Did you know that dropshipping has a 'close cousin' that adds an interesting twist to the business model?
It does!
It's drop servicing, and this article will explain everything you need to know about it.
Let's dive in!
What is drop servicing?
Drop servicing, also known as service arbitrage or subcontracting, is selling digital services while outsourcing them to a third party.
In other words, drop servicing businesses find clients and then outsource the project to a service provider who completes it.
Drop servicing businesses generate profit from the difference between the amount they charge clients and the fees they pay to service providers.
How does drop servicing work?
Drop servicing has three key players: the drop servicing business, the client, and a service provider—sometimes called a subcontractor or freelancer.
Let's briefly discuss each party and the role they play:
1. Drop servicing business
Imagine a scenario where a business—let's call it Business X—doesn't have an in-house copywriter but still wants professionally written product pages.
Being a creative problem solver, the product manager proposes outsourcing the project to an independent copywriter.
The CEO greenlights the idea, and it's all systems go!
Using recommendations and online research, the product manager narrows her list to a few qualified candidates.
The team discusses the top picks and settles on a copywriter (let's call him Copywriter Y) because he has a spot-on portfolio website featuring product pages that align with Business X's needs.
After some back-and-forth negotiations, they agree on the project's deliverables, timelines, and a project-based fee of $2,000 for two versions of the product page copy (for A/B split testing).
They also agree on a payment structure (a 50% down payment and the rest upon successful project delivery), sign a service contract, and Copywriter Y starts the project.
We're together up to this point, right?
Awesome!
After closing the client and receiving the down payment, Copywriter Y outsources the work to a freelancer on his team or network—let's call him Service Provider Z.
Service Provider Z writes the product page copy according to set standards and for a fraction of the total project cost.
For this example, let's assume Copywriter Y has a 50% profit margin, or $1,000.
In this example, Copywriter Y is the drop servicer, Business X is the client, and Service Provider Z is the service provider.
Fundamentally, a drop servicing business is a middleman between clients seeking various services (like Business X) and service providers, freelancers, or contractors offering such services at a lower price.
Unlike dropshipping where business owners have an online store, drop servicing businesses have a portfolio—usually a website—that they use to market and sell their services to target clients.
A drop servicer's main role is to find clients and qualified service providers and then manage the workflow between all parties to ensure efficient service delivery.
2. The client
The client is the party seeking a particular service. In the example we've used above, Business X is the client.
Usually, the client starts the drop servicing business cycle by contacting the drop servicer seeking the required services.
However, in some instances, the drop servicer can start this process by using various sales prospecting strategies, such as cold pitching or email marketing, to find clients who need their services.
3. The service provider
The service provider, sometimes called a subcontractor or freelancer, is the party that provides the service or does the actual work.
The service provider has no direct contact with the drop servicing client.
Instead, they have contact with the drop servicing business.
Once a drop servicer closes a client and forwards the project details and deliverables to the service provider (including any agreed-upon down payments), the provider completes the work according to the set standards and sends it to the drop servicer.
The drop servicer checks and verifies that the work is up to standards and meets expectations.
If it does, he forwards it to the client for input/revision requests/approval and/or final payments.
If there are any revision requests, the drop servicer forwards them to the service provider.
This cycle repeats with every drop servicing project.
Pros of drop servicing
You're now familiar with the basics of how the drop servicing business model works and the roles of the three main parties.
But why exactly should you consider drop servicing?
Below, we'll outline the main advantages of drop servicing:
1. Friendly startup costs and low barrier to entry
Starting a business can be a financially draining undertaking, but not with drop servicing.
Because service arbitrage is a service-based business model, you don’t need costly inventory, equipment, or a physical storefront.
You only need a portfolio website and the willingness to market your business and find clients.
This low barrier to entry makes the service arbitrage business model incredibly friendly to beginners, aspiring entrepreneurs, and solopreneurs.
