Why you should hate dropship ecommerce like I do.

Why you should hate dropship ecommerce like I do.

For the last few years, buyers have been purchasing a type of website that, left unchanged, is almost always doomed to fail. The worst part is, it’s probably one of the most popular types of site being sold.

This is part of a series of guest posts by Justin Gilchrist the cofounder of Centurica, a company that provides due diligence and website assessments to people who buy web based businesses.

I’d like to show you how you can avoid the same fate. More importantly, I’ll take you through a strategy that’s been working for over 8 years now, turning these problem sites in huge profits for buyers.

A few months before writing this I sat opposite a lady on a flight and we had one those really awkward cross-aisle conversations. The type that happens when the other person sees Google Analytics on your screen and realizes you also have an internet business, but neither of you know if the other person really wants to talk.

Originally, she said she ran an ‘ecommerce company’. Five minutes in, it was actually a farming supplies store in the British countryside that happened to have a website … where about 5% of all their transactions happened, compared to the other 95% that happened in store. Her website was three months old and she was very proud of it. I didn’t have the heart to tell her otherwise.

I guess running an ecommerce company sounds so much cooler than “I run a small shop” but that wouldn’t be the first time I’ve heard ‘ecommerce’ used for all the wrong reasons. People’s definition of ecommerce varies depending on who you speak to.

We frequently work with buyers at Centurica where someone wants to purchase an ‘ecommerce business’. Sometimes, they want an online store. Sometimes, they’re just referring to any business that transacts on the internet – like a content site.

Both are technically ecommerce, but not the online store we usually mean.

Ecommerce can be split up into

Physical Ecommerce (PSE) – an online store selling a physical product that is either warehoused and dispatched by the owner, or warehoused by a third party fulfillment center such as Amazon FBA or ShipWire.

Drop-ship Ecommerce (DSE) – an online store that also sells physical products, but these are dispatched directly from the manufacturer or wholesaler.

Digital Ecommerce –  is a website that sells one or more digital information products where the transaction happens on the site. If this were an Affiliate site, the user would be sent elsewhere to make their purchase. If the user is taken to a third party hosted page to make payment (like many shopping carts do) then it still counts as Digital Commerce, providing the site owner also owns that cart transaction.

Knowing the difference is pretty important.

One of those three models comes almost doomed to failure unless you’re able to do something about it. Can you guess which one? Pretend for a minute that you didn’t already read the title.

Here’s the problem with drop-ship

In my opinion, drop-ship ecommerce (DSE) holds the least value out of all three of those types of business.

And to clarify, the ‘bad’ kind of drop-ship are those stores that sell generic products that are easy to source. The kind where you type ‘drop-ship directory’ into Google and your supplier pops up. If you have a site with a distribution agreement, or products that are difficult for competitors to find elsewhere, then the rules change.

New buyers tend to see DSE as being extremely low maintenance. After all, you’re just sitting watching the orders come in while someone else does all the hard work right? If you’ve been around for a few years you’ll probably know anything that seems like easy money on the internet is a problem waiting to happen! Less work means far less reward and whole host of other issues, but we’ll get to those soon.

In reality, Digital Product Ecommerce tends to be the lowest maintenance of the three different types. Outside of customers being unable to open a zip file (yes … it happens), and people asking for a refund, there’s very little maintenance that you need to do providing the product itself is evergreen.

Meanwhile, drop-shipping (which everyone assumes is the easy option), is probably tied second with Physical Ecommerce (PSE), often to people’s surprise. This is providing you have a PSE store where you:

1) Use a fulfillment center to warehouse and dispatch your goods, and a shopping cart that automates most tasks for you, like sending the orders to that fulfillment center when they come in.

2) Outsource or hire someone for basic customer support and

3) Set up triggers with your suppliers for automatic reordering whenever stock runs low. Again, this is something most modern shopping carts will automate.

You’re likely to spend about the same amount of time maintaining a physical ecommerce store (with fulfillment) as you would with a drop-ship one, so the argument about maintenance becomes redundant.

