This is part one of a two-part series on why Dropshipping is a Waste of Time.
For many of you, if you’ve been thinking about starting a business recently, or selling online, then certainly you’ve been inundated by numerous ads and people pitching dropshipping courses.
In fact, the first time you searched Google, Youtube or Facebook for a phrase such as “start an eCommerce business”, you instantly became an ad target of people, perhaps claiming to be successful store owners themselves, trying to reach out to help you start a dropshipping business, promoting this type of business model in some form or another.
And if you’re a beginner who is looking to learn the best way to start an eCommerce business and have success long term, then perhaps some of these ads and testimonials were appealing to you.
Maybe you found these “gurus” on social media while researching drop shippers (and the photos of their Lamborghinis that always seem to be attached to them).
At a minimum, you are doing your due diligence to learn as much as you can – and that is a really smart thing to do.
But I’m here to explain to you why starting a dropshipping business the way these people are suggesting is a huge waste of time and money.
For those that don’t know me, I’ll share a little bit about my background so that you know exactly where I’m coming from when I say this.
I’ve been an eCommerce professional for over 20 years now. I managed eCommerce start-ups for huge companies as Harley-Davidson and DSW.com and I was the VP of eCommerce for the largest ecommerce business on Shopify (at the time, theChive.com), and for our apparel brand called Buy Me Brunch.
I was head of consumer products and eCommerce for a $10 million+ digital entertainment company.
As a consultant, I’ve worked with brands such as Caterpillar, Mattel (working on ecommerce for the American Girl dolls, Barbie, Hot Wheels), Calvin Klein, Tommy Hilfiger, Sears, Campmor, Cengage, Acme Tool, and many other familiar brands.
I’ve started numerous eCommerce brands and companies of my own and as the founder of Launch Commerce, and I have helped many others launch and grow their own successful eCommerce businesses across a variety of different niches and industries.
So I’ve been around the eCommerce block a time or two, and have been involved, in one way or another, with over 200 different eCommerce sites over the course of my career. Odds are, you have shopped on a site that I’ve been a part of building.
Annnnnnd exactly ZERO of those sites have been businesses based on dropshipping products from factories in China that can be easily found and bought by any customer savvy enough to search Oberlo or AliExpress.com.
Now this doesn’t mean that I don’t understand the dropshipping business or that I’m not really qualified to speak intelligently on the topic. As a matter of fact, I’ve studied and researched dropshipping quite a bit – and I DO in fact have dropshipping sites in my portfolio of businesses – using a trusted wholesale supplier – and not using AliExpress of Oberlo or other Chinese dropshipping suppliers.
I’ve actively participated in many online Facebook groups dedicated to dropshipping, in an effort to see if this really were a viable business model. I have reached out to factories that sell products on AliExpress to understand their perspective of the business, and I’ve worked with literally dozens of people that have owned these types of dropshipping businesses and were looking for advice – on how to get out of it.
For those that are new to eCommerce or dropshipping, what I am referring to is the one that I discussed in an early article here on the Ultimate eCommerce Blog, which I referred to as “Dropshipping – the 1 eCommerce Business Model that Sucks“.
As a reminder for those who may not know, dropshipping is when a person or business sells a product that they don’t produce, pay for, store in a warehouse, or even ship to customers when purchased. Because a dropshipping business typically doesn’t have to pay for the inventory that they sell, it can be a very low-cost way to start an eCommerce site.
In most cases, products only have to be paid for once an order has been placed, therefore every order would be paid for with money paid to you by your customers. So in a way there is zero risk. If you never sell anything to customers, then you never have to buy anything to send to the customers.
Finding products to dropship can be easy, as sites such as AliExpress.com list thousands of products that can easily be selected and imported into an eCommerce shopping cart platform such as Shopify. Oberlo.com is another one of these sites, and one that is literally owned by Shopify.
It has a Shopify app that can be installed into your store to make it ridiculously simple to add dropshippable products to your store in a matter of seconds. In fact, it is perfectly realistic for someone to decide to build a dropshipping site during dinner, and have a fully functional ecommerce site with hundreds of products that can be purchased by customers – and maybe even have a sale – before going to bed that night.
Sounds great, right? You can create a business with hundreds of products – in a matter of hours – with a grand total of less than $50 invested. What’s not to love about that?
Well, for one, it’s important to take a step back and revisit what is really involved. Starting a business means that you have to deal with customer service and paying sales tax (or even when you have to pay sales tax), not to mention managing your drop shipping suppliers.
Since time is money, you need to know how much money you need to make in order to make it worth your time.
