Why the reseller / dropshipping ecommerce model sucks (unless you do these 3 things)

by Jeremy Robinson
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pros and cons of outsourcing shipping and fulfillment

If you sell products which are not strongly differentiated in terms of features, or that are available through other sellers in identical or similar form, you are engaged in the reseller / dropshipping ecommerce business model.

Advantages of the reseller / dropshipping ecommerce business model.

The advantage of the online reseller / dropshipping ecommerce business model is that you have no product development costs and are not taking on the risks of production. You are also not as constrained by minimums when it comes to ordering from suppliers, so you will not have nearly as much risk around carrying inventory. This allows you more freedom to try out new products and categories until you find the most profitable mix

It is significantly easier to get set up as a reseller. You can start as a drop shipper who doesn’t carry any inventory whatsoever in order to test out the market. As long as you can cover your marketing costs with profits you’re in the black. Once you understand your marketing costs and what products are most successful, you can then capture greater margins by stocking and fulfilling products. You may even transition into developing your own branded products once you have a deep understanding of your Niche and audience needs.

Disadvantages of the reseller / dropshipping ecommerce business model.

Lower barriers to entry mean that it may be extremely difficult to gain traction in a competitive niche without a significant upfront investment in marketing. With the rapid growth of e-commerce over the past 5 years, it is increasingly rare to find a niche that has not already been saturated and where marketing costs (ie the cost of traffic divided by your conversion rate) are consistently less than the profits from a sale.

If you happen to find a new niche and be among the first to sell in a category, you may see your early success gradually eroded as more and more competitors enter the space. Owning a search term can be extremely valuable but puts you at the mercy of search engine algorithms that are beyond your control.  There is a higher degree of risk involved with this approach as changes in the search engine or competitive landscape can seriously impact your ability to generate profits without warning.

How to succeed as an online reseller

Here are the 3 strategies that can lead to success as an online reseller. While each may work on their own. these strategies will be most successful when combined to create an insurmountable competitive advantage. On the other hand, much is dependant on the product you choose and category that you are selling in.

Find a niche that depends on very specific search engine terms and own it.

If you are adept at search engine marketing, or willing to learn, it is possible to build a mostly automated business by becoming a highly effective online marketer for a specific search term/product solution.

This approach will only work in a category in which there is search engine activity but little to no competition, allowing you to own key organic search terms. You may also be able to build a model in which you can generate a reasonable amount of paid or affiliate traffic that is more than covered by your profit margins. However, this may require a fair bit of research and testing. You will need to constantly manage and track your performance to ensure your marketing costs are covered by your margins, with enough leftover to justify your time and the risk involved.

This largely a numbers driven approach that demands that you set your personal preferences aside and sell products for which you may not have a personal affinity or passion.

Steve Choe teaches this approach on www.mywifequitherjob.com and uses his wife’s wedding linens business as an example. Steve definitely knows his stuff but be warned that much has changed in the e-commerce landscape since he and his wife launched bumblebeelinens.com in 2007. It is now a much more competitive landscape and much harder to find valuable search terms that are not already owned by someone else. .

Examples:

http://naturalfrenchsoap.com/
http://bumblebeelinens.com/

Build and reinforce a strongly differentiated brand

No matter what business you are in, the ability to build a distinct and differentiated brand is one of the strongest strategies for long-term business success. While commodity products may present a substantial challenge, it is still possible to build a unique positioning around your selection of products.  

Strong brand positioning arises from the ability to focus your message, create a unique positioning and tell a compelling story about your brand. Developing visual, written or video content that reinforces your brand can go a long way towards creating a competitive advantage, but it is likely to be more of a long-term play rather than an instant traffic generator.

You should understand that creating a powerful brand around undifferentiated products (or any products for that matter) is more of an art than a science, and not everyone has the creative talents or insights to effectively and actively shape a brand. Be honest with yourself about whether this is where your true strengths lie.

Read: how to create a strong brand positioning and how to enhance your brand image.

Examples

UPDATE: Both the below examples seem to have moved on/switched business models since I originally posted this (Case in point)

http://nationalparksdepot.us/
https://photojojo.com/

Build an offline sales force

In some cases, the answer to succeeding in the online space is to build a human sales force that can actively engage one-to-one with potential buyers. This is particularly effective if you sell supplies for businesses, who have bigger budgets and are likely to make repeat purchases. If you have the margins with your products, a salesforce can help you sell more products through offline retailers who may not have the time or connections to source your products.

This can be cost-effective if, once a salesperson has closed a new client, they then continue to order the products online. You will need to develop a strong understanding of the potential lifetime value of your customers, since upfront selling costs may be high, and you will want to make sure they are justified over the long run.

Example:

http://www.garrettspecialties.com/

Conclusion

While it is easy to get set up with a reseller / dropshipping ecommerce business model and possible to succeed,  it can be very tricky to get traction without an upfront investment in marketing and advertising – unless you are able to own a search term. Plus, more than half of product searches start on Amazon, where you are competing with a global marketplace. The best approach is to build an unassailable brand for long-term success. However, the less differentiated your products are, the harder this is to do.

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