Is Dropshipping A Pyramid Scheme?

What is dropshipping

Dropshipping is the concept where a person builds an online shopping site on a third-party platform. The purpose of the site is to market products from vendors and reach out to consumers for the purchase of these products.

 In reality, the owner of the dropshipping site does not physically stock any product, rather when an order is placed on the site, back to back order is placed on the vendor who has the physical product, and the same is delivered to the consumer. 

Sites like Flipkart, Amazon, and eBay are all dropshipping sites. These sites can also be used to set up one’s business model. However, since there are millions of products listed on these sites, your product is likely to face tough competition. New entries in online business often prefer to have websites of their own. 

Your first step will be to scout for vendors who can provide you products at low prices.  Next, you have to list or display these products on your online website,  quote a price for the product, and accompany the photographs of the product with the proper description to go with it. 

 For some products, you could also hire a model to display the products.  It is very important to display the products impressively,  since a quality product if shabbily displayed will not attract the required attention.  Also,  with the proper display of the product, you can tag a price on it whereby you can make some profit margin. 

How is dropshipping different from a pyramid scheme

The pyramid scheme is a business model,  where there is no purchase or sale of real products.  Instead,  earnings are made by routing more people to the business model. A person joining a pyramid scheme cannot make any immediate profit because he would have to bring in more people to join the scheme and only when they pay, shall the person be eligible for any earning or commission. 

The business model of the pyramid scheme is often deemed as a scam,  as it is based only on a concept and does not involve any product.  It is also difficult to get any returns against your investment if you are not able to bring in more people to join the scheme.  The returns that you receive are also not immediate as you only get to earn when your affiliates pay up.  This is a difficult model to sell because most people don’t like the idea of investing and not getting anything in return immediately.

Some might confuse the concept of dropshipping and pyramid marketing scheme as some of the features might look almost identical.  Some of these features are listed below-

  • The walking pattern of the pyramid scheme sometimes involves gifting a new joiner the hamper consisting of products or services to lure more people to join the scheme.  However, in the dropshipping model of business, you outsource the products from a vendor at a low price and sell the same products at a higher price thereby enjoying a profit margin. In dropshipping, the earnings are immediate as you get the profit margin as soon as you make a sale.  Out of the final price of the product, you need to pay the cost price of the product to the vendor and the rest is your income. 

The pyramid model of marketing is sometimes illegal as they promise to sell imaginary products thereby asking for upfront investment from the joiners. The pyramid schemes are designed in such a way that they look authentic, however, the actual motive behind designing a pyramid scheme is to collect money from other people. 

Promotional activities of the pyramid scheme often look like that of dropshipping, as the designers of the pyramid scheme intentionally rope in the concept of the drop-shipping business model to make the scheme look authentic. 

For example, someone can start selling or promoting a particular training on the dropshipping business model on social media asking others to join the training program.  They also put forward suggestive concepts saying that once the training gets completed the person undertaking the training would be able to create his dropshipping site and will be immediately able to begin his business online. 

Similarly, promotions are often made for software and selling platforms that help you in creating a dropshipping site and building a production base for the site. 

When you see promotions of such sort make sure that you look into the authenticity of the promotional offers as they often end up as part of cheap and noninformative training programs which are not at all required for any dropshipping business.

How does dropshipping differ from pyramid schemes

 There are vast differences between the concept of dropshipping and pyramid schemes. 

  • The first and foremost difference in concept is the fact that dropshipping does not include hiring any employee under you.  You are the creator of the business model and you run the business model alone.  However, the main concept of the pyramid scheme is to hire more people under you so that you are eligible for some commission or a cut.

In dropshipping, you create a real business model where you sell products and make a profit out of it. This is a well-established model of e-commerce that has been practiced for a long time now.

Pyramid schemes do not build a real business,  rather you are just a part of roping people to let them believe that they will be able to earn some profit if they make some investment and bring in more people to join the scheme.

  • In dropshipping, you sell real products. Though you do not stock the product yourself,  you do purchase these products at a lower price from the vendor and display or promote these products on your eCommerce platform so that customers can buy from you.  Your gain in the entire process is a profit margin that you earn on each product sale. 

The pyramid scheme does not involve any real product apart from the fact that there could be some cheap products that are gifted to new joiners as a token of appreciation.

  • In dropshipping, you earn a margin against every product that has been sold on your site.  There is no restriction on the sale of a minimum number of products to make some profit. 
  • In dropshipping your customers are not expected to sell anything,  rather whatever orders they have placed are delivered to them.  You as the owner of the dropshipping site are the person who is making the sale.

In the pyramid scheme, every person is expected to make a sale by inviting other people to join the group.  Only when the minimum number of designated people join the group will you be able to make money.

How to make a dropshipping site

The best part of owning a dropshipping business is that it doesn’t require huge investment, as you do not need to purchase and stock products by yourself.  The only cost is for setting up the dropship website and impressively displaying the products.  This is to make sure that customers who visit your site are impressed with the products and their price, and go ahead and place an order.

When you do not have to worry about the product, then the only thing that you need to focus on is customer acquisition.

Select a niche

The most important part of creating a dropship website is to decide the products that you would like to promote on your website. 

Whereby you will have a lot of competition from other dropship websites and online marketing sites that are well established, an impressive product line can go a long way in generating sales.

Be confident about the products that you have selected.  In the initial days of setting up your website, you can aim for high profit-making products as the amount of hard work that you devote to selling a product of $10 is the same as a product price of $1500.  So better focus on higher profit margins.

  • Once you have selected the broad product line,  conduct a market competition search to make sure that the product is in demand.  A common mistake that new businesses do is to search for products that have a minimum to nil competition in the market.  But they ignore the fact that it might be because the product is not in demand at all.

Look for products that are frequently consumed in the market like FMCG products which are regularly consumed and are replaced in every household.

Onboard a supplier

Since your entire business model is dependent on the delivery of the products to your customer from your supplier;  working with the correct supplier is the key to setting up a successful business. 

When deciding on overseas suppliers,  make sure that the response time and availability of the supplier are as per your business requirement.  If supplying a product takes a long time then the customer is unlikely to be impressed and you might lose a potential buyer. 

Conduct proper due diligence on the quality of the products and the compliances of the vendor. Avoid products that are fragile or are difficult to ship.  The addition of the high shipping charges demotivates the customer from buying a particular product. 

Make sure you go for products that are easy to ship and do not involve a lot of costs. In that case, you can provide free shipping to the customers and include that as part of your business expenses. 

 This will not only help to create a happy customer base,  but you can also expect referrals and heavier traffic to your website.

Build the website

If you have a sufficient budget then you might consider hiring a web development agency to design and customize your website.  However, startups prefer to use available platforms that provide a facility of plug and play.  These are platforms where you can easily create your website even if you do not have the technical knowledge of coding.  Some of these platforms are Shopify and  3D cart. 

Create a customer acquisition plan

Once you are done with the website building your next focus will be to draw traffic to your website to make sure that you have better chances of sales.  Some of the customer acquisition strategies could include promotion through Ads on social media platforms like Instagram and Facebook. 

Once your website is up and ready and you’re making sales make sure you fine-tune the requirement of the website as per your customer’s demands now and then.  This is to keep up with the latest trends and the demands as well as the customer reviews of products.

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