- Dropshipping.
It's the online business model
that we'd see touted so frequently now online
as being a fast easy way to generate large amounts of money
in a short period of time.
But what is it really?
Is dropshipping really an effective business model?
Is it something that most people will succeed at?
What is actually involved?
That's what we're going to talk about in this video.
I'm going to walk you through
the dropshipping business model,
how it works,
the benefits of it,
the downsides or the cons to dropshipping
and we'll talk about
if it's something that I would personally do
and if it's something I would recommend you do
and why or why not.
So we're going to dive deep into this one.
If dropshipping is something you've been considering,
you're really going to enjoy this video.
We're going to dive deep.
It's a no BS look at dropshipping as a business model
and everything that's involved without all the fluff,
filler and hype that you see in most videos.
So first and foremost,
let's look at how the business model itself works.
Dropshipping in a nutshell
is where people will go to AliExpress,
which is a Chinese website that sells thousands
and thousands of different products
that are really low price,
they will go to AliExpress and find a product.
Usually the criteria is that the product is small and light,
meaning it's easy to post,
and it's something that is either trending
or something that they believe will trend
with a large audience.
So something that appeals to a lot of people
and is something that they think will catch on easily.
It's something that's going to be appealing
to a relatively large audience.
Fidget spinners are a classic example.
Literally hundreds,
probably thousands of dropshippers
were selling fidget spinners because they met this criteria.
They're a hot item,
small and light,
meaning postage was cheap and easy to manage.
So they will go to AliExpress and find a product.
Step two is they will set up a store using Shopify.
If you're not familiar with Shopify,
it's an online e-commerce platform
that allows you to quickly and easily
set up an e-commerce store.
So they'll go to Shopify
and they will set up an e-commerce store
specifically to sell this product.
They'll grab a logo,
usually go to Fiverr,
set up a logo and that becomes their brand.
And from there,
they'll generally source some product images.
Now, most dropshippers,
what they will do because they're starting
with very, very minimal budget,
so usually what they'll do
is they'll take the images directly from AliExpress
or they'll go around on Google
and find images of the product
and they'll use that on their product page
for their Shopify store.
Now, this in itself eventually causes issues
because they get copyright claims
and things like that on the images.
So usually it's a short-term fix
but that's our dropshippers do this.
They just grab images from over the web,
videos, if they can find them,
and they use them on their products store.
Now, when it comes to pricing,
this is how the business model operates.
They will look at how much the product costs on AliExpress,
they will then list the product for,
usually, three four times more than that,
maybe even more,
on their own Shopify store.
So if they pay $2 for the product and AliExpress,
they might charge eight, 10,
$12 from their own online store via Shopify.
At that point,
once they've got their Shopify store up and running,
they will then go and run ads,
usually Facebook ads,
to that product on their Shopify store.
When somebody clicks an ad,
they go to the store
and they purchase the ad from the dropshipper.
The next thing the dropshipper does
is they will go to AliExpress,
purchase one of those products
and send it directly to the customer.
Meaning they will purchase the product from AliExpress
using the customer's name and address.
AliExpress will then ship that item directly from China
to the customer,
wherever they are in the world.
So the dropshipper themselves
never actually touches the product.
That is the business model in a nutshell.
Now, the profit margins for the dropshipper
are quite simply the amount that they sold the product for
minus shipping, if they didn't add shipping,
minus the cost of the product.
So if, let's say,
the dropshipper finds a product for $2
and they sell it on their Shopify store for $12
and they have a postage cost of $2,
they do free postage,
so they eat that cost,
and the Facebook ad cost them $5 to get that customer,
they have a cost of $5 for the Facebook ad,
$2 for the product,
$2 for shipping,
so that's $9,
and they've generate a $2 profit on the product.
Okay?
That's quite simply how this business model works.
There isn't really too much more to it.
Now, you can probably already see
that there are several pros
or benefits to this business model.
So we'll start with that
and then we'll talk about the downsides.
The main benefit of this business model itself
is that it's very cheap and easy to set up.
And that's what all of these people promoting dropshipping
are going to be telling you first.
It's that you can start with little money down,
you can start with no experience,
blah, blah, blah and all that stuff,
you've seen it all.
Now, yes,
that is true because what happens
is you don't have to purchase any inventory or any stock.
As a dropshipper,
the only time you purchase inventory
is after a customer has purchased the product from you.
Somebody purchases from your store,
you then log into AliExpress and purchase the product.
So there is no downside risk
in terms of holding inventory or stock, okay?
That's the key benefit of dropshipping.
It's you have very little downside risk
in terms of money outlaid.
The cost of getting set up,
again, they're very small.
The cost of a Shopify store
I think is like 10 to 20 bucks a month.
Everything else is pretty much covered.
