The dropshipping model can either be a lucrative business opportunity, a source of passive income, or a surefire way to lose a few thousand dollars on Facebook ads. Here are important industry insights to consider before starting your dropshipping business.
The vast social media e-commerce ecosystem of the digital age is filled with cheap products made in China, identical products across different storefronts, amorphous middlemen, and at the centre of it all is dropshipping. The business model holds the promise of a constant source of passive income, but the industry is not as lucrative as it seems.
What is Dropshipping?
Dropshipping is a business model that bridges the gap between a manufacturer and a customer. A seller handles marketing, customer service, and an e-commerce storefront without having to handle the production, maintenance, and delivery of products, which the manufacturer or supplier is responsible for.
When a customer places an order through a dropshipping arrangement, the seller purchases the product at wholesale price directly from the manufacturer, sells it to the customer at a markup, and keeps the difference, all while saving costs on maintenance, delivery, and shipping.
Many of the biggest e-commerce businesses started out as dropshippers, and some still operate off the model today. When American online shoe and clothing retailer Zappos started out, they relied solely on shoe manufacturers to ship products directly to customers. Even Amazon started out selling books by transmitting dropshipping orders to Ingram Books and Baker & Taylor.
Quality Control and Instagram Burner Brands
Of course, there is no denying that there are people making a good amount of money off of dropshipping, but when the entire business model is built around sellers catering to customers they have never met and will never meet, selling products they have never seen, and shipping from countries they have never been to, the variables are never as controlled as one would prefer. Contrary to popular belief, dropshippers actually do need a sum of starting capital to start an online storefront and invest in advertising and customer service tools, and plenty of them have lost money to unreliable suppliers and products whose quality turned out to be lower than expected.
David Rusenko, the CEO of e-commerce web hosting company Weebly, wants no part of the trend, citing participation in the industry as a matter of integrity. Low-quality products sourced from Chinese marketplaces such as Aliexpress are more and more prevalent in the dropshipping ecosystem, which, combined with astronomical markup prices and long shipping times make for a disappointing customer experience. There is understandably an appeal in getting rich, or at least making a passive income, by leveraging the veneer of Instagram burner brands to sell synthetic Chinese-made overcoats, but Rusenko, who aims to serve creative entrepreneurs through Weebly, views dropshippers as essentially the opposite of what he does.
“Buy low, sell high,” say Steve and Evan Tan, the two brothers who took the e-commerce world by storm. The pair have clearly found success in the game, but the principle is not quite as easy to execute as it is to understand. It cannot be denied that dropshipping has earned a select few people a lot of money, but contributing just as much, if not more to their infamy are their dropshipping courses. These figureheads of the dropshipping scene have successfully leveraged their success and monetised their alleged expertise in the field. That said, Steve’s Lamborghini is not quite a testament to the get-rich-quick gospel of dropshipping so much as it is a marketing tool meant to convince aspiring entrepreneurs that the Tan brothers’ course is the way to go.
Plenty have found value in these courses and profited from the model, but like all education-based businesses, not all clients are guaranteed success. Regulatory bodies such as the Federal Trade Commission (FTC) prohibit deceptive claims about moneymaking potential in commercial practice, but as long as sellers specify in the very fine print that the methods leading to their own success might not work for everyone, they can still promote their successful clients without disclosing the fact that many more have failed and lost money.
There is also an environmental dimension to the dropshipping business. A recent investigation by ITV News found that Amazon marks millions of unsold inventory for destruction each year in the UK. The British news outlet found boxes labelled “destroy” that were filled with books, electronics, masks, and other products in an Amazon warehouse, and tracked some of the goods to landfills and recycling centres. Over the course of a single week in April, over 124,000 items at the warehouse were marked for disposal, half of which were products that customers had returned, according to an Amazon document obtained by ITV journalists posing as Amazon employees. Numerous news outlets and environmental organisations have reported on similar cases in Amazon warehouses in France and Germany.
A significant proportion of Amazon warehouse stock is owned by third-party sellers who pay Amazon for inventory space. If merchants are unable to sell the products, it is generally standard practice to throw them out instead of keeping them on hand due to it being more cost-effective. This is all part of the dropshipping process, the environmental impact of which goes unnoticed as a direct result of the two-times-detached nature of the model itself.
As long as flaws in the industry continue to get swept under the rug by the countless social media personalities and e-commerce platforms promoting the business model, eager aspiring entrepreneurs will continue to spend on advertising for products they may never sell.
The dropshipping boom is a reminder that e-commerce is an ecosystem in which quality brands may soon become indistinguishable from those selling marked up third party products on your Instagram Explore page. It is only a matter of time before consumers, alienated as they may be from the labour that produces their jackets and smartwatches, become aware of how exactly they are spending their hard earned money.