But you promised ‘hate’ in the title …

Being ‘comparatively not as low maintenance as everyone thinks it is’ is hardly a crime or a reason to loathe drop-ship ecommerce. The maintenance issue was merely making a point that DSE’s biggest perceived benefit actually isn’t that much of a game changer.

My personal vendetta against drop-ship ecommerce is that the business model is seriously flawed. When you sell goods on a drop-ship basis, you will always have the smallest margins in the supply chain. UPS will often make more than you do on a typical transaction.

DSE margins are usually so slim there’s not enough left to run paid traffic campaigns. And love or hate paid traffic, most new buyers soon learn this is the ONLY reliable and consistent way to grow an ecommerce business.

Look at it this way – organic traffic is nice, but difficult when you sell a generic product with the same description as everyone else and very few genuine product reviews. You could start a blog and you will get traffic, but most of that traffic will read the article and bounce. Ecommerce blogs typically have low conversion to sales, even with remarketing. Social marketing works well in niches where people care enough to share their love for the products you sell, but what if that product is a lawnmower … or worse still a pubic hair trimmer? Suddenly, your only source for new customers are those where you have to pay to reach them.

Based on the average conversion in your niche, and the cost to buy one click (which is dictated by the other advertisers who all have bigger margins if they’re supplying direct), the amount you would spend to get a sale usually doesn’t generate enough gross profit to make buying clicks sustainable. I’m sure there are exceptions or sites that convert so well, they buck the trend but you’ll find this isn’t the case for the majority of drop-ship sites that you look at.

This why most drop-ship stores rely on Organic Search traffic.

The owners try paid traffic and quickly give up. But we all know that an ecommerce store without paid traffic is like a goldfish in a shark tank right? Besides never being able to hit scale that matters, you’re stuck in a market dominated by competitors who can and will spend whatever it takes to steal your market share, and you’ll be defenseless to do anything about it.

If that wasn’t bad enough, you might also be competing against your own suppliers, who can offer lower prices if need be and spend more to advertise than you ever could.

In short, DSE is a flawed model that SHOULD never scale. It sometimes does, but it’s usually short-lived. Buy at the wrong time and you’ll be left paying for the seller’s mistakes.

So wait, I should never purchase a drop-ship Store?

Not quite.  Drop-ship purchases have been some of the most profitable ones I’ve ever made. The problem comes from purchasing a drop-ship store and leaving it that way, expecting untold riches and a place on the Inc 500.

If you buy DSE, do so with a healthy dose of reality. You could keep it as is, but chances are you’ll find it difficult to grow and scale, and often struggle to just maintain your current position.

A more effective strategy for renovating drop-ship sites is to see it for what it really is – an opportunity to acquire customers cheaply and build a more sustainable system around what is already there.

Take this example

You purchase a store that sells stationery and office supplies to businesses that order online. Currently, they drop-ship directly from the manufacturer and have an average of 100 orders each month. The site generates a profit of $10 on a $100 average order size.

Most of the traffic comes from organic search and the seller has told you PPC is too expensive and doesn’t work. When he tried it, he experienced a conversion rate of 2% and an average cost per click of $0.80

Your first step would be to look at the most popular 20% of products that account for the majority of revenue. In this case, it’s pens, staples and paper. You can order these products directly from the manufacturer in bulk and pay a wholesale rate. On stationery, the margins are significantly higher when you buy wholesale as it’s a commodity item dominated by low cost Turkish and Chinese imports.

Next, you setup an account with a fulfillment provider like Shipwire. They handle all of your warehousing and shipping just for these new products. After Shipwire’s costs have been considered, let’s assume you’re now making an average profit of $70 on each $100 order that you dispatch from the fulfillment centre. All the other long-tail products like lamination machines or laser toners are still drop-shipped as it makes no sense to keep inventory just for the occasional purchase.

Your profit on a sale now averages $60 on a $100 order. This is an average of the majority of products where you earn $70 and few drop shipped items where you still earn $10.

With increased profit per transaction, paid marketing is now back on the table.

