One of my first business successes was buying cell phones from one eBay seller, adding a markup and then reselling them back on eBay for a small profit.
After finding success, I began buying phones locally in my city and then selling them on eBay. After that worked, I began selling stuff that I didn’t physically have. Right after the customer placed his order, I would ship the item out from the third party store directly to the customer.
Basically, I was dropshipping before dropshipping became a buzzword.
All of this was back in 2005 before the era of the smartphones and commoditization of the market first by the iPhone and then by Android devices.
In the past 3-5 years, dropshipping has been making a lot of waves as a method for creating a business from nothing and making money relatively quickly.
In this article, I want to talk more about the different types of dropshipping, discuss the pros and cons of the business model, talk about my personal experience and close out with some final thoughts.
When you dropship, you sell something that you don’t physically have. Then, after the customers order this item from your store, you separately fulfill the order from another supplier (or store) who then ships the product directly to your customer.
The business model is very similar to affiliate marketing; instead of selling your own product, you’re acting as a middleman who connects the customer with the store that actually has the product and then takes a cut of the transaction.
For instance, let’s say you’re selling a widget for $30. You know you can order the widget for $10 from a supplier.
When the customer orders the product, you get paid $30 minus the $10 that you paid to your supplier.
Of course, there’s also the cost of ads that must be also factored in. But, hopefully, when everything is added up, you should have a profit.
Types of different dropshipping
There are different types of dropshipping models. They vary by their business models, the type of products they’re selling and the type of customers you’re targeting.
The first type of dropshipping is the more traditional one where you’re selling high-ticket items such as furniture on your online store. Think of it as a brick-and-mortar store that joined the Internet and built a website.
In this case, your actual supplier is in America and your customers are probably there as well.
The advantage of this model is that, because you’re selling high-ticket items, you’re making a nice profit margin on each one, therefore you only need to sell a couple of items to earn a decent living.
Another advantage is that, because you have an official agreement with your supplier (you’re an authorized dealer), you’re able to deliver the products in a very timely manner (as you’ll see below, this isn’t always the case).
This is the “traditional” model of dropshipping and has been around for at least a decade, if not more.
The Shopify/Facebook Model
Around the end of 2015, a new model of dropshipping emerged that quickly gained momentum. It was called the Shopify/FB Ads model.
In this model, you’re basically taking a product from an online catalog (usually a Chinese site), and then creating Facebook Ads for it. Then, when you have a sale, you forward the customer’s information to your supplier (usually in China), who then fulfills the order and ships it out to your customer around the world.
In this case, most of the products sold are low-ticket items. This could be anywhere from $10-60 price point. Although they are items that have been sold for much more, up to around $200.
There are several pros and cons with this model. First of all, the barrier to entry is very low. Anyone can create a Shopify store$, fill it up with random products from an Aliexpress.com (or something else) catalog, create a bunch of Facebook Ads and then start selling.
The second problem with this model is that unlike in the first case when you’re dealing with a reputable company and become their authorized dealer, here, you’re dealing with some random, no-name supplier in China.
This supplier can exist one minute and be gone the next. That can be problematic when you suddenly stumble upon a great product and sell a ton of it, then you forward the customer’s orders to the supplier and pray they’ll actually ship the item out and your customer receives it in a timely matter.
Unfortunately, this happens often and the new business you started quickly goes from “cash—money” to a nightmarish situation where customers gave you money for products you don’t have and you have zero control of actually putting those products into their hands.
Imagine, you received 100 orders from customers to your online store, just before Christmas. They might order for themselves or as gifts for others.
Then, you forward all the orders to your Chinese supplier who you know nothing about.
The supplier promises to fulfill and ship the orders to your customers, but never does or screws up and messes things up.
This is actually a pretty common situation that I’ve seen happen to many people. Nightmare is the proper word to describe the experience.
Getting a fulfillment center
A solution to this dilemma is to get a fulfillment center in China or elsewhere (America).
This means that instead of sending each order you receive to a supplier one-by-one and praying they’ll ship, you hold inventory in a warehouse and then ship right out of your own stock.
This eliminates the problems of shady suppliers and missing orders. Additionally, by buying directly from the warehouse in bulk, you can get your products at a much lower price.
My team and I actually have a warehouse in the southern Chinese city of Shenzhen where we store our products and then ship them out to our customers. Since we have a warehouse, we know exactly how many units we have and have complete control of the shipping and delivery to our customers.
Dropshipping and competition
One of the problems with dropshipping—especially with the low-ticket items sourced from some Chinese site—is the fact that anybody can do it.
Today, you’re selling a certain widget and making good money. Tomorrow, five new guys begin selling the same item from their stores. That would immediately affect your sales.
This is something that happened to us a few weeks ago. One of our best products was picked up by another store which then began promptly selling it.
Our sales immediately took a hit and there’s nothing we could’ve done.
This happens fairly often, so when you stumble on a great product, it’s important to scale it quickly and sell to everyone who you think might be interested.
So, if you’re a possible market of 1 million interested people, instead of selling them 5 items per day, you increase ad spend so that you’re selling 50 items per day (or more).
This way, you exhaust your market quickly before someone else shows up and steals your thunder.
Dropshipping and branding
Of course, worrying about a competitor showing up is not a stable business model. It’s not a passive income business if you can’t sleep at night because you’re afraid your sales will suddenly drop.
The solution is to build a brand. When you build a brand, you’re essentially selling an image and no longer competing on the product itself.
This means if I have a strong and widely recognizable brand, and I’m selling Widget A, and you’re a no-name store who’s also selling the same Widget A, there’s a good chance, the customer will probably buy it from me because they recognize the brand and don’t know anything about yours.
