Dropshipping has become an increasingly popular method of selling and buying goods online, but it has also sparked a lot of debate around whether it is a legitimate form of business. In particular, there has been a lot of talk about whether dropshipping is a pyramid scheme.
You are here because you are likely interested in dropshipping, you have engaged in a product that is teaching this (and you are unsure), and/or you are looking to make money online and this seemed like a viable direction.
There are definitely some good things about running a dropshipping programs, but there are some drawbacks and also MUCH BETTER alternatives. I am going to be helping you understand all of this as you move forward through this article. I am also going to be covering whether or not dropshipping is actually an “illegal” pyramid scheme, which is a worry by many getting into that space.
First, What is Dropshipping?
Dropshipping is an online retail business model where a seller does not actually own the products they are selling. Instead, the seller partners with a third party supplier who provides the products and ships them to the customer. The seller earns a profit on each sale by charging the customer more than what they paid for the product.
Dropshipping has become increasingly popular due to its low overhead costs and the ability to quickly start up an online business. Many entrepreneurs have found success using dropshipping as a way to make money online.
Here is a look at the dropshipping business model.
You can see as the store owner, you are going to be able to retain the profit difference between teh price you charge a customer, and the price that you are able to ship that product to them for (behind the scenes).
As a dropshipper, you don’t typically have any inventory, you are simply “portraying” as though you are and then you are sending off the shipping details to the wholesaler behind the scenes after your get the order.
There are some good things about dropshipping, and actually quite a few drawbacks and I really want to help you understand both of these.
Some of the Good Things About Dropshipping…
There are several pros to using dropshipping as a business model.
(1) Low Cost. The first pro is the low overhead costs associated with dropshipping. As the seller does not have to purchase any inventory upfront, they can start their business without investing a large amount of money. Additionally, the seller does not have to worry about shipping and fulfillment, as this is taken care of by the third party supplier. There are going to be costs to running an ecommerce store, and memberships to the “wholesaler” programs.
(2) No inventory. Another pro of dropshipping is the ability to quickly start up a business. As the seller does not need to purchase any inventory, they can start selling almost immediately. Additionally, the seller can offer a wide range of products without needing to worry about storage space or shipping.
(3) Lowered Risk (as no ownership of products). Finally, dropshipping is a great way to test out new products and markets without needing to invest a large amount of money. As the seller does not need to purchase any inventory, they can quickly switch to different products or markets without needing to worry about inventory costs.
Now let’s jump into some of the drawbacks of running a dropshipping business, they are actually more obvious than the benefits.
6 MAJOR Drawbacks of Running a Dropshipping Business
Although there are several pros to dropshipping, there are also some cons that should be taken into consideration before you jump into this “online business model”. Sometimes when things sound too good to be true, they are. I have actually worked with FAR MORE struggling within the dropshipping business model, versus those that experience any success at all and there are reasons for this.
Let me help you understand six of the risks to starting a drop shipping business.
(1) High competition: Starting an online dropshipping business means competing with countless other businesses offering similar products, which can make it difficult to stand out from the crowd and make a profit. Remember, anyone can access these same products as you so it becomes a “dog eat dog” sort of environment as to who can offer the lowest prices on the same thing.
(2) Low margins: Dropshipping businesses typically have to pay a wholesale price for the products they are selling, which can lead to low profit margins. This makes it even more difficult when you take into consideration that you will have to pay to market your store, which is where 99% of people fail.
(3) Quality control issues: When you don’t control the quality of the products that you’re selling, it can be difficult to guarantee consistent quality. The wholesale platforms tend to ship products that are from China, so they are “knock offs” of the actual brands that people want to buy and tend to be rife with quality issues.
(4) Poor customer service: Without a physical presence, it can be hard to provide your customers with the same level of service as a traditional shop. This leads to lower end customer service, and the inabiltiy to control the quality of your product naturally will lead to some level of negative reviews.
(5) Lack of control: Dropshipping businesses don’t have much control over the products they are selling, as they are reliant on the supplier to provide them. This can make it difficult to respond to customer demands or ensure product availability.
(6) Shipping delays: Shipping times from suppliers can be unpredictable, which can lead to delays in orders being delivered to customers. It isn’t uncommon for your customers to be waiting 4-6 weeks for shipping as these products are coming from overseas (usually China), with a high rate of damage happening during these travels. This can lead to frustrated customers, and returns which you are going to be responsbile for carrying those costs.
Is Dropshipping a Pyramid Scheme?
The answer to this question is no. Dropshipping is not a pyramid scheme. A pyramid scheme is an illegal business model where participants are promised returns based on the number of people they recruit, rather than based on the sale of products.
Dropshipping, on the other hand, is a legitimate business model where the seller earns a profit based on the sale of the products, though they are not the ones holding inventory those products.
The problems are less about it being a pyramid schemes, and more about being a low-margin, competitive, and over saturated market place. The result of that, is a much lower opportuntiy than another online business model which I want to discuss here.
It certainly is NOT an “ideal” model if you are looking to start a business online, and I want to introduce you to a much superior alternative and one you can get started with right away called Affiliate Marketing.
Let’s look at a comparison between the two.
Dropshipping vs. Affiliate Marketing – There is a CLEAR Winner
Dropshipping is a business model where you don’t have to own or store inventory. You simply partner with a dropshipping supplier and list their products for sale. While dropshipping is an attractive business model for its convenience and low startup costs, affiliate marketing offers much more potential for profitability.