Based on the figures above, 100 clicks would cost $80 and generate 2 sales. Previously, this equaled $20 profit (a $60 loss after marketing costs are removed) whereas now, it’s $120 (i.e. a $40 profit after marketing costs). If a campaign works on Google Adwords, then it’s highly likely it will work well with retargeting platforms and paid social too (e.g. Facebook or Twitter Ads), often at a fraction of the acquisition cost of Google.

You now have a system that’s scalable and gives you far more defense against new competitors. You’ve also increased the value of what you purchased several times over before even thinking about recruiting an extra visitor. Any kind of strategy that doesn’t involve the ever-vague “doing SEO” instantly gets my vote.

Conclusion

So on reflection, hate was a little strong.

If you own or you’re thinking of buying an ecommerce store, then you should think twice before diving head first into drop-shipping as a model.

That said, you can turn a negative to your advantage and acquire drop-ship ecommerce sites, providing you intend to change the model, and you’re able to do so quickly.

In Digitally Wed, I go into some depth about how to avoid the type of purchases that appear great on the surface, but deliver mediocre results because of a flawed business model. You can download or order a copy really soon from Flippa – with a special price just for Flippa members. Stay tuned for my next post to get this deal.

Happy Hunting!

5 Simple Rules for Running Ecommerce Websites

In 2010, Dropship Ecommerce was one of the most popular type of site listed on Flippa, not far behind affiliate and Adsense as a site’s primary model. Flash forward to 2013, and the honeymoon is pretty much over: ecommerce sites now account for a much smaller percentage of listings, and valuations on these sites have hit an all time low.

If you remember the whole ‘flipping mania’ thing that happened around 2010 (when flipping sites went viral in the Internet Marketing nichenot to be confused with a 80s wrestling event), you’ll know buyers were taught to look for passive investments – just like investing in gold or property. These buyers bought Dropship Ecommerce sites by the boatload, but quickly realised that to make this work was anything but passive. They were sold the dream of hands-off recurring cash that they would eventually trade in for a huge payday, but often ended up with a template site in a high competition niche that either failed to perform, or required a ton of work if it did.

The end result?

People fell out of love with ecommerce, and moved on to sexier business models like Lead Generation, Mobile Apps and Member Products. Think of this article as marriage counselling for buying ecommerce sites and for one simple reason.

Currently, ecommerce sites have one of the lowest profit to selling price multiples of any business here on Flippa. That means $1 spent on an ecommerce site, if managed correctly, is likely to provide a better rate of return than any other type site. If you’ve never considered an ecommerce purchase, then there’s no better time than the present; likewise, if you own or have previously bought or sold ecommerce sites but you’ve lost your passion and enthusiasm, I hope this article will help to turn things around.

Rule 1) You can’t succeed doing what everyone else is doing

Someone, somewhere, started a rumour that you can take a bunch of generic dropship products sold by hundreds of others, list them at average prices on a template ecommerce store and be successful.

My guess – it was knowledge from an ebook, and started as a ‘special offer’ on a certain forum I’m sure we all know. Frankly, there’s probably no surer way to go broke. One of the main complaints from buyers and owners of now abandoned dropship stores, is that it was too difficult to attract traffic and generate sales. The chances are, this is why:

a) If your product comes from a dropship directory or catalogue it’s likely competition will be immense. Just to be seen, you need to invest in enough SEO to outrank the manufacturer (who often sell the product too), other dropshippers, distributors, Amazon and Ebay.

Assuming you manage this on some long tail product search terms, you’ll either have to be the cheapest (unlikely as a dropshipper) or offer the best service / brand familiarity (unlikely with Amazon or Ebay competing) to get that person to buy.

b) Alternatively you try Paid Search, but aside from facing the same problems as in a), you also have the issue of margins as the profit you make on a product and your conversion rate have to be high enough to pay for that click.

In most cases this just doesn’t happen leaving you with a lot of expensive clicks and few sales. This leads to Rule 2.

Rule 2) Your best chances of success will come from original products in a high demand niche.

