Drop servicing has emerged as a popular business model in the modern day because of the tremendous growth of the gig economy. Instead of selling your own services, you can outsource the work to talented freelancers. This strategy, similar to dropshipping, takes much less effort and is infinitely more scalable than providing the services yourself. All you need are the skills to market yourself and to manage freelancers.
Our experts at Business2Community have built an in-depth guide to help you get started drop servicing today. Let’s dive in.
What Is Drop Servicing?
Drop servicing is a business model where companies sell services to customers and outsource the delivery of those services to a third party. In other words, the company sells services under its own brand but the actual work is done by an agency, freelancer, or contractor. Under this model, the business acts as a kind of middleman, connecting the customer to the service provider. This is also known as white labeling or service arbitrage.
Drop servicing businesses make a profit by adding a markup to the services they sell. For example, a drop servicing company offering proofreading services may charge a customer $3000 to proofread a report and pay a freelance proofreader $1000 to complete the work. In that case, their profit is $2000.
If you can find a niche where customers are willing to pay a lot more for a service than freelancers are charging to deliver that service, you can make high margins. Drop servicing businesses also tend to be highly scalable and have relatively low startup costs and overheads.
It is not always obvious when a company is using the drop servicing model. The customer will often have no engagement with the third party service provider by design so companies may keep their outsourcing hidden from customers. Otherwise, the client could deal with the third party directly. Others may choose to make the business model part of their brand.
Drop Servicing Vs. Dropshipping
You may have heard of another business model called dropshipping which has become popular in recent years. Both dropshipping and drop servicing fulfill customer requests using a third party but dropshipping is about selling physical products while drop servicing involves selling services.
Dropshipping is an ecommerce fulfillment method where products are sent directly from the manufacturer or another third party to the customer. The dropshipping business never actually touches the product and they do not have to arrange shipping, storage, or packaging.
Like drop servicing companies, their focus is on the sales, marketing, and customer service aspects of the business. Both models use the concept of arbitrage and sidestep some of the capital and labor intensive aspects of doing business.
How to Start a Drop Servicing Business
Starting a drop servicing business is relatively straightforward but it is still advisable to conduct thorough market research and develop a strong strategy before you get going. Here is a step-by-step guide to help set you up for success.
1. Choose a Drop Servicing Niche
There are lots of different services that fit with the drop servicing model. So how do you identify a good opportunity? Here are some things to consider.
One way to assess demand for a service is to look at search queries for related keywords. You can use Google Trends to see search trends over time. As you can see from the image below, searches for ‘video translation’ are trending upwards. You could also use a keyword research tool to assess the volume of searches or check social media to see if your niche is a popular topic with people in your target market.
Drop servicing is most profitable when you can add a high markup to your services. You can use platforms like Upwork and Fiverr to get an idea of what freelancers will charge then try to get a price estimate for similar work from an agency. This will give you an idea of the potential margins you could earn.
You don’t necessarily need any special skills to start a drop servicing business but the more familiar you are with the niche, the better you can understand your customers’ needs and assess the quality of the work produced by your service providers. If you don’t enjoy customer service or people management, you might want to choose a niche that requires less engagement with customers and service providers.
Is the service easy to price or does it require complex custom pricing for each customer? Would you need to spend a lot of time establishing the customer’s requirements and doing revisions? How difficult will it be to find skilled providers?
Scroll down to the end of the article to see a list of some of the most popular niches for drop servicing if you still aren’t sure which one to pursue.
2. Conduct Competitor Research
Competitor research is about identifying and analyzing your main competitors and using that information to position your business in the market. Start by searching for your service online. Make a list of companies that top the search results. Examine their websites, social media channels, and any available reviews. You might even go so far as to pay to use their service to get the full customer experience. Take note of these factors.
- Service: What services do they offer?
- Price: How are their services priced?
- Audience: Who do you think they are targeting?
- Reviews: What do customers like and dislike about their service?
- Customer journey: What are the most useful and persuasive elements of their website? What is the process for requesting a quote or making an order?
- Promotion: What marketing channels are they using and which ones have the most engagement?
Once you’ve analyzed all your major competitors, ask yourself whether there are any gaps in their offering that you could fill or weaknesses that you could improve on. Remember to research secondary competitors too.
For example, if you offer a website building service, your main competitors will be website building agencies but you will also be competing indirectly with web building tools like Wix. This may influence how you position your product.
