The Internet has radically changed the way retail works thanks to companies such as Amazon and eBay. However, if you're on Instagram or Facebook, you've probably also come across ads for shockingly cheap boutique items from companies you've never heard of.
There is a good chance that those brands do not exist outside a Shopify shop window. They only sell low quality Chinese goods at high prices. Welcome to the dark world of dropshipping.
A merchant using dropshipping is just an intermediary. You place an order with that merchant, but another company – a manufacturer, retailer, or wholesaler – sends you the product. The trader takes his money and never has to deal with the inventory.
Dropshipping is often called an online get rich quick program. All you need is a website and some social media ads, and you can sell people products from your online store. You don't have to keep anything in stock or make anything because someone else manufactures, stores, and ships the actual product.
Dropshipping is not necessarily a bad thing, it can (and is) used for legitimate purposes. However, many companies that use it often deal with low-quality products. Again, it is also a common feature of getting rich quick with scams.
Let's say a factory in China sells widgets for $ 3 each. A drop shipper can set up a website and social media campaign that will advertise and sell these great high quality widgets for $ 15 each. The drop shipper may not even handle the widget itself and has no idea of its actual quality.
Every time an order arrives on the website, the drop shipper buys a $ 3 widget and the manufacturer sends the product to the customer. The drop shipper will receive an additional $ 12.
All That Glitters Isn't Gold
Most people come across drop shipping sellers while performing routine tasks such as aimless social media browsing. Amid the baby photos and intentionally crafted snacks, they spot an ad for designer caliber technology or clothing at a low price.
Contrary to the easily recognizable ads that fake Ray-Bans offer, this ad claims that the product comes from an independent boutique. If you click on it, you will see a website that looks professional. There may even be a backstory or photo from the design studio where the product was made. It probably also comes with an SSL certificate to suggest further legitimacy.
So type your credit card information and wait. And wait. Eventually, a package arrives at the door, except it's not from a Los Angeles fashion house, but directly from China.
Disappointment starts quickly when you realize that the product doesn't quite meet your expectations. The material may be completely wrong or the stitching may be of low quality. Instead of something that looks like it comes straight from the catwalk, you have something that could have been fished up from a Goodwill bargain bin.
Stories like these are all too common in the drop shipping world. You could even argue that it is an inevitable part of the business model. Salespeople rarely, if ever, check quality. Neither they nor their customers have any idea how the product really is.
Anatomy of a dropshipping operation
Despite being characterized as fly-by-night operations that disappear just as quickly as they appear, the dropshipping market is big. Analysts at Grand View Research estimate sales in 2018 at $ 102.2 billion. This already impressive figure is expected to reach $ 557.9 billion by 2025.
Fashion products account for 30 percent of sales, with food and personal care (such as luxury Korean cosmetics) accounting for another 30 percent. Electrical product sales are 22 percent and the rest are divided into several categories, including toys, furniture and appliances.
Dropshipping sites are designed to launch quickly and operate inexpensively. They often steal or reuse images and text from third party websites. They also use existing platforms to quickly launch new shop windows – Shopify is a favorite. Products are also routinely sourced from AliExpress, often referred to as "China's eBay."
Once a store is established, they attract customers by aggressively advertising on social media, with Facebook and Instagram being particular favorites. Digital advertising is an effective form of marketing in terms of impressions of dollars spent, making it ideal for this type of business.
One of the reasons dropshipping companies are so productive is that they often consist of pre-existing parts that are put together quickly. Operators can hastily merge a Shopify page with a cheap ad campaign, and they're all set! They don't have to build a new website from scratch.
This also makes them insensitive to the negative word of mouth that a traditional company would face. Once they started collecting negative reviews, they quietly went to another website.
Get rich quick?
Part of the growth of dropshipping is its appeal as an easy way to generate passive income while working from home. While this applies to some people, many others find themselves losing money.
In many ways, this industry has taken the same course as the multilevel marketing world, which has grown tremendously due to stagnant wages and rising living costs.
Ironically, many people find their way into the dropshipping business through social media ads. Watch enough YouTube and you will come across an ad where someone brags about how they made a lot of money from home. Of course he will be happy to tell you how he did it – for a price.
These are often the first costs borne by potential drop shippers. Then there are the costs of building and advertising a store. Even if you spend just $ 5 a day on ads, that's still a decent amount of money over time, especially if your store isn't attracting sales.
Then there are the unexpected costs of running a dropshipping company. Credit card chargebacks pose a major occupational risk when dissatisfied customers attempt to recover their money through their banks. Returning is another problem.
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Of course there is room for nuance here. Undoubtedly, there are some companies that use dropshipping and also sell decent products and try to do well with their customers. Unfortunately, there are too many who don't.
In the end, we can only be careful whether you are tempted to buy from a dropshipping website or start your own dropshipping business. It is an area full of risks and both buyers and sellers often lose money.
If something sounds too good to be true, it almost always is.