Seriously, how many things in life that come across as being too good to be true ultimately turn out to be too good to be true? Consider dropshipping to be one of those examples.
Any business with a low barrier to entry has to be considered a red flag from the very beginning.
Consider that someone who knows absolutely nothing about ecommerce can set up a business in a day or so, having spent around $50 total if they splurged and bought their own domain name to go with the $29 for the first month of a Shopify “Basic” Plan.
Consider that McDonald’s franchises require an initial investment of over a million dollars to open a new restaurant, and despite that cost there are plenty of them around the world.
But imagine if McDonald’s decided to allow anyone with $50 the ability to open a restaurant, in any location, selling the exact same Big Macs, Filet o Fish and McRib sandwiches that every other McDonalds restaurants sell, and they can set any price that they wanted to.
Pretty soon, there would be McDonalds restaurants on every street corner, and maybe even a couple of them side by side. Because of the influx of new restaurants, existing franchises would have to do something to draw customers to THEIR restaurant instead of the one that was built right next door.
McDonalds “A” would lower their price to attract more customers. Big Macs for $2 to get people in the door. But then McDonalds “B” lowers their Big Mac prices even lower to bring the customers to THEIR restaurant instead.
This type of economic model is commonly called a “Race to the Bottom”, and happens when multiple businesses compete on price to sell the exact same product that their competitors sell, with no clear differentiator to help them stand out from the crowd.
A Big Mac is going to be exactly the same at any of these McDonalds, so the customer is going to go where they can get the least expensive one. And maybe there is one McDonalds owner who doesn’t care about making a profit at all – zero – and simply wants to break even and sell the most hamburgers so that she can sell her franchise to an outside investor interested only in revenue numbers.
Now consider what happens when you open your Oberlo app and try to find products to sell in your new dropshipping store. Perhaps you’ve spent hours on product research or are trying to follow a hot “winning product” that you heard about on a product research site like EcomHunt (more on that site and others like it later).
So you go to the app and you find the perfect potato peeler for your new kitchen supply store – WorldsGreatestUselessKitchenProducts.com (because the domain name was available for $10 so hey, why not…) and you can see that it this potato peeler is available for $3.
From your research, you believe that you can sell that potato peeler for $20 on your site, so you add the product to your site and now have your “winning product” up and running on your site.
Now what? You sit back and wait to count your money, right?
Hell no! You need to get some visitors to your site so that they can buy your majestic new potato peeler. And the way to do that, at least in the beginning of your new business venture, is by paying for traffic.
This means that you need to create a Facebook Ads account or a Google AdWords account and then do your homework on how you want to target your potential customers.
We’ll focus on ecommerce marketing in future articles, so for this example we’re just going to assume that you are in fact targeting the right audience, create some great ads, and do a terrific job in getting your cost per click to a reasonable level.
The cost per click, or CPC as most people refer to it, is the amount of money that you pay to Facebook or Google to get a single visitor to visit your site. Some people refer to CPC as Cost per Conversion, and there is a big difference between the two.
Make sure you know which CPC someone is referring to if they are tossing that KPI (Key Performance Indicator… aka important metric).
This is something that can vary greatly, depending on many variables, but we’ll assume you do a great job with this and have managed to get a $.10 CPC – and note that it is very rarely going to be that low, if ever, just an FYI.
So with your great ads written, and your ad sets targeting the exact people that might want to buy potato peelers with a little help from Cambridge Analytica perhaps, you are starting to get traffic to your site.
Now it’s time to sit back and count the money rolling in, right? Hmmm…. Not so fast. It’s time to learn another term that is extremely important to anyone running an eCommerce business – Conversion Rate.
As most commonly measured, Conversion Rate (or simply CR) is the percentage of people that visit your site who end up making a purchase.
So if you have 100 visitors to your site, and 50 of them make a purchase from you, then your conversion rate would be 50%.
Which would be great, right?
Except actual conversion rates are never anywhere near 50%. In fact, while it can vary quite a bit depending on the many factors, a really solid eCommerce conversion rate is usually around 3%.
Many fall under that, and new dropship sites – without any established customer history, reviews, or credibility to bank on – MIGHT be around 1% as an absolute best case scenario.
This means that of every 100 people that visit your site, you should expect *maybe* 1 of them to actually complete an order. So yes, you’re still paying those other 99 people to come visit your site and then leave, perhaps never to return.
I can not tell you how many people with new dropshipping sites reach out to me, asking me to take a look at their site (or worse, at their ads) because they’ve started sending paid traffic to their site and have had 50 or 75 or maybe even 100 visits to their site – but no orders come through.
