Drop-shipping is not necessarily an evil thing.
But it is a hell of a lot of problematic to base a business on.
Drop shipping is, in a nutshell, a really shitty proposition. It goes something like this:
You find a supplier in Asia (usually China) who makes consumer products for pennies on the dollar. And of course the quality is sub par, but heh, you have dreams of sitting on the beach collecting money while you nap. You come up with a snappy site and sell these items that are shipped on your behalf by your Asian business partners.
It sounds good. No inventory costs, automatically calculated bulk shipping rates and a huge markup.
Then there are the bad parts: complete lack of quality control, no shipping expedition and your Chinese “business partner” is mass producing these items, whatever they are, which leaves with a hyper competitive ecommerce situation.
All this was reiterated to me in a recent SeekingAlpha.com, which is a totally nerdy geek journal that worries about the details in this digital economy that I ignore. The article dives deep into one platform’s (Shopify) seemingly disturbing over-reliance on drop ship clients.
If your unaware, Shopify is a great Canadian company that has created an ecommerce platform that allows inexperienced developers easy entry into ecommerce. I’ve used them for years and do not have one bad word to say about them. And their product is actually very good — well thought out, scalable and fairly transparent. And the market has responded by awarding them approximately 20% of the ecommerce platform market share, which is pretty damn good. The problems start to arise when you realize Shopify’s reliance on drop shippers leave them with a very vulnerable population who will, in most cases fail miserably, thus leaving them with no customers 🙁
At the same time, there are persistent questions about the company’s disclosures on user numbers, its lack of disclosure on customer churn, and the apparent reliance of the business on ‘drop-shippers’ – Shopify stores which simply re-sell cheap Chinese merchandise, ordered directly from Aliexpress – at huge mark-ups – a practice which appears to be not only endorsed, but encouraged by SHOP.
These questions have been around for a while – and we are not accusing SHOP of fraud – but if it is the case that a material percentage of SHOP’s clients are this kind of business, then the sustainability of the growth rate, and perhaps of the entire business could well be threatened.
781% MARK UP?
One of the more scummy things about drop shipping is abusive mark-ups.
By all means, you deserve to earn a profit to cover your efforts. But 781% is not only scandalous, it’s idiotic.
If you had, say, created these items by hand and made 10 of them, their value would approach a markup of say 100%. But theser are being made by the millions — and are being brought for the same wholesale by your competitors.
In short, you not only look like a profteer, you look like an aggressive idiot.
The article goes into depth of some very daunting accounting processes — required since Shopify will not release its numbers — which shows the truly horrible truth of drop shipping:
(…) this suggests that the average store on SHOP, using generous assumptions, is generating less gross profit that would be necessary to support even a single worker at the Federal minimum wage.
This wouldn’t be necessarily alarming, but, there is a very well-orchestrated campaign that markets to people with false claims of the revenue that drop shipping can generate:
(…) the pushing of drop-shipping as a kind of “get rich quick scheme” on YouTube is alive and well.
Worse than this, many of these video-makers are attempting to sell training or coaching services on the back of this “drop-shipping opportunity”.
There are way to do this correctlly and make a decent income by being realistic. I’ll explore that in my next post.