Before we dive into Why Dropshipping Business is Useless & A Complete Waste of Time I can promise you that you will have a great time reading this and once you’re finished, you will legitimately question a lot of things about dropshipping business.
Important Note: We wrote a follow up for this article which makes it a two part series, the link for part two is included at the bottom of this article, so once you’re done reading this you can check that out.
I suggest that you get yourself a nice hot cup of tea that you can sip throughout reading the article.
So lets start…
I’m sure if you’ve been thinking about starting a business recently, or selling online, then certainly you’ve been bombarded by numerous ads and people pitching dropshipping courses.
In fact, the first time you searched it on Google, Youtube or Facebook for a phrase such as “How to start an eCommerce business?” or “How to start dropshipping?”, you instantly became an ad target of “Successful Entrepreneurs”, perhaps claiming to be “Six Figure Store Owners” themselves, trying to reach out to “help” you start a dropshipping business, by promoting this type of business model in some form or another.
And if you’re someone who is just starting out and looking to learn the best way to start an eCommerce business and have sustainable long term success, then perhaps some of these ads and testimonials were very appealing to you.
Maybe you found these so called “Six Figure Store Experts” on social media while researching drop shippers (and the photos of their Lamborghini’s that always seem to be attached to them, no pun intended).
At a bare minimum, you are doing your due diligence to learn as much as you can – and that really is a smart thing to do, considering you’re only a new fish in this vast ocean of ecom dropshipping.
Let be very clear about the objective, I’m here to explain to you why starting a dropshipping business the way these “six figure ecom store experts” are suggesting is a complete and utter waste of your 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 the past 5 years now.
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.
Guess what? None 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.
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. Hey, 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 tax, not to mention managing your dropshipping suppliers.
Since we all know and agree that time is money, so you need to know how much money you need to make in order to make it worth your time, makes sense?
How many things in life that you’ve come across as being too good to be true ultimately turn out to be too good to be true?
You can consider dropshipping to be one of those examples!
Why so? Because any business with a low barrier to entry has to be considered a red flag from the very get go.
Consider this, someone who knows absolutely nothing about ecommerce can set up a business in a day or so, having spent less than €50 total if they splurged and bought their own domain name to go with the 29USD for the first month of a Shopify “Basic Plan”.
Consider that good auld McDonald’s franchises require an initial investment upwards of half million Euros to open a new restaurant, and despite that cost there are over 38,000 McDonald restaurants 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 sandwiches that every other McDonalds restaurants sell, and on top of all that the franchise owner can set any price that they wanted to.
Well… Pretty soon, there would be two McDonalds restaurants on each corner of every street, 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.
So picture this… McDonalds “A” would lower their price to attract more customers but giving away Big Macs for €2 to get people in the door.
But then McDonalds “B” lowers their Big Mac prices even lower i.e €1.50 to bring the customers to their restaurant instead.
And the problem? Huge! Because 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 for €2 and for €1.50 are 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 – Yeah Zero! – and simply wants to break even and sell the most Big Macs so that he can sell his franchise to an outside investor only interested in seeing revenue numbers and not the margins.
Okay, consider what happens when you open your Oberlo app and try to find products to sell in your new dropshipping store. Maybe you’ve spent hours or even days in some cases on product research just because you’re trying to follow a hot “Winning Product” that you heard about on a product research site like EcomHunt (more on this site and others like it later, keep reading).
So you go to the app and you find the perfect “Salad Chopper Bowl” for your new kitchen supply store – www.rex6free.com (because the domain name was available for €0.85 on godaddy.com for the first time buyers so hey, why not…) and you can see that it this Salad Chopper Bowl is available only for €3.
Now your juices are all flowing and you’re start to picture yourself standing next to your lamborghini very soon.
Stay with us….. We are not finished yet!
So From your research, you believe that you can sell that “Salad Chopper Bowl” for €20 on your site, so you go ahead and add the product to your site and soon enough you have your “Winning Product” up and running on your site ready for the world to see and buy, after all every kitchen needs that perfect “Salad Chopper Bowl”.