The biggest thing that eCommerce beginners need to do is to set realistic expectations in regards to conversion rate.
There are many factors that could impact conversion rate in a negative way, such as shipping costs (the top factor) and shipping times (usually 3-4 weeks for products being dropshipped from China).
These are often big factors on dropshipping sites, as well as overall site user experience, or overall product catalog, or lack of history/reviews, or pricing, or poorly written product descriptions, or… it really could be a lot of things.
But getting back to your new potato peeler ad campaign, if you do the math on your paid advertising campaign, with an absolutely terrific (and exaggerated to make the example easier) Cost per Click of only $.10 per visit, your cost would be about $10 to drive 100 visitors to your site.
Assuming an exactly 1% conversion rate (and you should NEVER assume anything higher until you have some established data stating otherwise), you are looking at $10 spent in marketing dollars to drive every single order.
With a price of $20 for the potato peeler leading to your Average Order Value (AOV) of $20, you have $10 remaining as profit after your marketing ad spend.
However, once that order was placed by your customer, you have to buy the potato peeler from the factory in China and have it shipped to your customer. And if you remember, the cost of the potato peeler was $3.
So now you’re left with $7 per order as pure profit. Of course, shipping the item to your customer costs money as well, even though shipping from China can be surprisingly inexpensive (cheaper than shipping within the U.S. in fact).
But still, assume it costs $4 to ship that potato peeler directly from Shanghai China to your customer in Columbus, Ohio. If you didn’t charge the customer anything for shipping, then your profit dips to only $3 per order.
If you did charge the customer for shipping, you can recoup some of the cost to ship the product to your customer, though sites that charge for shipping also tend to have a lower conversion rate.
But for the sake of this example and keeping it all sunshine and rainbows, we’ll say you were able to charge $5 for shipping and because of that, you actually made a dollar in profit on the shipping as well. Cha-ching… your total profit for this order is now $8.
Not a bad deal, right?
In fact, this entire scenario has been an absolute best case scenario for your new eCommerce business.
Earning $8 profit per order isn’t a terrible thing, especially if you are able to scale your marketing campaign to bring in thousands of visitors per day to your site. Imagine getting 10,000 visitors a day to your site, selling to 100 of them and making $8 a pop on each one.
For really no risk at all, you’d be making a cool $800 per day in profit. That is not bad by any means, especially for a new business.
Ah, but remember that whole race to the bottom thing I was talking about? You see, since you found your great potato peeler product from Oberlo, it is important for you to realize that there are literally thousands of other people scouring the same site looking for products to sell on their own ecommerce store.
Just so you know, Shopify now has over 600,000 active sites – and over 700,000 sites if you count inactive or trial stores that could be turned on at any time.
It is estimated that over 75% of them are dropshipping sites, so mathematically there literally are hundreds of thousands of people actively searching Oberlo and AliExpress for products to sell.
If even one of them has the great idea to sell the same potato peeler that you are selling, they are likely pulling the exact same product name, product description and product imagery that you have on your site (most people never change these, which is a common mistake).
Maybe the competitor even came across your own store and decided that if you’re selling the product for $20, they will sell the exact same product on their site for $19.
And since they are now going to be marketing to the same exact customer base that you are targeting, not only will customers choose the buy the product from them instead because of the lower price point, but the added competition for those marketing eyeballs means that your CPC has risen from $.10 per click to $.12 per click.
Now your marketing cost per conversion (cost per 100 visitors resulting in 1 order) has jumped from $10 to $12. Ugh!!!!
But since the product is still less expensive on your competitor’s store, your conversion rate drops and you aren’t able to sell any of the potato peelers… that is, until you lower your price to $18 and begin a price war (racing to the bottom yourself).
With your marketing costs now higher because of the added competition, you’re now selling an item that costs $3, with $12 in marketing costs, for a total of $18 (plus the $1 in shipping profit), and taking your own profit to $4 per order.
It’s not like the good old days of earning $8 profit per order, but $4 is still ok I guess.
So you sell another potato peeler and log into Oberlo to fulfill the order right as you realize that the Chinese potato peeler manufacturer is completely out of potato peelers.
In fact, they sold the last one to your competitor. Talk about salt in the wound.
Now you have to deal with an angry customer that purchased a product from you and doesn’t care even a little bit that you’re running a dropshipping business and it isn’t your fault that the peeler is not available.
In fact, it’s probably better that they don’t know that you don’t actually have any control over your own inventory.