You might have a small cost on Fiverr
to get your logo developed and some branding developed,
five, 10, 20 bucks,
but overall, you can get up and running with this
for less than a hundred dollars.
It's a very cheap business to get up and running, okay?
So it's cheap to get up and running,
there's no big cash outlays,
no risk in terms of holding inventory.
They're the two main benefits
of dropshipping as a business model.
All right, so now you understand the business model.
You understand the pros or the reasons
why somebody would get into dropshipping.
Let's talk about the downsides and the cons.
Why wouldn't you do dropshipping?
The first one and I think this is probably the biggest one
is quite simply,
that it's not something that consumers like.
It's not something that is going to please your customers.
And the main reason for that
is because when you are dropshipping items from China,
the shipping times are huge.
They're two, three, four weeks
for somebody to get their item.
This is a problem for many reasons,
but one, it creates unhappy customers.
They're not going to be repeat buyers.
This is a business model
that relies on a pump and dump type strategy.
You want to sell a lot of a hot product one-off to customers
in a short period of time, okay?
That's a big downside to this.
Most of your customers are going to be unhappy
with the lengthy shipping times,
they're not going to come back,
reviews aren't going to be positive because of that, okay?
Now, the other part to that is that with dropshipping,
the nature of this is people don't realize
they're ordering from China,
and that's the problem.
People are thinking,
they're seeing these stores
and they're thinking they're buying from somebody in the US
or somebody in their local country.
So they purchase it expecting shipping to be reasonable,
to be a few days, right?
And so when it takes a long time
and they realize that it's coming from China,
that's going to upset the consumer.
And that's not,
it's just not a good business move, right?
Some dropshippers will say,
from what I've seen around the place,
they'll say, "Oh, tell people,
you know the shipping times are long,
dah, dah, dah, dah."
The reality is that's not what most dropshippers do.
Another problem that comes from that with dropshipping
is Facebook just,
there's no other way to say this,
Facebook hates it.
As a Facebook advertiser,
I see people coming to me all the time and they're saying,
"I got my account shut down."
And I said, well, what's your business?
"Well, we're dropshipping,
blah, blah, blah."
Straight away, right?
From that point on,
there's not much I can do do to help them
because Facebook just doesn't like dropshipping
as a business model.
And the reason is,
as I just explained,
it's because consumers and customers
don't like dropshipping, okay?
Dropshipping provides a poor customer experience
and Facebook values the customer experience.
So if you're a business
who's providing a poor customer experience
and your advertising on Facebook,
Facebook are going to shut you down.
They value the customer experience,
and if you're providing a poor one,
that's it,
you're out of there.
So most dropshippers you will find
will have multiple Facebook ad accounts.
They'll be constantly battling account shutdowns,
constantly trying to start new accounts
to keep their business running.
Now, as you can imagine,
that's just not a stable business model.
If you're literally,
every day, having problems with your main traffic source
and you're getting shut down,
business stops,
you're getting up and running again,
then a week later,
business stops suddenly again
because a Facebook ad account is shut down.
It just doesn't work.
It's just not something that you want to deal with
as a business owner, right?
So we know that shipping times are long,
provides a poor customer experience,
You're going to be dealing
with Facebook ad account shutdowns
on a regular basis with dropshipping.
Another thing to also think about
is there is no moat around this business model.
You're not building a business that is defensible.
There is nothing from stopping your competitors
finding out or catching on to this hot product
which they do all the time.
This is what happens with dropshippers.
Someone figures out a great product
and they're very secretive about it
because they know
that as soon as their competitors catch on,
and when they do,
they simply start selling the product.
It's a race to the bottom
to see who can sell the product the cheapest.
Margin compression kicks in
until it's no longer profitable to sell that product
and then they have to move on to the next product.
So you're not building a defensible business
because anyone can start
one of these dropshipping businesses.
That was one of the pros that I mentioned,
that, you know,
you can go on for less than a hundred dollars,
start doing dropshipping.
Anyone can do that.
The only skills here are finding products,
like picking winning products and running Facebook ads.
If somebody got those skills,
they can start up and become a competitor to you.
So what's going to happen is as a drop-shipper,
you find a winning product,
it runs for a little while,
if your Facebook ad account doesn't get shut down
too many times,
then you might make a bit of money out of it
until the competitors come in
and you've got to find a new product to sell.
So it's this constant hamster wheel of finding new products,
you get a rush,
it dies off, you find a new product
you get a rush, it dies off.
Ad nauseum, okay?
That's another downside of the dropshipping business model
that you won't get told about.
The other piece of that too is, of course,
it relies on your ability to find those products.
And you might have five, 10,
15 products that you try and sell unsuccessfully
and waste Facebook advertising budget on
before you find one that actually catches on.
So to sum that up,
you're essentially just not building a lasting brand.
You're not building something that has value.
