There are several types of passive income ecommerce business models that can get up and running pretty good quickly. The top three most common are probably: drop-shipping, wholesaling and warehousing, and white labeling and manufacturing. We also listed them in order of complexity, so keep that in mind. If you are getting started in ecommerce for the first time and are looking to start with the easiest model, start with drop-shipping and you can always grow into wholesaling and warehousing, and white labeling and manufacturing later.
Drop-shipping is when you sell items on your website that are manufactured, fulfilled and shipped to your customers by someone else. Generally, these relationships are established between you and a manufacturer or a wholesaler who has a warehouse full of the items you’d like to sell. Once the proper agreements are in place, the manufacturer or wholesaler will send you images of the products you wish to sell along with pricing. You’ll then place those items 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 benefits people love most about the drop-shipping model is that there’s very little upfront investment. You don’t buy any of the products until one is ordered from you and paid for. Once your foundation is set up with a selling platform, and your relationship with your drop-shipping partner is in place, your primary focus is driving targeted buyers to your store and providing an amazing customer experience. Once the sale is made, that’s when you pull money out of your pocket to pay for the item sold. This is a low-risk, high-reward model. You don’t have to stock any inventory or deal with the headache of order fulfillment.
Some of the drawbacks are that you have no control over the shipping and fulfillment and sometimes your suppliers let you down. If a supplier is running behind or forgets to provide you with a tracking number, that increases your customer service responsibilities. Also, since you’re not keeping any of the inventory, you don’t always know if an item is running low. You could end up unknowingly selling something that’s out of stock. Then you have to deal with the customer service and reputation ramifications.
The good news is that if you don’t feel the supplier you have chosen is living up to your standards, it’s pretty easy to get out of a drop-shipping contract. Your assets are entirely digital. It’s much easier to transition an ecommerce business that uses drop-shipping as its fulfillment model than it is if you have a warehouse full of items that have already been manufactured for you.
Wholesaling and warehousing
This model involves buying products in bulk and storing them in a warehouse somewhere. Usually people who prefer this model are selling product in volume. People most commonly use this in a business-to-business (B2B) market as opposed to a business-to-consumer (B2C) model.
With this model, you get better pricing because you’re buying in bulk instead of making one-off purchases, as in a drop-shipping business. If you’re buying in bulk and selling the items individually on your website to consumers, you also have better margins than you do with drop-shipping.
However, if you’re like most people using this model, which has lower margins, you’re selling in bulk to businesses who are selling to consumers. In most wholesale businesses, you need to create enough sales volume to make up for the smaller margins. This model also requires high upfront investments for purchasing and housing the product.
White labeling and manufacturing
Manufacturing is when you pay to have the items created for you. In white labeling, you aren’t manufacturing the product, but your licensing contract allows you to put your name or brand on it as if you are the manufacturer. With this scenario, you are either manufacturing products overseas or importing them from overseas and putting your brand on them. You’re the top of the product chain at this point.
When you’re importing or manufacturing overseas, your margins are much higher. You get to create the product for a lower price, then sell it online for a much higher price. You also control all the shipping and fulfillment yourself. While this is more work, it has a lot of benefits, too. You get to control the entire cycle and always know what’s going on with the product. Also, at this point, you can take advantage of wholesalers and drop-shippers to retail your products for you.
This model isn’t for the commitment-phobe. There’s no easy way to end a manufacturing contract. You had the products made, you’ve imported them into your country, and you have them sitting in a warehouse somewhere. You also have to develop a process to monitor and maintain quality control. This is definitely an advanced model for earning passive income online. There is almost always a large cash investment required upfront, so you need to have a financial plan.