Business Unusual

'Drop shipping' - the shady side of connecting buyers with sellers on the web

This is a story about a good idea, a long-standing business practice and how the buzz around entrepreneurship and the web can create an industry that looks a lot like a scam.

"Drop shipping" and retail arbitrage are buzzwords created to make a low margin business look attractive to novices hoping to start a business.

All of the businesses and theory are sound, but the way it is being marketed should sound alarms.

Drop shipping

Imagine being able to sell products you do not need to buy on a website for any price you want, and when you make a sale, the actual retailer will package and ship the product to your customer.

Retail arbitrage touches on another impressive sounding principle. You find a product for sale at a price way lower than what it could be sold for if marketed on a premium looking website and advertised to the right audience. The theory is also sound; it is the basis for any proper retail operation. It falls short in that there are large professional retailers that provide the service which makes finding a willing buyer a lot more challenging.

Amazon is an online retail giant, and it was launched looking for items that it could shift in bulk online. Books, music and videos were the original products. (The first product sold was a book in April 1995, and in honour of the customer John Wainright, Amazon has named one of their buildings after him.)

Soon they diversified and began to see the opportunity was not just in retail but the online sales channel and in delivering the products as quickly as possible.

As more people were attracted to look for products on Amazon, it also attracted those that would want to sell products via Amazon.

Amazon would typically determine how many of which products might be sold in any given month and where. Those products could be ordered upfront to ensure they were in the Amazon warehouses ready to be shipped as soon as the order is made. Amazon’s success saw some products sold as house brands; hundreds of products became available as Amazon products raising the ire of those who used to sell it themselves and from regulators concern with Amazon operating as a retailer and a platform. Traditional retailers have long stocked house brands to attract shoppers for the low price commodity items. While some have argued that it may kill competition, sales data suggests that for many products shoppers prefer brands and don’t only buy on price.

Shopify is the next business that is key to the rise of drop shipping. The brainchild of some Canadian programmers that loved snowboarding. When trying to set up an online shop for snowboarding gear, they found little that was easy to use and that worked the way they wished, so they built their own and like many who saw a problem on the web realised that solving the problem for others may be a better business than solving it just for yourself. Shopify is now a $14 billion revenue business with over half a million users.

If you are looking to sell a product, you will find that it does have some great options to manage the hosting, sales, shipping and tracking of any products sold via their platform. It has grown to the point that online stores that have real-world stores can manage real-world purchases via the site too. It works on a subscription model and does not require expensive hardware or software to get up and running.

Shipping too has improved incredibly. The market for courier services has mushroomed allowing for broad coverage, good speed and reasonable costs.

It could not be easier to be a retailer

But as old problems have been solved, new issues emerge and this is where drop shipping looks more like a scheme to part novices from their cash rather than empower online retail entrepreneurs.

There is no shortage of YouTube videos explaining how to set up a drop shipping operation which typically covers step one. Choose which payment partner to use for your website and payment option and then plug the products you want from platforms like AliExpress which stocks just about any product you might want.

You then set the price and start looking for customers.

The best place to find your new customers is the incredible ad machine that is Facebook and its subsidiary Instagram. For the right sum, you can create some very specific targeting (something Facebook is looking to reduce over 2019 following legal challenges relating to discrimination in the US).

At this point you should be watching the orders roll in, only you don’t. So back to YouTube and the invitation to take a master class on how to do it properly. There is always merit in making the time to investigate a potential future investment and business properly, but many of the classes are offered by drop shippers who have realised that there is more money to be made in training than the actual practice. This is true for many so-called great business ventures where enthusiastic business mentors would rather see you succeed using their techniques that applying it themselves.

At some point the reality catches up with the hype and coverage like this resets the expectation from the sure-fire business venture to the real world challenge of managing a retail outlet.

The technology has undoubtedly removed many barriers, but it does not change the age-old truth that a business needs customers and that in retail your margins are as crucial as your revenues.

*The first product sold and paid for online was Sting CD called Ten Summoner’s Tales. Other items were ordered or exchange via the Internet but were either not paid for or not paid for online.

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This article first appeared on 702 : 'Drop shipping' - the shady side of connecting buyers with sellers on the web


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