Since you only need a functional portfolio and marketing effort, your initial, most basic expenses will be a domain name and web hosting.
The other thing that makes the drop servicing business model so beginner-friendly is that since you (the drop servicer) won't complete the actual work, you don't need hands-on expertise to offer different services.
Essentially, your role is to profit from being the bridge between clients willing to pay good prices for services and skilled service providers willing to complete the work for a fraction of the client's pay.
2. Flexibility
How many businesses can you run from anywhere in the world?
With service arbitrage, you can set your hours and work when you want, determine your rates and profit margin, and work from anywhere, perhaps while unwinding on a sunbed at a beachside café.
This flexibility makes this business model perfect for digital nomads and anyone who wants to work when and from anywhere they want.
3. Scalability
Drop servicing also excels in scalability.
This is because there is no limit to how big this business can scale.
As long as you have a good portfolio and your services are in high demand, you can easily take on more clients and outsource additional work to your qualified network of service providers.
There’s also no need for substantial investments in infrastructure or staff because as long as you have good project management skills and exceptional quality control, you can handle more work and increase your revenue.
In other words, the service arbitrage business model can accommodate even the most ambitious business growth goals.
4. Low risk
Think of the many businesses that have gone under due to various business risks or the horror stories of business owners fighting a losing battle with inventory management or rising business expenses.
Here is the good news: a drop servicer never has to deal with that, thanks to how this business model works.
Drop servicers have little to no risk since they pay service providers only after securing a client and, in most cases, getting a down payment for services.
Because the risk is so low, drop-serving businesses can experiment, start over in a different niche, and offer various services without incurring additional costs (besides a domain name and hosting plan).
5. Wide range of services
Drop servicing isn’t limited to a single type of service.
You can offer various services or even multiple services at the same time.
For example, you can arbitrage services like:
- In-demand digital marketing services like SEO and content, social media, and email marketing
- Web development
- Copywriting
- Video editing
- Content creation
- Social media management
- Graphic design (think logos, flyers, ad assets, T-shirt designs, etc.)
- Translation
- App development
This bullet list isn't even half the picture because drop servicing can work with any digital service.
Cons of drop servicing
Every business model has its fair share of drawbacks, so let's focus on the other side: the potential disadvantages.
1. Difficulty landing clients
Because data never lies, here are the facts: drop servicing is wildly popular.
In fact, according to Exploding Topics, the global search data for the topic ' drop servicing' has grown by +6500% over the last five years.
Because of this high competition, finding paying clients is the most challenging part of running a service arbitrage business.
As a beginner, you'll need to devote a lot of time and effort to marketing your services and building a solid portfolio that attracts clients.
2. Quality control challenges
Quality control can be a significant challenge because the entire drop servicing business model involves the drop servicer outsourcing work to freelancers.
Fortunately, rigorous quality checks, effective communication with subcontractors and clients, and a commitment to delivering high-quality services that meet and exceed client expectations are great ways to overcome this challenge.
3. Reliable service providers are not easy to come by
Another critical factor that determines the success of a drop servicing business is how reliable its service providers are and their ability to deliver high-quality services.
For example, working with service providers who become suddenly unavailable, fail to deliver, or deliver low-quality services can easily doom a drop servicing business.
Therefore, drop servicing businesses should have a network of dependable subcontractors who deliver high-quality service on time every time.
How to start a drop servicing business in 2024
Now that you know more about this business model, how it works, the main parties involved, and its pros and cons, you're probably eager to start your drop servicing business.
Let's discuss it step by step.
Step 1: Find a niche
Like most businesses, niching down is the first step to starting a service arbitrage business.
The good news is that finding a niche looks fairly similar across industries.
That's why the seven methods discussed in our How to Find the Best Niche for Dropshipping guide can help you find your ideal drop servicing niche.
Here's a summary of these methods:
- Choose a niche you are passionate about.
- Choose a niche that aligns with your interests.
