Are Dropshipping Businesses Worth Buying in 2021?

posted in: General | 0

So, you’ve come across a dropshipping business that’s for sale. Or perhaps you’ve stumbled across your 27th video this month of an online guru posing in front of his Lamborghini trying to convince you to purchase his dropshipping course. In either case, it’s probably worth talking about whether this once-coveted business model has any place in 2021. Before we do that, it’s probably worth answering an important question.

What exactly is a dropshipping business?

In simple terms, a dropshipping business is an eCommerce website where customers can buy products. From a customer’s point of view, it’s not very different from most eCommerce websites such as Amazon. However, what makes an eCommerce website a “dropshipping” business is that the owner holds no inventory. In fact, it’s a fairly simple process: A customer makes a purchase on your website, you forward the order details to the supplier, the supplier sends the product to your customer, and you make money off the sale. Sounds perfect, right? Well, not exactly, primarily due to a few reasons.

Margins on dropshipping businesses suck

Look, the simple rule of business applies here: You have to spend money to make money. Starting a dropshipping business is very cheap. All you need to do is buy a domain name, set up an eCommerce store, and find a few suppliers who’ll let you list their products for a small markup. All of this can usually be done for under $50 and that’s why dropshipping businesses gained so much notoriety to begin with.

So, you’re not risking much but you’re likely also not making much. Firstly, the products listed on the dropshipping website are likely not unique as the same supplier is providing these products to many other online retailers, all of whom you’re now competing with. When you do sell a product, you receive a small % markup while the majority goes to the supplier because after all, the manufacturer is taking the risk in creating the product and the supplier is taking the risk in buying the product in bulk. So, the only way to generate a lucrative income from a dropshipping business is to make sure you sell a lot of volume. Is there a workaround for this? Well, kind of.

You can try selling high-ticket items

One way to combat the low profit on items is to sell high-ticket items. Your profit margin % will likely stay the same but you’ll make more dollars of profit per product. However, it’s important to note a few things: When you’re selling high-ticket items, you’ll be doing a lot more customer support (yup, that’s still your responsibility). After all, a customer who purchased an $800 TV is much more likely to be worried about the whereabouts of their product than someone who purchased a $9 pair of socks.

Another downside of selling high-ticket dropshipping items is that a single fraudulent “dispute” can wipe out weeks worth of profit. For example, a customer purchases the aforementioned $800 TV and receives it. However, they file a chargeback with their credit card company claiming that they received the wrong product and the chargeback is resolved in their favor. Now, you’re out $800 and the supplier won’t refund you either because they have proof they shipped out the item. Assuming you make $50 in profit per transaction, you’ll be selling a heck of a lot more TVs before you make up for that loss. It may seem like a far-fetched scenario but it happens more often than you’d think and dropshipping businesses that sell high ticket items are the most susceptible. Now, not to add to the bad news but there’s one other thing that’s made dropshipping businesses very tough to operate nowadays.

The nemesis of dropshipping businesses: Amazon

It’s unfortunate but the reality is that Amazon put a lot of eCommerce websites out of business, both dropshipping and non-dropshipping. Most of the products you’ll be selling on your website are likely already listed on Amazon, perhaps by other retailers or the supplier or manufacturer themselves. This means it’s likely cheaper on Amazon than on your website, shipping is almost guaranteed to be faster, and customers are aware that they get the repuability and reliabilty of Amazon customer support in case a product isn’t to their liking. Given all of that and the above, it’s really difficult to justify buying most dropshipping businesses in 2021.

So, no dropshipping business is worth buying anymore, right?

Well, it’d be tough to make a definitive statement for all dropshipping businesses but the above certainly applies to most. Now, there are some characteristics of some dropshipping businesses that do make them lucrative and worth considering buying:

  • Exclusive or difficult to obtain supplier relationships. If the dropshipping website sells products from suppliers or manufacturers that are typically very tough to obtain a relationship with, then that definitely holds its merits. You still run the risk of the manufacturer or supplier selling directly on Amazon or on their own website but outside of that, there’s certainly viability.
  • Highly niche or “specialty” products. Firstly, you likely want to avoid broad niches when buying a dropshipping business. If a dropshipping business is selling “general electronics” or “clothing”, it’s probably best to avoid altogether. Now, there are certain specialty niches where people will pay a premium over Amazon and go to a specialized online retailer because it requires specific knowledge. This is particularly true for collector’s items and niche parts. For example, if the dropshipping website sells aftermarket car modifications, it may be worth considering as customers likely require specific advice on the products they’re purchasing that an Amazon or Walmart support representative can’t provide.
  • Established online brand name. There are also cases in certain niches where the customer base simply prefers to shop on a website they’ve used for many years over something like Amazon or Walmart. This is usually true for niches targeting an older demographic who are okay with paying a small premium to purchase from an online brand they’ve shopped with and trusted for a very long time.

The final verdict

As much as we want dropshipping businesses to be viable purchases again, most (not all) are very difficult to justify in 2021. They have little competitive advantage, razor-thin margins, and require a lot of volume to remain sustainable. If you’re considering buying a dropshipping business, we’d suggest ensuring it meets one of the three “exception criteria” above and ultimately has some sort of competitive advantage that’s not easily replicable with $50 and a couple of hours. If you think you’ve found a dropshipping business that’s seriously worth considering buying, we’d be happy to take a deeper look or answer any questions!

Follow Rapid Diligence:

Rapid Diligence provides comprehensive and data-driven due diligence services for online businesses at every price range. Whether you're ready to close or considering buying an online business, we're here to help!

Leave a Reply

Your email address will not be published.