Original products don’t have to be products that aren’t sold anywhere else, just products that aren’t widely available to resellers. This means getting to know your niche, finding out what’s in demand, and making contacts amongst sellers. Here are a few examples that I’ve used with Ecommerce sites I’ve owned in past in niches to find new and original products to sell:

  • Trade Shows and Exhibitions. As well as being a tax deductable business trip (the kind of ‘business trip’ where the nights are more important than the days!), Exhibitions and Trade Shows are packed with new product ideas, and manufacturers and retailers keen to make more sales. Try to find overseas exhibitions; as well as the benefit of seeing a new country under the guise of work, you’re also likely to find products that currently aren’t being sold in your home-territory, giving you a significant head start.
  • Niche / Industry Print Magazines. Assuming the newspaper and print magazine industry still exists when you read this, the classifieds at the back of these publications usually feature small independent manufacturers with good products and poor marketing skills.
  • Private Advertisers on related blogs and forums. Use a tool like Whatrunswhere or Mixrank to find advertisers in your niche who produce a product. Many will already have an affiliate program in place, but will often also consider a dropship arrangement if you speak to the right person.

Rule 3) It’s ok to change a niche that sucks.

The worst niches for ecommerce are those with high competition, low geographical barriers and a high percentage of generic products. On the flip side, a niche with lots of small boutique manufacturers, products that don’t travel well overseas and low or evenly distributed competition is ideal. A perfect example is iPod docks  and mp3 players versus high-end home theatre and designer audio accessories; another is general car spares and accessories versus manufacturer specific custom tuning and interior enhancing kits.

The nature of selling something generic not only means microscopic profit margins, but also a price sensitive buyer. With the likes of Ebay or Amazon featuring cheap offerings shipped direct from overseas (in places where sellers are happy with lower margins), you’re continually fighting a losing battle. If this sounds familiar, then it’s probably time to change your niche.

One of the most useful developments on Google over the last few years was building semantic search into its algorithm. A by-product is that if all of your SEO or PPC efforts so far have been towards ‘mp3 players’ for example, then you won’t find it too difficult to rank for ‘home hifi’ or ‘Bose speakers’. Whilst you might not have this keyword heavily featured on your site, Google knows the people who link to you, and those who search for what you offer will tend to visit these types of pages too.

Start by adding to the products you already offer with products from your new target niche, linking to new product pages from relevant existing ones, and announcing the products on your blog or through press releases.

Rule 4) Always offer a geographic phone number for customers to call.

One of the easiest ways to increase conversions by a double digit amount is to have a prominent phone number on every page of your site. The reason many new owners fail to do this is because they wrongly envisage themselves tied to a phone line handling customer support enquiries. Here are a few facts to put it all in perspective.

  • You don’t need to man your own phone lines, or set up another line where you work. The best numbers to use are geographic VOIP numbers (available for around $5 / $10 per month) routed to a live (human) call answering service that greets the caller in your company name, takes their enquiry and emails it over to you.
  • Each message will typically cost 50c – $1 (on a pay as you go answering service), but generally users who have taken the time to call are on the verge of a purchase and convert extremely well, more than paying for any timewasters.
  • Only a fraction of all your visitors will actually call. Most people like the security of knowing that you’re a real company, and they have a point of contact should something go wrong.
  • You may have so many calls to return that it starts taking up a substantial part of your time. This is a good problem to have, as it either means you’re making decent sales (in which case you can outsource this to a part time customer service rep) or your potential customers are telling you that there’s information they’re unable to find on your site with having to call you first.

Avoid Toll Free numbers or numbers with a national non-geographic dialling code. People tend to associate geographic numbers with belonging to a ‘real’ company and one they’re more likely to do business with.

Rule 5) Go outside the box and hack your shopping cart

Your off-the-shelf shopping cart will be more than adequate for what you need it to do, but making a few tweaks will always give you the edge, and another reason for people to choose you over your competitor.

Here are a few tweaks I’ve made in the past that I highly recommend. All of the tweaks in this list cost less than $100 to do (probably a couple hundred in total if you get them all done together), and were all outsourced on Elance.

Rotating Geographic Numbers. Remember how having a phone number on every page of the site increases conversions? Well having a number near to that user’s location will increase it further. Purchase several VOIP numbers choosing most of the major cities in your region as their location. Ask a developer to add these to a script so that the system can guess the visitor’s location from their IP address and show the number geographically closest to them. Doing this on a renewable energy ecommerce store improved conversions by 73%, but call volume practically stayed the same. It seemed that just seeing the number gave people more confidence to buy. The downside of a couple customers wanting to collect in person (and being told they couldn’t) was certainly worth the increase in sales.