- Use keyword and market research tools to find a niche.
- Explore listicles of niche ideas for inspiration.
- Research successful drop servicing businesses.
Your goal should be to find niches with in-demand and profitable services while avoiding saturated niches with high competition from many well-established experts.
Remember that while you don't need to be an expert in a certain area to start a drop servicing business, you will need to know how to market your services and deliver high-value services, so choose a service you know you can market well.
Step 2: Create a portfolio
Your portfolio website will be the face of your drop servicing business, so you must get this part right. Your success with this business model depends on it.
The most important thing is to make your portfolio website interesting, informative, and memorable to the target client.
Here are a few key things your portfolio website should feature:
- Professional design and layout. Your portfolio website should have a clean, modern, responsive design with easy navigation.
- Compelling copy and content. The content should include a clear value proposition, engaging headlines, informative descriptions of your services, and strong call-to-actions (CTAs).
- High-quality portfolio pieces. Showcase your best work with diverse project samples and detailed case studies.
- Client testimonials and reviews. Include client testimonials and reviews to build trust and credibility.
- Professional branding. Ensure your business uses consistent brand colors, fonts, and imagery, and include a professional logo and tagline.
- Contact information. Provide easy-to-use contact information, including a contact form, email, and phone number.
- About page. Include an 'About page' with content that markets you to potential clients and features your business's background information, workflow, and other relevant information.
- Blog or resource section. Maintain an active blog or resource section with informative articles and industry insights.
Since the role of a portfolio website is to market your services, create a good one that stands out to potential clients and effectively markets your services.
Step 3: Determine your rates
Let's be honest: The purpose of every business is to turn a profit.
Guess what?
You cannot turn a profit if you do not charge clients an amount that allows you to earn a decent amount after paying the subcontractor.
So, how much should you charge to ensure your drop servicing business is profitable?
Researching other drop servicers in your niche is the best way to determine how much to charge, but you can charge clients hourly, monthly, or on a project-by-project basis.
Remember that drop servicing businesses generate revenue from the difference between what a client pays and what a service provider charges to complete the work.
That's why the best way to determine your rates is to conduct thorough market research to determine how much clients are willing to pay for services and how much service providers charge.
Once you know how much clients pay and service providers charge, add your desired profit margin to it to arrive at your rate.
Step 4: Find, train, and create your service team
Because of their important role in the equation, finding, training, and creating a robust team of service providers is another key thing drop servicing businesses should do to achieve success.
It's very important to vet potential service providers to ensure you only work with reliable ones who can deliver high-quality services within timelines/deadlines.
Freelance websites like Fiverr, Upwork, and similar platforms are good places to find good and pre-qualified service freelancers who can deliver high-quality services for your drop servicing clients.
Here are tips to help you prequalify, vet, and create your team of service providers:
- First, remember that having a clear idea of a project's requirements and scope ensures you can identify top freelancers who can deliver high-quality services.
- Ask for samples because portfolio review is the most effective way to vet and prequalify freelancers.
- Only work with experienced freelancers whose portfolios demonstrate their expertise in their service field. For example, a freelance product photographer should have a solid portfolio of great product images.
- Work with already qualified freelancers. High-quality freelancers on sites like Upwork and Fiverr have positive reviews from previous clients, which makes it easy to filter and find good service providers.
- Use questionnaires to pre-qualify freelancers. For example, ask freelancers about their industry experience, rates, and how much work they can handle within a specified period.
- Do a paid trial project. Paid tests are another great way to determine whether freelancers are as qualified as they claim to be and whether they can deliver on their promises.
You can also ask freelancers under consideration for references or jump on a call to see how well you get along.
Step 5: Find clients
As a drop service business owner, your revenue will be the price difference between what the client pays for a project and what you pay your subcontractor to deliver high-quality services that match the client's expectations.
Because of this, we can assume that the more clients you have, the higher your chances of generating higher revenue.