So you sit back and wait to see money start rolling in, right?
You first need to get some visitors to your site so that they can buy your majestic new “Salad Chopper Bowl”. 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 marketing in our future post, so for now we’re just going to assume that you are in fact targeting the right audience by creating some great creatives, and doing a terrific job in getting your “Cost Per Click” (CPC) to a reasonable level and keeping your user engagement to an ideal level.
The 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 also refer to CPC as Cost per Conversion, BUT there is a big difference between the two.
So we are going to say you 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, as said already, we’ll assume you somehow did a great job with this and have managed to get a €0.10 CPC – although it’s very rarely going to be that low, if ever, just so you know.
Now with your great creatives all set and targeting the exact people that might want to buy your “Salad Chopper Bowl” with a little help from “Cambridge Analytica” perhaps, you are starting to see traffic rolling onto to your site.
Now it’s time to sit back and count the money rolling in with that traffic influx, right?
Ahhhh, No! Not so fast…..
As a matter of fact, it’s time for you to learn another term that is extremely important to anyone running an eCommerce business it’s called “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 lets say if you have 100 visitors to your site, and 50 of them make a purchase from you, then your conversion rate would be 50% (don’t get too excited with the conversion rate of 50% even if you were selling drugs to the junkies, you wouldn’t have a conversion rate of 50%, it’s merely an example to make you understand the CR).
In fact, CR can vary quite a bit depending on the many factors, a really solid eCommerce conversion rate is usually around 3 – 4% and I am talking about those who understand the in’s and outs of Ecom and have solid foundation and background in ecommerce.
A vast majority fall under 1% or less, and new dropshipping sites without any established customer history, reviews, or credibility to bank on will be less than 1% as an absolute best case scenario.
What this means is that of every 100 people that visit your site, you should expect “Maybe” 1 of them to actually complete an order by purchasing that amazing “Salad Chopper Bowl” of yours.
So yes, you’re still paying those other 99% of people to come visit your site and then leave, perhaps never to revisit again.
Honestly, I cant 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 creatives) 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 and most valuable advice that I can give you here is to set realistic expectations in regards to your conversion rate.
There are so many factors that could impact conversion rate in a negative way, such as “Shipping Times” (number 1 factor, usually 3-4 weeks for products being dropshipped from China) then there is “Shipping Costs” (another very important factor) another important one is the “Over All Site User Experience”.
The are often big factors on dropshipping sites, or overall product catalog, or lack of history/reviews, or pricing, or poorly written product descriptions, or no descriptions at all , or… seriously it could be a ton of things.
Let’s get back to your new “Salad Chopper Bowl” 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 €0.10 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 Euros to drive every single order.
With a price of €20 for the “Salad Chopper Bowl” 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 “Salad Chopper Bowl” from your supplier at Aliexpress in China and have it shipped to your customer. And if you remember, the cost of “Salad Chopper Bowl” was €3.
So far its €10 in Ad Spend + €3 for “Salad Chopper Bowl”
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 China to your customer in Texas. If you didn’t charge the customer anything for shipping, then your profit dips to only €3 per order.
However, if you did charge the customer for shipping, you can recoup some of the cost to ship the product to your customer, though keep in mind that sites that charge for shipping also tend to have even lower conversion rate and sky high Cart Abandonment.
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 stands at a staggering €8.
Not a bad deal after all, right?
In fact, this entire scenario has been an absolute “Best Case Scenario” for your new eCommerce business.
Earning €8 in 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 pure 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 earlier on?
You see, since you found your great “Salad Chopper Bowl” product from Oberlo, it is important for you to realize that there are literally hundreds of thousands of other people scouring the same site looking for products to sell on their own dropshipping ecommerce store.
Just so you know, Shopify now has more than half a million “subscription paid” active sites – and over 700,000 sites in total if you count trial stores, many of those will be turned into a paid subscribers buy the end of their trial.
It is estimated that over 80% of them are dropshipping sites, so mathematically there are literally over four hundred thousand (400,000) dropshipping sites now imagine the amount of people who are actively searching Oberlo and AliExpress for products to sell.