Easier Custom Checkouts. Most abandons in shopping carts happen at the checkout stage, and tend to be relatively high for off-the-shelf solutions such as OpenCart or Magento versus custom ones. A few simple tweaks to your checkout process will make a big difference and include

  • Not requiring customers to login or create an account to purchase
  • Not asking for the same information more than once (e.g. use this as my delivery address versus entering in their billing address again)
  • Reducing the number of steps required
  • Removing annoying country specific validations or requiring fields that aren’t entirely necessary (like asking for State / Country for non US residents)

Dynamic Price Adjusting. For products that were highly price sensitive (in our case, branded solar panels and solar hot water cylinders), we wrote a script that queried the affiliate product feeds of our competitors, and automatically showed the user a price that was a few dollars lower (but never lower than our minimum margin would allow). It’s a cheap shot (especially when you make that amount back in delivery costs), but works well short-term if you’re aiming for volume to negotiate a better price from your supplier.

Most dropship stores that were purchased and subsequently failed did so because their owner underestimated what was required to run the site as a business. Ecommerce of any kind will never be a passive investment, but then again very few businesses worth buying actually are.

With so many good sites currently available for far less than their Adsense or Affiliate driven counterparts, now is a great time to consider investing in an ecommerce store if you’re looking for an asset that you can buy and develop to hold onto mid – long term. If you’ve previously had success or failure with ecommerce, or if you’re thinking of acquiring an online store and have questions, let us know in the comments below.

Photo Credit: Daniela Hartmann

Due Diligence Data At Your Fingertips


Dig a little deeper.

This month, Flippa made an addition that gives you direct access to professional due diligence on any of their website listings, directly from the listing’s due diligence page. Even for those who have been doing their own due diligence for a while, it’s easy to overlook how significant this is.

If you’ve ever been ready to make a purchase, but held back at the last minute because of doubts you had about a seller or the site, you’re not alone.

In fact, one of the most common fears of both experienced and amateur buyers is the fear of loss; either through buying a business that eventually loses its traffic or revenue, or through being deceived by a dishonest seller with inaccurate and faked revenue or traffic proofs for example.

Solid due diligence will give you many of the guarantees that you need to have confidence in a site that you’re about to buy. Just like running DD on an offline business, or even a house purchase, it involves taking a thorough look at all the information you have.The difference with online businesses is that it often involves making a judgement on that information and joining the dots, to see what’s likely to happen several months in the future. This is the kind of knowledge you can only get from experience, but unfortunately with buying and selling websites being such a specialised field, it’s the kind of experience very few people have.

This is why we built Centurica, the first complete Website Due Diligence Solution.

We’re a team with extensive experience in buying and selling internet businesses. Our goal is to provide buyers with ALL the information and interpretation they need to make informed decisions about the businesses and sellers they choose to work with.

A few examples

You can see what we do in our sample report, but here are a few ways that we’ve saved buyers money through smarter due diligence:

  • Uncovering a scam where a site’s main revenue source was an affiliate product owned by another company belonging to the same seller. Commission rates had been set artificially high to inflate revenues and make the company seem like it was far more profitable than it actually was.
  • Spotting an obscure, but valid trademark violation in the domain of a dropship ecommerce retailer.
  • Discovering a partially hidden and very low quality backlink profile, and several warning signals of a pending search penalty for a site where 67% of its traffic came from Google. The client didn’t buy the site, and it was relisted two weeks later having lost just over half its traffic in the most recent Penguin Update this May.

Outsourcing your Due Diligence to professionals isn’t just about avoiding loss. We currently work with several investors and brokers who use our services simply to save time and resources, leaving them to do what they do best – source new deals.

You can find the link to any listing’s specific report by clicking the “View Extended Due Diligence Data for this listing” button, and choosing the “Get Your Report” option from the blue box on the right hand side:

Centurica

Photo credit: mrgariss0n