Later on, as your brand becomes stronger, you’re able to retain customers because of something called “brand loyalty”; customers will keep returning to buy new products from your store because they believe in the brand and what it stands for: solid quality, good customer experience, etc.
When you have a brand, you’re no longer selling the product itself; you’re selling everything that comes along with that brand.
The downside is that it takes some time to build up a quality brand; good brands aren’t built overnight.
Making money quickly
One of the biggest advantages of the dropshipping/ecommerce model is the fact that you can scale your sales very quickly and make a ton of money in a very short amount of time.
The reason for this is because you’re paying for customers in the first place (advertising) instead of getting them via organic traffic (free) that you get from search engines.
Once you realize you have a great product, all you have to do is increase the budget on your ads and more people will begin seeing your add. That should typically lead to more sales.
This is how a lot of people are able to make a lot of money relatively quickly, something that’s not possible via other means.
I’ve had situations where I was making something like $50 per day and, then once I realized the product is selling well, I was able to scale it to $500 per day in just a span of two days.
I know many others were making only $100 per day and then suddenly started to make $1,000 per day.
Facebook Ads challenges
On paper, dropshipping from China sounds pretty easy and straightforward.
All you have to do is find a great product, make ads for it, and then start waiting for sales to pour in.
However, one of the challenges with this model is actually in the part where you’re acquiring customers: Facebook Ads.
Facebook Ads, while can be very effective, have a steep learning curve that takes a while to get going. This is the area that creates the most confusion for people because there’s no set pattern of how things should work.
In fact, many experienced people have called the system “random.” Sometimes it works and sometimes it doesn’t.
I can definitely relate. In my experience, the notion of what works varies from one week to the next, or sometimes even from one day to the next.
One week you can have absolutely amazing sales and then the next week suddenly nothing seems to be working. There are tons of different communities that discuss Facebook Ads and everyone experiences the same thing.
I once remember making $500/day pretty consistently for about two weeks. Then, Mother’s Day came along. On that day, I made like fifty bucks.
Thinking that something was wrong, I checked to make sure everything was working. There were no issues.
The next day things gradually began returning back to normal. This randomness is something you just have to get used to.
One option is to buy ads elsewhere. Many people switch over to Google Shopping network and notice a more stable return on their revenue.
But, Facebook Ads still has an important place. There are over 2B active monthly users and many of these people simply aren’t searching for specific products on Google.
Thus, whether you hate it or love it, Facebook Ads is still very lucrative for any kind of business, especially if you’re selling products that aren’t available elsewhere.
My experience with dropshipping
I started a new store in January of this year.
Initially, I was just experimenting, trying to sell different products, playing with Facebook Ads and just getting familiar with how all the pieces work.
After a few iterations and playing with different products, I was able to find a product saw immediate success and scale it fairly quickly.
I started making about $50/day, and that quickly went to $500/day. That continued until at some point were making approximately $1,000 per day.
Eventually, I added new products to the initial store. Later on, we built two more stores to cater to a different audience.
My plan is to build a couple of new stores in the next several weeks in anticipation of the end-of-year demand, which is higher than usual.
Dealing with customers
Dropshipping also exposes you to a whole array of problems, not least of which are angry or unsatisfied customers.
Unlike in affiliate marketing where you’re simply a middleman who sends traffic to an offer and aren’t responsible for any customer support because the vendor is, in dropshipping you’re the vendor and are wholly responsible for making sure the customer is happy and taken care of.
That means if the customer isn’t happy with the product they’ve received—for whatever reason—it’s your job to make it right.
If you don’t reply to their emails, all they have to do is make one call to their credit card company and the friendly representative will immediately return them the money “pending an investigation.” (Most of these investigations are won by the customer anyway).
Fortunately, most customers are reasonable (at least in my experience), it’s not difficult to work something out if it means a quick refund or an exchange.
Moreover, if you don’t want to deal with customers yourself, you can hire a virtual assistant to do that for you.
Dropshipping is not sexy
One of the biggest problems with dropshipping and e-commerce, in general, is that it’s not a very sexy business model.
I don’t know many people who would call selling furniture or mattresses online as something they’re extremely passionate about.
I know I wouldn’t.
Even, now, in one of our stores, we’re selling small niche products for a very passionate audience.
This is definitely more interesting than selling chairs or tables, but I can’t say that I’m thrilled about selling random products from China.
Nevertheless, what dropshipping is, is a business in the purest form. With a blog, you need to wait years and years before you even see a minuscule return on investment (99% of bloggers don’t make any money), but when you start an online store, you’re able to make money immediately.
That’s why many bloggers I know have a blog where they philosophize about life and their place in it and a separate business where they make money and which pays the bills.
If you ask me, I believe that money is money and profit is profit. If you’re able to build something that generates you an income, then who really cares if it’s boring or not—provided it’s at least faintly connected to your interests.
And even if not, you can always outsource the menial work and then sit back and collect the profits.
So, there you have it. Hope you enjoyed the 30,000-foot view of what dropshipping is, how it works, its main challenges, my own experiences and whether it’s for you or not.
I don’t know about you, but I was initially very skeptical of the whole model. I was more interested in writing about my experiences and thoughts and getting to know people around the world than selling random products in some store.
Many of you are probably thinking along the same lines.
Nevertheless, I now view it differently. As an entrepreneur, I consider any business that makes money as a business that’s worth pursuing, regardless if it’s considered “sexy” or not.
Like my mentor once said, money is money.
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