If even one of them has the great idea to sell the same “Salad Chopper Bowl” 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 bother changing or putting the descriptions, which amazes me).
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 dropshipping 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. OMG!
But since the product is less expensive (for €18) on your competitor’s store, your conversion rate goes down and you aren’t able to sell any of your miracle “Salad Chopper Bowls” all of a sudden …
So you spend some time digging and deep diving to figure out that “Salad Chopper Bowl” of yours is also for sale on someone else’s site only for €19, so what do you do? You lower your price to €18 and therefore begins a “Price War” (race to the bottom).
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 (don’t forget the €1 shipping profit), So now you’re taking your own profit to $4 per order.
It’s not like the good auld days of making €8 per order right, but instead its €4, is still ok I guess.
Next day you sell another “Salad Chopper Bowl” and log into Oberlo to fulfill the order right as you realize that the Chinese “Salad Chopper Bowl” manufacturer is completely out of “Salad Chopper Bowl”.
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 that you’re running a dropshipping business and it isn’t your fault that the peeler is not available.
In all honesty, it’s probably better that your customers don’t know that you don’t actually have any control over your own inventory!
Either way, the customer is furious because they had a big vegan party next weekend and now you’re ruined that because they can’t get their “Salad Chopper Bowl” in time. What do they do? They threaten to leave 1-star reviews on Trust Pilot and 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 (there’s a term for it and it’s actually called “appeasement” in the industry).
A week later, when the product is back in stock, the customer uses that 20% discount code to buy the “Salad Chopper Bowl” 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 “Salad Chopper Bowls” are the hottest thing since the fidget spinner (remember those, ya!).
By having no control what so ever over the products or pricing that the manufacturer is charging you, you realise that you have no choice but to pay €3.50 instead of €3 per “Salad Chopper Bowl” from now on leaving your profits at only €3.50 per order going forward and actually take a loss on the order for the angry customer due to offering them a 20% discount.
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 “Salad Chopper Bowls” are still worth your time.
Remember, there are thousands of people who run big dropshipping businesses who do NOT care about margins, or about making any profit from an eCommerce perspective.
So why do they do it?
They 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 euros/dollars in sales (remember seeing shopify dashboard screenshots by those six figure experts on social media) then they charge those people for the training on how to do it, oh the secret? Spend a Million in marketing – trust me works almost every single time!.
These individuals 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!
Frankly speaking, generating sales really is not all that hard to do.
Running a dropshipping business that is both sustainable and profitable, however is a lot more difficult and harder to do, I can pretty much guarantee that you cannot watch a bunch of YouTube videos or even buy a premium course of these 6 figure experts priced well over €1000 and a month later find yourself on a hot sunny beach at Bahamas, there are tons and tons of factors at play under any successful dropshipping store.
I have close friends that I’ve helped who were absolutely crushing it with dropshipping a couple of years ago.
They had Shopify, Amazon and Ebay all working out very well for them and they were living well. One of my friend, who got into it over in 2010 quickly grew his business to over 100,000 unique products, that’s a lot of products!
It was an enterprise level 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 turned it down because 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 shopify based site and also on Amazon and ebay with a total revenue over €1 Million a month with a solid 25% margin, yes you’ve heard that right.
Nevertheless, 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%.
It’s worth noting that these days a lot of companies run a “low margin and high volume” model and many people might happily take €30,000 profit on a million bucks of revenue every month.
However, 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 their FBA program.
Now he’s trying to build his business back up, but he’s vowed never to get involved in the dropshipping 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 it’s not a walk in the park as they make it look like and I find it very interesting to hear the founder of Oberlo, Tomas Slimas, on the 2 X eCommerce Podcast with Kunle Campbell 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 guy who presumably became quite wealthy selling his dropshipping platform to Shopify feels that people should not consider dropshipping a sustainable business model.
To be honest 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 and money on 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.
Now remember the part two that we talked about at the beginning of this article? Its called “Thinking about dropshipping from china? Read this first!” I insist you to read that.