Take a look at Asana’s great example of a competitor analysis framework for an SEO company:
3. Build a Foundation of Service Providers
Freelancer platforms like UpWork and Fiverr are an excellent resource when you’re looking for service providers. You can easily compare freelancers and review their product offerings and pricing – as you can see from these logo designer listings. You can also see their reviews. This gives you an indication of their professionalism and the quality of their work.
Another way to get hold of service providers is to use marketing strategies like SEO, paid advertising, job boards, and social media to advertise the fact that you are looking for certain skills. Reedsy, for example, is listing a role for a freelance ghostwriter on LinkedIn.
Once you’ve identified some candidates, screen them by arranging an interview or setting up a test assignment. Consider their experience, technical and communication skills, and their flexibility and availability. If you are not an expert in your niche, perhaps ask someone more experienced what you should be looking for.
It is also a good idea to prepare a contract template so that you can set clear expectations for every project, especially if your providers will be creating intellectual property.
4. Develop a Sales and Marketing Strategy
Sales and marketing work hand in hand to bring in new leads, convert them into customers, and persuade those customers to spend as much as possible with your business. You can think about this by moving through your customer journey from start to finish.
Identify your customers
Build a profile of your target customer. You can use customer segmentation to group different categories of customers by criteria like industry, job role, age, location, or budget. Start trying to figure out what they care about, which channels they use to find service providers, and what they are willing to spend.
Build your brand
A brand is not just a name, logo, slogan, and color scheme – although your business will need all those things. It’s about communicating what you do and who you are as a business. Think about your unique selling point (USP) or what makes you stand out from your competitors.
Use your customer profile and what you learned from your competitor research to decide how best to target potential customers. Are you going to focus on generating:
a) inbound leads (meaning people find your product through channels like web search, referrals, influencers, adverts, or social media)
b) outbound leads (meaning you reach out to potential customers through strategies like cold calling)
c) both inbound and outbound leads
From there, narrow your marketing strategy down. For example, if there is a high search volume for your service and your competitors are using SEO to attract leads, you may decide to focus on SEO. You could set out a step-by-step plan to optimize your website and develop blog content along with clear deadlines and a budget.
Other popular marketing strategies for service businesses include referral programs, influencer marketing, and advertising on podcasts, Facebook, or Google.
Convert your leads
Once you’ve decided how you will attract leads, think about how you will convert leads into customers. A well-designed website can go a long way to improve your conversion rate. Factors that can improve your website’s performance include:
- An engaging homepage
- Intuitive navigation
- Clear prices and service descriptions
- Testimonials or reviews
- An easy payment process
Depending on your service and your customers, you might also choose to have customers engage directly with you or a salesperson. The same general principles apply on a sales call as they do on a website: make a good impression, communicate your USP, tackle any objections, and provide the information the customer needs to make a decision.
Measure your results
To assess how your marketing and sales strategy is working and make improvements, you’ll need to gather data. Metrics to consider include:
- Google ranking
- Page views
- Total revenue
- Conversion rate
- Average order value (AOV)
- Cost per lead (CPL)
- Cost per acquisition (CPA)
Once you are generating revenue, you might decide to take on more business. This is only possible if:
a) There is enough demand for the service.
b) There are enough providers who can deliver the service.
c) Your business has the capacity to process more orders.
If you’ve done your research and it looks viable, you’ll need to update your marketing strategy to bring in more leads, grow your network of providers, and, potentially, invest in sales and customer service staff. You might also want to upgrade some of your tools and software or automate some of your processes to cope with higher volumes. If you scale efficiently, you may be able to bring in more profit without significantly increasing your costs.
Benefits of Drop Servicing
There are several things that make the drop servicing business model preferable to a more traditional service business model.
1. High margins. If you can find a niche where customers are willing to pay more for a service than freelancers are charging, you can pocket the difference. Digital services allow you to use talent from anywhere in the world and serve customers from anywhere in the world, meaning there are lots of examples where you can add a sizable markup.
2. Low startup cost. The only resources that are essential for starting a drop servicing business are an internet connection and a website. You can get set up online with a website builder like Wix from just $16 a month or an ecommerce platform like Shopify, which offers a free trial and then starts at $29 per month (when billed annually).
Other potential expenses to consider include branding, marketing, software, and the costs involved in formally registering a business. You can even opt to take payment from customers upfront which means you do not need any capital to pay your freelancers.
3. Low running costs. A drop servicing business does need the staff, equipment, or software that is used to actually deliver the service they are selling. As a result, the only ongoing costs are the tools and staff needed for marketing, sales, and customer service.
4. Flexible. Agencies often face the problem of having too much work and not enough staff to deliver. A month later, they might have too little work and pay employees to do nothing. Drop servicing makes it easier to be flexible when demand shifts because you can simply hire the number of workers you need. Of course, this is only possible if you can find service providers who are available to deliver the work.
