Watch Out For Drop-shipping Scams!

A popular e-commerce trend has emerged over the last few years. Random guys on YouTube will teach you how to make money from the comfort of your home. It is super easy, fast, and doesn’t take much money to get started, and they only need $500 to teach you! I am talking about drop-shipping.

I sincerely believe there are legitimate drop-shipping businesses out there: smart, ambitious entrepreneurs, who are personally invested in their brand, build strong relationships with their manufacturers, and stand behind their business. However, too many people are selling drop-shipping as a “risk-free” option to make seemingly “unlimited ” profits.

This is what the online gurus are selling: they teach you how to set up a store front online using Shopify, Square Space, etc… While setting up the store, you connect the orders and payments to another an over-seas supplier that actually takes care of the inventory. When a customer visits your online store, they are actually buying the product from China. Then you let the supplier drop-ship the product directly to the customer.

Here is an example. After doing market research, I discover that leather cord jump ropes are selling well. I make website that appears to sell the jump-ropes, but I don’t hold any actual inventory. When the customer places the order, it’s connected to the over-seas supplier which is supposed to “drop-ship” the product to the customer after the order has been placed.

In this supply chain, you make money by taking profits from the difference between what the customer pays, and what you send to the over-seas supplier who ultimately will ships the product. This may seem like a clever idea, but I do not believe it is a sustainable one, which is why people are trying to teach it to you as a course for exorbitant prices – that’s a more sustainable business model.

One huge flaw with this type of business is there is no skin in the game(thank you Nassim Taleb). The “entrepreneur” is trying to start a business where there is no downside. They try to eliminate downside by not holding inventory, because inventory is expensive.

Normally when you sell a product to customers, you need to hold a large amount of inventory to cover customer orders. This means spending hundreds, thousands, hundreds of thousands of dollars or more to make sure you have product available to keep the orders rolling. “Drop-shippers” try to side-step this by relying on a the manufacturer or supplier to hold inventory and ship it out when ordered.

However, drop-shippers that rely on this model are sacrificing product quality and customer service for a quick buck. It is impossible to verify the quality of your product when it is being drop-shipped from China directly to the customer, and if the customer has a problem with the order, customer service will be a headache because you likely have no connection to the actual sale. You run a very high risk of missing orders, and sending out low quality product.

If you decide to truly put your personal brand behind the product, but pursue this half-ass drop-ship strategy, you could inject skin in the game by guaranteeing refunds. However, if the over-seas supplier doesn’t agree to pay, then you loose all the revenue from the sale. So if you made $ 4 profit from a $10 item($6 goes to the supplier), and you have to refund the full purchase price, then you lose $ 6 for every refund – this sounds fun doesn’t it? If you are lucky enough to sell thousands of items using this method, you better be lucky enough to have a fantastic supplier who sends out items promptly, and of the highest quality.

Story time!

I followed an account on Twitter, lets call him Mr. Idiot. Mr. Idiot was 25 years old, and had the Twitter swag of a gangster. He was always “dropping knowledge” on people, telling everyone how it is, acting like a self-help/manosphere and e-commerce guy. Mr. Idiot had quite a following – nearly 23,000 Twitter followers. He regularly hosted live chats “answering” peoples questions about e-commerce, or talking about how successful he was. There was were some problems though, he never disclosed what items he sold or gave out his business name, website, or seller information. After realizing his business was hidden from his followers, I became suspicious that he was either full of bullsh*t, or not confident in his business.

A few weeks went by, then people started blowing up his Twitter comments and mentions. Someone found his business Instagram account. Mr. Idiot was selling watches, but he had a big problem: customers weren’t receiving their orders, their orders were wrong, or just poor quality, but the customers couldn’t get a hold of anyone to help them get their money back. The negative feedback from customers was filling up his Instagram comments, so he started deleting them. This is when I realized Mr. Idiot was full of sh*t. He was trying to run a drop-shipping business and thought he could do so without taking risks, or thought he could simply transfer risks to the customers (i.e. no customer service). At the time I as not entirely sure what happened, but I knew I should not be influenced by this guy.

Since then, I have seen several online “professionals” explain elements of drop-shipping. I combined their advice with my own importing experience, and applied Nassim Talebs Skin In The Game to understand that most of these online “sellers” are likely full of sh*t.

If someone is supposedly making millions of dollars drop-shipping, ask them if they personally stand behind the products they sell. Is their name in the title of the company, do they guarantee refunds, do they have strong relationships with the suppliers? If a drop-shipper does not put his own money or business reputation on the line for the products he sells, DO NOT LISTEN TO THEM, ITS A GET RICH QUICK SCHEME!

Watch for the scammers!

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