But either way, the customer is livid because they had a big french fry party next weekend and now you’re ruined that because they can’t get their product in time. They threaten to leave 1-star reviews everywhere they can, which would crush your new business.
So that they don’t flat out put your company on blast with negative reviews, you are extremely apologetic to them and decide to offer them a 20% off discount code on a future order as an apology (or “appeasement” as it’s called in the industry).
A week later, when the product is back in stock, the customer uses that discount code to buy the peeler from you, making the sale price $14.40. This would still leave you with a profit of $.40 on the order, which you can live with considering in this case you are mostly trying to make the customer happy and win by not having a negative review out there for the world to see.
But when you try to fulfill the order, you discover that the manufacturer decided to raise their own prices by $.50 because apparently, these terrific potato peelers are the hottest thing since the fidget spinner.
Having zero control over the products or pricing that the manufacturer is charging you, you realize that you have no choice but to pay $3.50 per peeler from now on – and actually even taking a loss on the order for the angry customer, leaving your profits at only $3.50 per order going forward.
When a third competitor comes into the market and decides to offer the same product to customers for only $17 per unit, you realize that you’re essentially out of the game as you can no longer compete with that pricing and remain profitable to the point where potato peelers are still worth your time.
It is important to keep in mind that there are MANY people who run big dropshipping businesses who do not care about margins, or about making ANY profit from an eCommerce perspective.
Some people only want to show big revenue numbers so that they can sell their business to an unsuspecting buyer, or to show people that they are successful in generating a million dollars in sales and then charge those people for the training on how to do it (the secret, spend a million and a half in marketing – works almost every time!).
These people have spent nearly all profits on advertising to the point where there was no profit at all, combined with a low price to make sure they get all the sales. I guess this person would be declared the winner in that race to the bottom.
Generating sales really is not all that hard to do.
Running a dropshipping business that is both sustainable and profitable, however is much more difficult to do.
Now imagine this same scenario playing out on a larger scale. I have close friends that I’ve helped who were absolutely crushing it with dropshipping a couple of years ago.
They had Amazon clicking, Shopify clicking, a little bit on Ebay and on Jet.com and they were living well. One friend, who got into it over 10 years ago, quickly grew his business to over 300,000 unique SKUs.
That’s a legit enterprise operation, and at one point he was approached by a very large player who wanted to acquire his business for a hefty payday. But he was making money hand over fist and wanted to grow it even more in order to make the business even more valuable.
After all, he was selling directly on his own site and also on Amazon, and total revenue was over $1 million a month with a solid 25% margin.
But in time, the things that I described in my simplistic example started happening to him in a very real way, with new competition appearing and profit margins tumbling in an effort to remain competitive.
This made a bigger and bigger impact on his business to the point where his overall margins were at a very unhealthy 3%.
Now, lots of companies run a low margin / high volume model and many people might happily take $30,000 profit on a million bucks of revenue every month.
But a 3% profit margin is very unhealthy for almost any business, and in such a volatile industry where you have no control over costs, inventory, or quality, it is like a ticking time bomb waiting to explode.
This friend ended up having his business crash all around him, having to lay off all of his employees and cut costs in every way possible. Today, those 300,000 unique products are down to 50, and almost all of them are products that he owns and fulfills himself, with the others being fulfilled by Amazon in the FBA program.
He’s trying to build his business back up, but he’s vowed never to get involved in the dropship nonsense again as it can not be trusted to be sustainable.
Because of that, there is one ecommerce business model that truly sucks. You wouldn’t know it from reading blog articles at Oberlo that seemingly make it sound like you can print money using their tool.
But I did find it interesting to hear the founder of Oberlo, Tomas Slimas, on the 2X eCommerce Podcast with Kunle Campbell.
He basically said that dropshipping is great for people to get into eCommerce and learn what they can. But as soon as you make any money at all, you should shift to a traditional ecommerce business with inventory and your own products.
It seemed interesting to hear that a guy who presumably became quite wealthy selling his dropshipping platform to Shopify feels that people should not consider dropshipping a sustainable business model.
I couldn’t agree more, though I do think that there are better, yet still inexpensive ways to learn eCommerce skills without wasting your valuable time building a site dependent on AliExpress or Oberlo via dropshipping. Options like print on demand or affiliate marketing are often better fits for people looking to learn without investing a lot of money in the effort.
I’d also encourage you to read part 2 of this two-part series, called 9 Reasons Why Dropshipping from China is a Bad Idea.
Let me know your thoughts in the comments below. And if you have any questions, I’ll be there in the comments to answer them all.
[optin-cat id=13228]Tags: Beginner Dropshipping eCommerce Training