Dropshipping is all the rage online. You’ve probably seen articles or stories about it before. Hell, even Tim Ferriss talks about it in Four Hour Work Week as an excellent way to set up a ‘Muse’ business. Unfortunately, the reality is dropshipping is a horrible business.
The business model is incredibly simple, and theoretically extremely profitable. Here’s how it works:
- You set up a virtual ‘store’ that advertises lots of products. You don’t own those products
- Someone buys a product (let’s say it’s a football) from you for $20
- You go to a supplier in China and buy a football for $5. You have the supplier ship the football to your customer, not you
- You pocket $15
I wrote a detailed look at the economics of drop shipping if you want much more detail on what I call the “dropshipping profit equation.”
But, at first glance, dropshipping sounds wildly profitable.
So as someone interested in all things business/entrepreneurship, I looked into the business model. Over 18 months, I tried three different dropshipping stores. I legitimately thought it could serve as a tool on my journey to $10K a day at 30.
Here’s what happened.
Dropshipping store #1: zero sales
Dropshipping is advertised as “easy”, so I went pretty low-hours on this one. I set something up in less than an hour on Shopify and figured I’d sit back and see what would happen.
As you’d expect, nothing. Nobody even went on my site, although that’s probably because there was nothing on the site aside from the products I was trying to sell.
Result: I shut the store down after a month because I didn’t want to pay Shopify’s monthly fee.
Dropshipping store #2: nominal improvement
I kept seeing more material online about how dropshipping is a great business. After more consideration, I decided to give it another shot with the sole goal to make money.
Again, nothing happened. I had no clue what I was doing, and my store wasn’t set up well to sell things. For example, page loading speed is a huge predictor of conversion rates. Every additional second a page takes to load is another considerable percent of your customers saying “screw it” and backing out of the page.
Check out the famous Crazy Egg burndown chart:
As a consultant, this intuitively makes sense and matches with what my business school professors would tell me. However, at the time, I had no clue my store was slow, or how to test whether it was. So that ‘business knowledge’ didn’t help here
Result: Loss of a couple hundred bucks, but a ton of execution/experience gained
Dropshipping store #3: Finally working
It took almost another six months, but I decided to give it another shot. At this point though, it wasn’t about doing it for money. Instead, the goal was experience.
For my old day job and now side consulting, I regularly meet with CEO’s to talk with them about strategy. I work on highly confidential acquisitions and analyze information the public doesn’t have yet. In terms of ‘cool experience’, I have had some awesome experiences.
But here’s the thing: My day job doesn’t allow me to learn how to run a business.
I mostly consult for >$10B companies or Private Equity firms so each project can only impact a portion of their business. Consulting does leave a knowledge gap of how to run a P&L, and that’s the experience I wanted.
So to make sure I got that experience, I wanted to make sure this dropshipping store would work. In other words, you can’t run a P&L if you don’t have any profits and loses.
To make sure that dropshipping worked this time, I put in the effort to understand the nuances of the model
I didn’t buy a $1,999 course from someone online! Nope, I just went to YouTube and watched probably a dozen hours of videos.
The result was a dropshipping store that was set up for success. I didn’t expect it to do well, maybe a few sales here and there. I was surprised the day I was hanging out with friends, and I got my first sale.
Within a week of that, I had $1,000 in sales in one day.
My time investment was still pretty low. For those who read the piece on how to read 75 books a year while working 80 hours a week, you know that tracking things is how I stay on top of things. For this dropshipping store, I invested a total of exactly 40.5 hours and generated more than $9,500 in revenue.
Two weeks after that first $1,000 day, I decided to sell the store.
Dropshipping is too antiquated to succeed in today’s world
In the first paragraph, I mentioned how Tim Ferriss talked about drop shipping in Four Hour Work Week as a great business model. It’s a great book and Tim is a champ, but 4HWW came out in 2004. Things have changed online now.
Dropshipping just can’t work in today’s world, and it’s Amazon’s fault. As a company, Amazon has made some brilliant moves. The most brilliant strategic move they’ve made is Amazon Prime….which came out in 2005, or exactly one year after 4HWW endorsed dropshipping.
From a business strategy perspective, Amazon Prime is brilliant for a lot of reasons. However, the one reason we care about most here is the free 2-day shipping.
Dropshipping doesn’t work in a 2-day shipping world
We’ve reached a point in the world where customers have begun to expect two-day free shipping as the norm. Anything more than that is a HUGE problem for customers. I’d also be willing to bet that Amazon will lower two-day shipping to one-day shipping at some point over the next few years.
Here’s why that’s the kiss of death for dropshipping: products purchased through dropshipping typically arrive in 14–28 days. It takes that long from them to be shipped from China to the USA.
Back in 2004 when 4HWW came out, there was no such thing as Amazon Prime and 14–28 days was perfectly reasonable. That doesn’t fly today.
As a result, a large majority of my time spent dropshipping was dealing with customer complaints. In fact, I had one customer email me two days and one hour after his order to complain that the order hadn’t arrived yet. He made sure to point out that he had waited the full two days before complaining.
Success in any business is about building relationships with customers. Dropshipping just isn’t going to be successful long term as the model sets customers up for disappointment.
Despite dropshipping being a horrible business, I am glad to have done it. But I wouldn’t do it over again
I don’t think anyone can make a long-term sustained income while dropshipping products from China.
What I do believe though is that the practical education I learned from dropshipping was incredibly valuable. Looking back, I’m glad to have done it.
However, if I could start over again, I wouldn’t have done dropshipping. I’d look for another way to get practical experience that is much less capital intensive. Things like tutoring and selling bottles of water outside on hot days are equally viable businesses if your goal is to learn a P&L.
So I hope this article is helpful to you if you’ve been considering going into dropshipping. There’s some value to be learned in doing it, but unfortunately not a lot of long term money. Even more, there are a lot better ways to get the P&L experience that are much more affordable.