With affiliate marketing, you don’t need to worry about stocking, shipping, or tracking inventory. Instead, you simply promote another company’s products and earn a commission for each sale you make. Additionally, the potential for earning more money is much greater with affiliate marketing since you can earn a percentage of each sale, rather than just a flat fee for each product. Furthermore, as an affiliate marketer, you have the potential to earn residual income from each sale, as well as from recurring customer purchases.
As you can see from the table, affiliate marketing can be a better business model for those who are looking for a low-cost, low-risk, and low-maintenance business venture. With affiliate marketing, you don’t need to invest in inventory, manage orders, or provide customer service. Additionally, you have the flexibility to promote a wide variety of products without being limited to a specific supplier’s inventory.
However, dropshipping can be a good option for those who are willing to invest in building a brand and want higher profit margins. Ultimately, the choice between affiliate marketing and dropshipping will depend on your specific business goals and preferences.
If you want to learn how to become an expert within the affiliate marketing world, and how to harness this “preferred” business model, I highly recommend that you get a free test-drive account over at Wealthy Affiliate. You will be able to get up and running in a matter of a few lessons with you own niche, affiliate marketing website (and I will be there to personally help you out)
Conclusion
Dropshipping has become an increasingly popular business model due to its low overhead costs and the ability to quickly start up an online business. Although there are several pros to dropshipping, there are also some cons that should be taken into consideration.
Despite what some people may think, dropshipping is not a pyramid scheme and is a legitimate way to make money online. However, there are much more viable and lucrative business models within the online world…that are also much more cost efficient to implement. Affiliate marketing being one of those.
If you want to start a business online, I highly recommend affiliate marketing and doing so through Wealthy Affiliate. You can get started for free, and no experience is necessary.
If you have any questions about any thing discussed in this article, please leave your questions below and I will be happy to help you out.
Thank you Kyle for your article. I wasn’t fully aware of drop shipping and there being a business associated with it. The pros look good but the cons far outweigh the pros. I remember ordering something a couple of years ago, and yes, I had to wait for it to arrive from China. The product was inferior and I assumed that if I sent it back, I wouldn’t get a refund and I wouldn’t even have their inferior product.
Affiliate marketing is by far better and I know that Wealthy Affiliate offers the best opportunity for those interested in affiliate marketing. They offer everything from education, community support, domain registration, and excellent, second-to-none, hosting.
Affiliate marketing takes effort, takes work. If a person is willing, they can make a good income as an affiliate marketer.
Hey Mike, like you I have ordered several things online (including from Amazon) that took weeks and sometimes months to deliver. Then when it came, it was not the product that was disclosed, and you could tell it was a cheaply made, knock-off of legitimate products. These are often times shipped from AliBaba stores (or the like), and if you are ever in a situation as a customer that you need to return it, good luck.
These are key issues with this model. You are putting your personal brand behind knock of products, with slow shipping times, no customer support, and poor return policies (and long shipping delays).
Personally I would rather promote the top brands in the world, and any products/service that I want. Affiliate marketing affords us all this opportunity, and as an affiliate you can choose from over 550 million products to promote (including every major brand). A much more elegant and opportunity rich business model.
Thank you for sharing this informative article on dropshipping. It’s true that dropshipping has become a popular way to start an online business, and it’s certainly more a legitimate opportunity than a pyramid scheme, but it’s important to do your research and understand the pros and cons before diving into it. Personally, I have tried dropshipping in the past and found that while it had its benefits, there were also significant drawbacks (one supplier just significantly changed its TOS with little warning).
I look forward to reading more about your perspective on this topic!
Thanks for sharing your experiences Aly, and that is another potential drawback in that a supplier can either have “stock” issues, change their TOS, or in some cases go out of business. If you have built your sales funnel around that supplied, you could be SOL.
Dropping shipping has been around for a while, I was once interested in drop shipping before I turn to affiliate marketing. Drop shipping is legit but you have to put in the time to do your homework well to have success. There have been so many people that have gotten into this line of work with good success. I once heard a 19-year-old that made millions and was offering a course to show people how he did it. Thanks for sharing.
It is legit, but the opportunity has been a diminishing one as you now have 100’s of people (sometimes 1,000’s) promoting the same lower quality products out there. Then once you get your store set-up, which tends to come with high ongoing costs, you have to somehow market these to people. And that is where 99% of all dropshipping “ventures” collapses.
There are much better business models, and affiliate marketing is one of these. But it is key and critical to learn how to build a foundation for your business and attract an audience, and that is one of the first focuses within training environments and platforms like Wealthy Affiliate.
I stumbled upon this article and I really found it to be very informative, Kyle. It’s great that you touched on the potential risks involved in this business model, as it’s important for people to be aware of both the benefits and drawbacks before diving in. Your discussion of the pyramid scheme misconception was particularly helpful in clarifying the difference between dropshipping and an actual pyramid scheme. Thank you for providing a balanced perspective on dropshipping as a potentially lucrative opportunity. Keep up the good work!
There are definitely more risks, than there are positives in my opinion. Some of the major drawbacks are the fact that people are often times spending a lot of money on their dropshipping set-ups only to be promoting inferior “knock offs” of the major brands that people want to buy.
Combine that with the fact that 100 others are doing the same thing, and shipping times and no customer support if the product is low quality. It is a recipe for a poor customer experience, high costs, and lack of brand creation.
There are much better lower overhead, more scalable opportunities out there and affiliate marketing is certainly one of these.