As soon as the product dies off or is no longer profitable,
then boom, you're onto the next product,
you're onto the next thing.
You don't have a long-term brand.
There's nothing to sell here over the long-term.
You're not building something of value.
And I think that kind of leads nicely into the final con
and what matters most to me in this,
and that is you're not adding value to the consumer
or to the customer.
Essentially,
all a business is is something that provides value
to a customer or a client in exchange for money.
But you're not actually adding any value at all,
I believe,
with the dropshipping model.
Think about what you're doing.
You're essentially just creating a new website,
selling a product
that they could already go to a website and buy,
but you're selling it at a marked up price.
And the only reason people are buying it
is because they probably don't know
that they could just go to AliExpress
and buy it for a fifth of the price.
They may be buying it because they know that,
but the only reason they do that is because they believe
that they're going to get it shipped from the US.
That would be the only reason people would buy
and pay five times more for a product
if they knew they could already get it on AliExpress, right?
So, I mean,
there is no value add here.
None at all.
Unless you're bringing the products into the US
or wherever you live
and then shipping them faster
than they can get them at AliExpress,
I just don't see the value add, okay?
And for that reason alone,
it's why I just wouldn't go into dropshipping myself.
The biggest thing for me in business
is that it's something that is providing true value.
Something that actually
adds to the experience for a customer.
And you're probably thinking,
well, okay,
what about a traditional brick and mortar storefront
a retail storefront?
Well, essentially all they do is buy the products cheap
and then sell them on at a higher price.
And this is something dropshippers will use
when they're saying,
"Well, this is dropshipping.
It's just like a normal retail
where they buy it at a low price
and sell it at a higher price."
The argument against that
is one, it's just not true
because they're buying from a wholesaler
and retail customers can't go and buy from a wholesaler.
A retail store also presents the product there
for you to look at, touch,
feel, try on,
all that kind of thing.
But yeah, I mean,
the biggest thing there is a retail customer,
whether it's an e-commerce store or a physical store,
can't go and buy the products at wholesale prices.
They have to buy them retail.
You can't go and buy wholesale priced Apple iPhones, right?
You have to buy it from a retail store.
So there is a big difference there
in what happens with dropshipping
where somebody can literally buy it direct,
get it shipped or they can buy it from you,
get it shipped,
the only difference is price, okay?
Very different there,
and there's just no value add in that.
Now, one reason why I might do dropshipping
is simply for the experience.
If I wanted to get into e-commerce
and I wanted to get a very low cost entry or feel
for what is involved in e-commerce,
then it might be worth
just trying a little bit of dropshipping.
Or if I'm wondering about a market,
if I'm thinking,
well, can I sell this product?
Or is it worth me building a brand around a type of product?
Let's say it is a fitness apparel
and I want to sell fitness clothing,
like workout clothing.
Well okay, maybe you start a dropshipping site
and you do that for a couple of weeks
to prove whether there's a market
and then you create your own fitness brand
and then you start to design your own products,
get your own products stored in a local warehouse
where you can ship them out quickly,
create real brand and customer loyalty and trust
and everything else that comes with building a brand.
But I don't think dropshipping is a longterm business.
Honestly, it's more of a hustle.
It's a,
let's try this as a can we make a bit of quick cash
kind of thing.
It's not a real long-term sustainable business, okay?
That's my personal view of dropshipping.
That's kind of laying it all out on the table for you
and sharing what's really involved,
the good side and also the ugly side
of dropshipping as well.
So if we just wrap this up really quick, right?
The good parts of dropshipping.
It is low cost to get started and it is low risk,
meaning you don't have to store a bunch of inventory.
You can just buy products as you sell them, okay?
They're basically the two things.
Quick and easy to set up,
low cost,
no inventory on your side.
The downside list is a bit bigger, okay?
Poor customer experience.
You're going to struggle with Facebook ads
because you're going to get your ad account shut down
very, very regularly.
You're going to be going and chasing your tail all the time
trying to find new products,
scaling them up.
Competitors will come in,
you'll have to find the next hot product.
Trends don't last forever,
which means that a hot product isn't hot forever,
so you're constantly in this cycle of finding new products
and you're not building a longterm lasting brand, okay?
You're not building a business
that's going to grow over time.
You might scale it up,
things die,
back to square one, okay?
It's going to get really frustrating.
It's not going to give,
personally, for me,
it wouldn't give me that fulfillment
of creating something meaningful,
something that adds value,
something that's going to last, all right?
There are my honest thoughts on dropshipping.
I hope this has been an insightful look
into the business model for you.
And if you've been thinking about dropshipping,
I hope it helps you with your decision making process.
If you have any questions, comments,
drop them below.
I'll be sure to answer them as well.
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Thank you for watching,
hope you enjoyed it.
I'll talk to you soon.
Bye.
(lighthearted music)