But how do you find clients? That's a great question.
Let's discuss four ways to get drop servicing clients as a beginner:
1. Work with your existing network
Marketing your services to your existing network is the fastest and easiest way to land your first drop servicing client.
Market your services to family members and friends, work colleagues, on social media, and every business and person you believe would benefit from your professional services.
Ensure everyone in your personal and professional network knows what your drop servicing business does, how much you charge, and where they can find portfolio samples of your work.
This way, even if someone in your circle does not need your services, they can refer others who might.
2. Attend networking events attended by your target clients
Although it may seem like an old way of doing things, networking still works and is a great way to get your service arbitrage business noticed by potential clients.
Attend virtual and physical networking events related to your niche.
At every event, mingle and interact freely, and don't shy away from engaging in genuine conversations about the value your drop servicing business brings to the table (but remember not to make the conversation one-sided).
3. Cold pitch businesses and companies that might benefit from your services
This is the most effective way to land drop servicing clients.
The only downside is that it's very time-consuming.
The process is simple:
Create a list of businesses and companies you would love to work with and pitch them by sending customized emails that show how your services would contribute to their growth goals.
While cold pitching is a deep topic we cannot fully cover in this article, here are some tips to get you started.
- Send emails from a custom address (acoolnamehere@yourdomain.com), not @gmail.com or other free email addresses. A self-hosted email address gives your pitch some business legitimacy.
- Invest time and effort into researching each client and personalizing each email.
- Grab their attention with a powerful, super specific, and intriguing email subject line.
- Adopt a professional, friendly, and polite tone to avoid pushy or sales-y language. Instead, focus more on highlighting concrete results and what a business can gain from working with you.
- Sprinkle case studies into the email to show your expertise and the results potential clients can expect you to deliver.
- Ensure every cold email has a clear Call-to-Action (CTA).
4. Use freelancing websites
This is another great way to find clients and service providers, especially for beginners, because the options are endless.
Here are a few freelance or gig websites you can start with:
Using freelancing websites to find clients and gigs has one advantage: these sites usually have many available jobs, and there are probably hundreds of gig and freelance work platforms.
Unfortunately, because of the popularity of remote work, most freelancing websites have stiff competition, and available jobs can receive as many as 30 pitches within a few hours of going live.
Here is an example from Guru:
Because of this competitiveness, it's important to keep checking the sites and to act quickly when you see jobs that match your service offerings.
These five steps cover a high-level overview of everything you need to start a service arbitrage business.
Summary
Before we go to the conclusion, we’ve created a quick summary of this article for you, so you can easily remember it:
- Drop servicing is also called service arbitrage or subcontracting.
- This business model has three main parties: the drop servicing business, the client, and a service provider.
- Drop servicing businesses sell digital services to businesses but outsource the work to service providers who complete it for a fraction of the project's price.
- Drop servicing businesses generate revenue from the difference between what clients pay them and what they pay service providers to complete a project.
- Drop servicing is widely popular because of its low barrier to entry, friendly startup cost, low risk, scalability, flexibility, and service scope.
- The most challenging aspects of starting a drop servicing business are landing clients, finding reliable service providers, and controlling service quality.
- You can start a drop servicing business in five easy steps: find a niche, create a portfolio website, determine your rates, find, train, and create a reliable service team, and then find clients and start working.
Conclusion
There you have it, folks: everything you need to know about drop servicing, including a high-level overview of how to get started!
As you can imagine, building any business, including a drop servicing one, takes time and a lot of consistent effort.
If you're willing to put effort and time into researching your niche, creating an A+ portfolio website, and finding clients, you'll start seeing results.
Let us know if this article has helped you get started with service arbitrage, and don't forget to drop a question in the comments below if you get stuck on any of the steps!
Good luck with starting your drop servicing business!
Want to learn more about drop servicing?
Ready to move your drop servicing business to the next level? Check out the articles below: