Plain and simply, margins, reduced barriers to entry and informed consumers are why you are not making money as an eCommerce entrepreneur. I hate to say it but drop shipping as a business model is on the way out, but hopefully it doesn’t die.
Please don’t kid yourself that you are the only person that is winning with a high demand product because the only person that is winning is your supplier.
Why is drop shipping dying?Arbitrage, basically. Due to lower barriers of entry and consumer awareness of ability to purchase direct from the supplier has created a higher demand for products on Aliexpress and related. This has increased the price that your supplier is willing to accept for said product, but at the same time your customers are only willing to pay the same. The margins are being squeezed.
How to mitigate the risks?
Private label your products and buy in bulk after you have proof of concept. In other words, use Aliexpress to test your products and if there is considerable demand switch to a private label option as soon as possible. Lets discuss private labeling first. Creating your own brand around a winning product will instill trust in what you are selling. This has flow on effect as increase in repeat customers as well as higher perceived value as opposed to substitutes. Higher perceived value that’s what any entrepreneur wants to hear. In terms of price it could earn you an extra 300% or more because there is a trust factor built into the value of the product. Please note that just slipping on a sticker isn’t going to add 200% of perceived value onto your product, you will still need to market the product and additional. Secondly with regards to private labeling you will also need to buy stock but why? Plain and simple, buying in bulk increases margins. There is no doubt about that. However buying in bulk has its own issues as well.. Buying too much creates a risk of obsolete stock or cash risk (stock that goes out of favor and doesn’t sell or you run out of cash because you have invested in too much inventory), and buying too less creates a stock out risk (running out of stock, you miss out on sales). We solve this by working out optimal inventory stock level for your business which in turn creates a profitable and cash flow positive experience.
Additional things to note.
Buying in bulk is not an easy feat as there are many things to consider. To name a few, Logistics, Foreign Currency Changes, and Carrying Costs. Logistics is probably the most important as you will be more interested in your supply chain then you were when drop shipping. Reducing lead time between your supplier and your fulfillment provider is one strategy to mitigate this risk. Foreign Currency changes are another issue if you are trading between multiple markets. Possible ways to mitigate are adopting a single currency or financing options (forward contracts that lock in the currency value etc). The final thing that I want to touch base on is Carrying Costs. Imagine holding 1,000 units of a particular SKU in a warehouse that costs you $100,000 per year. You effectively are now adding $1,000 of carrying cost on to each individual item. What if that item only has a margin of $500, you’ve made a loss. All important areas to consider when moving from drop shipping to private labeling and buying in bulk.
All and All.
Drop shipping is not dead, but it is definitely dying. If I was a drop shipper I would seriously be checking my numbers to see if this model is right for me. Yes there are still opportunities drop shipping but as we have seen previously the arbitrage of those opportunities are getting less and less. Less profits lead to lower cash flows and lower cash flows lead to businesses that suck.
Yours,\ Thomas Sparks – Ecommerce Accountant (www.infinity22.co)