5. Scalable. There are no geographical restraints on digital services which means you have access to talent and customers all over the world. This makes it easier to ramp up how much business you are doing. Scaling is especially doable if your business is set up so customers can make an order online without having to speak with a salesperson
6. Limited experience required. Outsourcing means you can deliver to your customers without having the expertise that you are selling. However, you may find that choosing a niche you are familiar with will allow you to better assess the quality of your outputs. It will also be advantageous if you have at least a basic knowledge of digital marketing.
Downsides of Drop Servicing
There are plenty of articles and videos online that say you can get rich quick with a drop servicing business but all businesses involve risk. Here are some of the potential downsides of the business model.
1. Limited quality control. When you work with third parties, you have less control over their outputs than if they were in-house employees. As you scale and use more providers, it can be difficult to keep on top of the quality of your outputs. Being rigorous in your selection and monitoring of service providers will help manage this risk.
2. Unreliable providers. If a service provider reneges on a contract, you might not be able to deliver to your customer. This can cause brand damage. Developing relationships with a network of reliable freelancers who can step in at any time is a wise insurance policy.
3. Tax and legal issues. Regulatory requirements in your jurisdiction may be different for drop servicing businesses than for traditional service businesses. It’s worth double checking things like VAT requirements and what to include in your terms and conditions, especially if you don’t disclose your outsourcing model to customers.
If your business involves intellectual property (IP), such as logos, jingles, or blog posts, it is a good idea to figure out who will own that IP and include that in your contracts. Under US copyright law, if a freelancer designs a logo, the copyright does not automatically transfer to the customer. However, on freelancer platform Fiverr, “clients are granted all rights for the delivered work, unless otherwise specified by the freelancer”.
Examples of Successful Drop Servicing Businesses
It is not easy to find examples of real drop servicing businesses because they often look just the same as a business that does the work in-house, but here are two great examples.
Wooshi describes itself as ‘the world’s greatest video studio at your fingertips’. They boast multiple awards and big-name clients like Amazon, Microsoft, and Twitch. The company outsources to a network of 16,000 creators all over the world. Video production teams and individual specialists, like cinematographers, can register by sharing their skills and experience and Wooshi gets in touch when they have a brief that is a good fit.
This registration system is clever because it means that Wooshi has vetted talent ready and waiting in a variety of filming locations whenever needed. Another factor in their success is that they have creative input on every project to maintain consistency and control quality. They also supplement their outsourced services with in-house services like editing and video analytics to make sure their customers are getting the most out of their videos.
From a demand point of view, this service is a great choice. Video is a breakout trend with a growing number of businesses using video as a core element of their marketing toolkit. Wyzowl’s 2023 State of Video Marketing Report found that over 91% of companies are using video marketing.
Smartling has been awarded a Bronze Stevie Award in the category of Artificial Intelligence / Machine Learning Solution in the 21st Annual American Business Awards®.
— Smartling (@smartling) May 11, 2023
Smartling offers B2B translation services for anything from social media posts and web copy to legal documents and VR scripts. Like Wooshi, they are award-winning and have big-name clients such as Peloton, Pinterest, and Volkswagen. Smartling has switched to AI translation tools but they previously operated a drop servicing model and all their translators were freelancers.
Demand in this niche is strong. The US Bureau of Labor estimates a 20% increase in demand for translation services between 2021 and 2031. Translation services are also straightforward from an operational point of view because you can bill for discrete tasks and customers can submit documents via a website without any need for human interaction.
The Best Drop Servicing Niches
In theory, almost any service business could use drop servicing. However, some niches offer higher margins and take more advantage of the benefits of the model. Here are some ideas.
Writing and Editing Services
- Script writing
- Content writing
- Resume writing
Graphic Design Services
- Website design
- Infographic design
- White paper design
- Lead generation
- PPC advertising
- Social media management
Video and Audio Services
- Video production
- Podcast production
Is Drop Servicing Right For Me?
Drop servicing is a great option for entrepreneurs who enjoy digital marketing and business strategy more than getting their hands dirty and creating deliverables. You’ll also need to have a talent for sourcing and working with providers to get the best quality for the lowest possible price.
If you like working as part of a team and building a company culture, then maybe drop servicing is not for you. Entrepreneurs who like to keep tight control over their outputs might struggle to trust freelancers or agencies to meet their standards.
However, not every drop servicing business is the same. You may be able to select a niche that suits your personality and risk appetite while still bringing in a healthy profit.