The Side Hustle 11: Do Dropshippers Really Make Money?

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Welcome to all the new people who have signed up to my newsletter, The Side Hustle. A reminder that I only send one email each weekend, with an ecommerce tip, tale or yarn.

You've probably wondered at some point, if dropshippers really make any money. 

The short answer is no. However, I encourage beginners to ecommerce to try it - I'll get to that later.

Firstly, let's not confuse a dropshiping online store with an online marketplace, which can make money.

A dropshipper - you know, those guys you see on Instagram with the rented Ferrari, is someone who typically finds manufacturers, often from China, and lists their products on their site. That's about where the relationship ends.

A marketplace is (usually) a larger, reputable ecommerce business that sells a combination of their own brands, while also allowing other brands, or individuals to list their products on their website - think Amazon, eBay, Walmart, ASOS - just about all of the main department stores have an online marketplace.

The key difference is that the dropshipping online retailer I'm talking about has just about no relationship outside of a transactional one with their supplier, while marketplaces still work with their brand partners on things like marketing, and often have some input into product ranging. A marketplace also generally takes a commission of the sale, whereas a dropshipper will take an order from the customer, and then place a new order from the supplier, who then ships the product to the customer.

OK, so now that we've got that out of the way, here's why a dropshipper generally won't make money.

Poor product margins

 I know, I know, here I go again talking about product margins - well, I'm not sorry, because 99% of drophsippers fail here.

Put simply, if you're planning to run a side hustle that earns you a few bucks a week, and you have no plans to hire anyone, grow your business, or generally expand, then you can probably get away with this as a hobby that makes you a few dollars. I like this - it's realistic, and it helps you fine tune your ecommerce skills, and allows you to make mistakes that won't cost you your life savings - but it wont make you rich.

If you're planning to scale your dropshipping store, pump decent money into paid ads, hire some staff to help you, and bolt on some nifty apps to your Shopify store, then you'll most likely never make any money as a dropshipper. In other words, your business is not likely to become big, nor profitable.

Let me break that down:

Your average profit margin on a dropshipping product from China is around 20-30%. Sure, you can aim higher, but that often puts your retail price higher than what your customers will find on Amazon, Temu, or the plethora of other mainstream sites selling similar products to yours - We'll come to the danger of that soon.

If you're making a 20% profit on your products, it's just not going to work, full stop. In other words, you're selling something for $100, and of that, you keep $20 after paying your supplier.

If you're making a 30% profit margin on your products, you could in theory put 15% of your projected sales into ads and a little website maintenance, some Shopify and app subscriptions, and take a 15% net profit - and that's your very little side hustle.

The reality is, your business will likely always be small though, because 15% is a very small amount to run your business with, let alone grow it. Compare this to my 50/30/20 rule in 'traditional ecommerce' which states that 30% of your sales, spent on running your business, would be a good result.

Why is investing 15% of your sales into growing your dropshipping business not likely to work? It's not enough to do much with. You'll often need:

- An increased marketing spend at some stage if you want to accelerate, especially in your early days.

- 15% of very small sales spent on marketing is likely to be such a small amount that it won't drive sufficient visitors to generate decent revenue, so you'll lose interest and drop off. 

For example, if you budget to get 10 sales per month, at $100 AOV (Average Order Value) that's $1000 in sales. Planning to spend 15% of that on ads is $150, which is likely to get you no more than 150 visitors at a very rough, and probably unrealistic CPC (Cost Per Click) of $1.

An average conversion rate of 2%, means that of your 150 visitors, you will get 3 sales, totaling $300.

Sales: $300
Less Marketing: $150
Less Cost of Goods: $210
Profit: -$60

So you lose $60.

So, you can't scale your ads, because every dollar you spend is losing you money. You try and scale your organic traffic, but that takes time, and I haven't met too many patient dropshippers, plus you're selling a pretty generic product that doesn't really get people talking - which is the best way to grow organic traffic.

So you have two choices:

1) You lost interest and stop trading.

2) You spend a tiny amount on marketing, or nothing, and try to build up organic traffic, while not counting your money - which becomes your hobby.

No control over the supply chain

 Speaking from experience, it's hard to maintain any consistency over the delivery of your products, when they're often being shipped from overseas, by a number of different suppliers. Often your products will be shipped late, in your supplier's packaging, not yours, which can make your customer feel duped (why didn't they just order from your supplier instead of you and save money?) 

The number one or two reason that customers will reach out to an online business after placing an order is to ask where their order is, so by losing control of the fulfilment process, it's likely that you will receive plenty of emails, and if you're delivering late, or unable to provide information with accuracy as to where your orders are, then you might be looking at a low repeat purchase rate.

Limited relationship with the customer

Whether we like it or not, the customer is key, and if we're unable to influence the customer's experience, it's hard for us to make an impression. I subscribe to the Peak End Rule, which is to say, that a person judges their experience of a certain event, based on how they feel at the peak, or the end. In other words, significant memories help to form impressions. As a dropshipper, it's very hard to be able to influence the peak or the end, and as such, how can we influence the customer's experience, when we have very little to do with it?

I'll finish by saying, that I started in online retail in 2005. Since then, I've been lucky enough to work with some incredible brands. I've helped make more millionaires that maybe anyone else in ecommerce, and I'm yet to work with one dropshipper who has become a genuine millionaire. For me, traditional ecommerce is the way forward, however, I encourage people to cut their teeth in ecommerce, and try a dropshipping store, and allow yourself to make those mistakes for free, that we all inevitably make.

A final thought - with the expansion of Temu and other platforms into western markets, it's a sure sign that offshore, particularly Chinese manufacturers are looking to sell more directly to consumers, rather than business to business, which means that if we are selling generic products, we are unlikely to be competitive on price. The question for dropshippers, as it is for all online retailers, is - how can we retain a point of difference, and why should a consumer choose our product over something they've seen on Temu, or one of the other many competitors out there.

So, give dropshipping a go, but consider it part of your training, and when you're ready to start your forever business, I'll be waiting.

Until next week,

Paul

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