though it can be tough to have a new website to rank for a specific keyword, you can implement other strategies to get your first clients:
- make your website rank on search engines
- create helpful content on Pinterest, YouTube, or Quora that link to your service
- direct messaging small businesses
- use a press release
- paid advertising
You need to evaluate a customer’s lifetime value to decide if it is worth investing in paid advertising and the best marketing strategy to implement.
Step 7: Building a customer database
A customer database contains meaningful information about all your customers: purchasing details, name, email, lead source, demographics, and more. You collect the data about your customers and use a CRM (customer relationship management system) like Keap CRM to analyze the data and attract more customers.
You can also use other tools to keep them engaged with your content. For example, setting an automated email sequence with GetResponse increases your chance of getting return customers.
Drop Servicing Examples
You can make money with service arbitrage in three different ways:
- selling low-ticket offers
- providing high-ticket services
- offering recurring services
Contrary to popular belief, you can be successful regardless of your chosen model.
An automated sales funnel getting a high volume of search traffic (with targeted keywords) can give excellent results for low-ticket offers. In contrast, a high-ticket offer may require you to get on phone calls to close the deals. It also limits the number of sales you can make per day.
Here are some ideas and examples for your drop servicing services:
- Ads and sales copy creation
- Advertising company
- Audio production or transcribing
- Creative agency
- Digital content creation
- Graphic Design and arts
- IT support
- Legal documents for business
- Marketing agency
- Podcast promotion services
- SEO services
- Social media management agency
- Software development
- Video creation and editing
- Web building and design
- Writing services
Customer middleman arbitrage
Customer middleman arbitrage allows you to make money leveraging affiliate marketing. As a middle-person service provider, you bring potential customers to a merchant website and receive a commission every time a prospect purchases. The course Click Wealth System, created by Matthew Tang, teaches how to become financially independent using customer middleman arbitrage.
You don’t have to ensure customer support contrary to contractor arbitrage. But you have less control over the service delivered.
Advantages and disadvantages of drop servicing
Benefits and advantages of drop servicing
Here are some extra advantages and benefits of running a drop servicing business:
Making money from service arbitrage does not require a large team because it requires little in-house work. Since you intervene mostly at the beginning and the end of order fulfillment, you considerably lower the tasks.
Drop servicing is a scalable business model: You do not exchange time for money. Instead, you focus on implementing processes that can increase sales and revenue. Your growth is not restrained by the workforce, infrastructure, and traffic (if you are in the right niche). And you can partner with third-party providers to keep up with increasing demand. You can focus on scaling and let your partner handles the fulfillment.
Drop servicing can be partially automated to make you money on autopilot, for example, by using automated sales funnels, outsourcing, and AI-powered customer service. An effective strategy should require spending less time managing orders and free more time for product improvement and marketing.
You can do service arbitrage on a tight budget because you:
- do not need to buy products before receiving orders
- have no inventory cost
- no extra fees for shipping
- do not need a warehouse or to rent a commercial building (and web hosting is affordable)
- can lower costs related to employees management
As we have seen, the money you need to start drop servicing is low. Setting up a legit service arbitrage business with all the legal requirements for less than $1,000 is possible. In comparison, it costs on average $275,000 to launch a restaurant, according to the Sage website.
You can start drop servicing with little experience to no experience: you do not need to be an expert. You need a minimum of knowledge, the ability to distinguish a good service from a bad one, and the resources to provide services that match customers’ expectations. For example, you can take a Google IT certificate and learn the skills necessary to offer IT support services.
Disadvantages of drop servicing
Quality of the services: Quality control is the most apparent negative attribute of drop servicing. You don’t have complete control over the digital service quality because you aren’t doing it yourself. It would help if you spent time vetting the contractors and companies that work for you.
Endorsement and liabilities: You are the service provider for your customers, even if you are outsourcing. You must make sure the clients have what they pay for. In any case, you are liable for improper service delivery. Being upfront about operating your business is a good practice that can increase trust. For example, you can include your partners on your About page and mention that you work with skilled contractors to provide the services.
Final thoughts: Is Drop Servicing worth it? Can you make a living with contractor arbitrage?
Drop servicing is a viable and profitable business model. Service arbitrage is entirely legal, and many big companies use it. You can start service arbitrage and benefit from other people’s skills to provide services. Although you need some marketing skills, it is beginner-friendly and has high earning potential.
Dropshipping and drop servicing are based on the same principle of the arbitrage business model. Dropshipping is selling physical products, whereas drop servicing is selling services. They both use a third party to fulfill orders, and your success also depends on how well you select partners or collaborators.