Dropshipping is for Dreamers | Wholesale is About to Die | Reselling 2020
Dropshipping was a great model about ten years ago. Probably longer than that actually. A whole lot of people got on the bandwagon and were able to make a lot of money. Now they are selling you courses about how you can too. It’s so easy. You find a product, build a website and throw a lot of money at ads and make a fortune. This model is deeply, deeply flawed and in the coming 12 months a lot of these set ups will go down and anyone trying to start one from today will not succeed and here’s why.
In a nutshell, dropshipping is advertising a product for sale without holding inventory of that product. The inventory is held by another merchant. You make the sale of the product, then go buy it from the other merchant, and have them ship it to your customer. You have sold the same product to your customer with a higher margin so you make some money on the sale. Sounds great doesn’t it? Can you see the flaws already? Let me explain some more.
Alibaba and Aliexpress are linked companies. Aliexpress is the sister site of Alibaba. The sellers on Aliexpress sell smaller quantities of merchandise at a higher price so small (mostly) online retailers can get a foot in the door to retail. Start small. Steadily grow and then find the same product on Alibaba for cheaper and larger quantities. Aliexpress and Alibaba are the main, but not only, players in the industry that has become online dropshipping.
So the sellers that are selling on Aliexpress have already made their money selling to you. Now you have to make your money by selling to someone else. Keep in mind – Aliexpress is open to the public and the public is much more savvy about online shopping and knows all about Aliexpress.
So you find your product on Aliexpress. It’s pretty much some more fantastic plastic and you build a niche website around that product on platforms like Shopify or WooCommerce through WordPress. They both pretty much work the same except WooCommerce is way cheaper in my opinion.
Now, you have to get traffic to your website. The tried and true old-fashioned way of SEO (Search Engine Optimisation) still holds firm, 20 years later. But this is not the way of the commerce website. You have to drive traffic there. The only way to drive traffic is to use Advertising online. This is where Google and Facebook (mainly) and other platforms come into play.
This is also where the courses make most of their money because working out how to target audiences using these platforms is a science. Some have perfected it to the point where their ad spend is reduced so much that they become profitable pretty quickly but that is because they have spent years perfecting their craft to hone in on exactly who they want as a customer and they know how to run an ad campaign to do that.
The beginner is a lamb in the woods. You can spend your ad budget in an hour and get no results, or conversions (sales).
In the second quarter on 2019 alone, Facebook earned $16.6 billion – for one quarter. For the same quarter Google earned $32.6 billion.
Even after you hone your audience and start getting some sales, you will still have to make up all the money you lost, cover the cost of goods, and then hope that the supplier on Aliexpress still has the product you are selling.
Enter the competition. On places like Amazon, dropshipping is not allowed in the terms of services. However, it hasn’t stopped thousands from trying and succeeding to do so. But, the same product that you are selling on your Shopify platform is available on Amazon from the same supplier you bought yours from. They are your direct competition.
Same goes for eBay. Every product you think you might have a shot at is usually already on the platform by the supplier who sold it to you.
Those suppliers are the geniuses in all of this if you ask me. That is the problem.
The only way dropshipping works is the old way in which it was born. When the internet was still growing, many companies had no idea how to ‘get online’ and sell on the platform. But other people did. So partnerships were formed where the ones who knew how to use the platform had agreements with manufacturers and they sold their products for them. The manufacturers were thrilled to have more product moving without investing in internet infrastructure, and were happy to ship items on the seller’s behalf.
So now can you see the problem?
Most companies, over 20 years into the internet, get it. They have an online presence. They have either set up their own commerce platform or have agreements in place with other online retailers or bricks and mortar stores to supply wholesale. This too, is about to be disrupted.
I make Product A. It’s great. There is a market for it. I don’t know how to sell online or in bricks and mortar stores though right? So I make an agreement with these venues to stock my product for me and sell it. Then I make enough money to do it myself. I hire an internet guy, set up a store, start selling direct to public and keeping all the mark up profit between wholesale and retail.
Only 42% of the whole world is online right now. Online shopping for Cyber Monday 2019 was $9.4 billion and increases year over year. The people who are shopping online know exactly where to go for the cheapest price and best service.
Let’s take “The Ordinary” as a quick example of this. “The Ordinary” is a line of cosmetics and skincare. They have some products sprinkled in retail stores. The recommended retail is the recommended retail. If you sell higher than that you lose your supply privileges. While the company was growing and building their brand this worked well. Word of mouth spread. Influencers on YouTube started to tout its praises.
Then comes “The Ordinary” online store. You can buy the whole range directly from them. You don’t have to rely on some bricks and mortar stores having some of it. You can get all of it at one place, delivered for free (over $50 I think). They will eventually take their products out of bricks and mortar stores once their brand has reached critical mass and everyone is just buying directly from them.
Wholesalers are about to do the same. Why sell to a retailer, ship to a retailer, when you can ship directly to your end customer and keep all the retail profit?
Technology and experience is allowing this to happen and I foresee this really taking a cut of the retail space in 2020 and beyond. Malls are closing all over America because more and more shoppers are buying direct online.
The only way forward for dropshippers is to actually design their own unique product and enlist the help of a manufacturer and then ship it from there. So a full circle moment for retail except you are the owner of the product rather than a carbon copy of some fantastic plastic thingamabob.
With all these deliveries going on, it raises a whole other question about logistics and packaging. This is being disrupted right now but will disrupted significantly more in the coming five years.
At the moment, there is a group of sellers on Amazon who use retail arbitrage to make a living on Amazon and eBay. Retail arbitrage is finding something cheaper in the marketplace and then buying it, sending it into Amazon or listing on eBay for a higher price and pocketing the difference as profit. This too will end soon.
Walmart in the US has seen this coming and has pivoted to compete with Amazon with its range of products. So instead of online sellers buying from Walmart at a low cost and relisting the product on Amazon for more, Walmart have now allowed shoppers to buy directly from them online and pick up in store or have it delivered.
Very smart move.
They also can use their enormous bricks and mortar presence to provide this service across the US. Kmart could do exactly the same in Australia.
Grocery stores have for the most part already seen this light and have built huge online catalogues so you can either have your groceries delivered or pick up in store already packed for you. Some grocery items are now becoming available to buy directly from the manufacturer and this trend will grow significantly over the coming years as more and more of them build their online presence.
Amazon are using retail arbitrage sellers as a stop gap in their journey to grow and provide everything in one place. They didn’t have the manpower or ability to pull it off themselves so they used other sellers to list just about everything on their platform. The book “The Everything Store” goes into the long-term strategy of Amazon in detail and I can see it unfolding before my eyes. They will soon have logistics and delivery and packaging sorted out to the point where the retail arbitrage middle man will no longer be needed.
For now they are making a reasonable living but this is going to be short lived. To survive long term in retail, the next 10-20 years, you will have to develop your own product and deal direct to the public. The days of manufacturer to distributor, distributor to wholesalers, wholesaler to retailer – are slowly dying in front of our eyes. It’s a deeply flawed clumsy model that can be replaced easily with technology and those that don’t see it will perish in the disruption.
So online dropshipping? It’s just a course they’re trying to sell you and make their own money from you. It’s not a model you can enter today and make any serious money. Those days are over and about to be disrupted forever.
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