Have you heard of dropshipping and wondered if it’s just another pyramid scheme in disguise? Well, let’s clear things up right away: no, dropshipping isn’t a pyramid scheme. Those are illegal scams that rely solely on recruiting new members to make money, not selling products.
So, what is dropshipping then? It’s a retail fulfillment method where you sell physical products for a profit. And yes, it’s totally legal. But is it the best way to make money online? That’s up for debate. Some folks prefer affiliate marketing, which doesn’t require products or recruits.
In this article, we’ll dive into the differences between pyramid schemes and dropshipping and explain why dropshipping is a legit business model. We’ll also touch on why some people believe it’s a scam and some insider tips for succeeding in the dropshipping game. Finally, we’ll explain why you need to move from dropshipping to branded eCommerce.
Table of Contents
- What is A Pyramid Scheme?
- What is Dropshipping?
- Dropshipping vs Pyramid Scheme: What’s The Difference?
- Is Dropshipping Legit?
- Why Do Many People Believe Dropshipping Is a Scam?
- 6 Common Dropshipping Scams You May Encounter
- How To Succeed With Dropshipping?
- Why You Should Switch from Dropshipping to Branded eCommerce?
What is A Pyramid Scheme?
Basically, a pyramid scheme is a fake investment opportunity that promises crazy high returns from fake investments. The early investors actually do get paid big bucks, so they end up telling others about it. But here’s the catch: the returns for the new investors are paid from the new money coming in. And eventually, there won’t be any new investors to find and the whole thing will crumble.
In some cases, investors at each level charge fees that get passed on to the next layer of investors. And eventually, no one’s left to bring in new recruits. The whole structure collapses.
The name “pyramid scheme” comes from the way it looks – it starts with one person at the top and gets wider at the bottom as more people are recruited.
So, let’s say the scheme’s creator Jack is at the top. He finds 10 people who believe his promise of big returns. They’re one level down. Each of those 10 people pays Jack a fee to join and then they have to find 10 more people each, for a total of 100 new members.
Now each of those 100 people have to pay fees to the next tier of recruiters, who then send a cut of their earnings back to Jack. And this goes on and on for as long as possible. Money just keeps flowing up the pyramid.
In a pyramid scheme, the focus is on bringing in new members. Rarely is there any real product or service involved, even though it might have been mentioned to attract recruits. And there’s no real income other than what’s coming from the new recruits.
What is Dropshipping?
Dropshipping is a retail fulfillment method where you don’t have to keep any of the products you sell in stock. When someone buys something from your store, you purchase it from a third party and have it shipped straight to the customer. No need to deal with any of that product-handling stuff.
See, the main difference between dropshipping and traditional retail is that you don’t have to own or stock any inventory. Instead, you buy it as needed from a wholesaler or manufacturer.
Imagine you run an online store that sells dog products. As a dropshipper, you wouldn’t have to buy a ton of collars or leashes up front and store them somewhere. You just find a third-party vendor who will store the items for you.
When a customer buys something, your supplier takes over and ships it directly to them. You just sit back and relax, never having to worry about the logistics.
So, what’s your job as a seller? Simple – just get customers to your online store! Do some marketing, get your name out there. And the best part? You can do it from anywhere with a laptop and internet connection!
Dropshipping vs Pyramid Scheme: What’s The Difference?
Dropshipping and pyramid schemes are two ways to make money, but they’re definitely not the same thing.
Dropshipping is a type of e-commerce business model where a company doesn’t keep any stock of the products it sells. Instead, it acts as a middleman between the customer and the supplier. Think of big e-commerce sites like Wayfair, Amazon, and Home Depot, which sell products from a variety of dropshippers.
Pyramid schemes, on the other hand, are a whole different story. They work by having people sell products, sure. But the real money-maker here is getting others to join the scheme, and then earning a cut of the sales they make. Companies like Amway use this multi-level marketing (MLM) approach.
So, while they both revolve around selling products, the main difference is that dropshipping focuses on retail while pyramid schemes focus on recruitment.
Below is a summary of how the two business models differ:
|Scheme-Like Nature: It’s not a legit business entity that you can easily sell or buy.||Sellable Business Assets: This feature makes dropshipping a valuable business option. The assets of the business can be sold to potential buyers at any time, providing financial security and flexibility.|
|No Real Products or Services: Even if some MLM Pyramid schemes pretend to sell products, that’s not where the money is made.||Legitimate Physical Products:
Dropshipping businesses sell physical products to customers who have a need, desire, or want for the product. This ensures that customers are receiving a legitimate product, making the business reputable and trustworthy.
|Always Growing: New members are constantly joining the scheme, each playing a role to keep it going.||One-Person Operation:
One of the best things about dropshipping is that it can be set up, managed, and run by just one individual. This allows for flexibility and the ability to scale the business as needed.
|Needs New Blood: The scheme requires constant growth and new members to keep it afloat.||Lean or Expanded Operations:
Depending on the individual’s preference, a dropshipping business can remain a lean operation run by one person or it can be expanded with virtual assistants and other team members. This allows for the business to grow and evolve as needed.
|High-Pressure Tactics: New members are often convinced or pressured to join. Watch out for those red flags.||Customer Demand:
Customers willingly purchase products from dropshipping businesses because they want what the business has to offer. This demand for products makes dropshipping a profitable business option.
|Mostly Illegal, Questionable Ethics:
Let’s just say, most pyramid schemes aren’t exactly operating on the up-and-up.
Dropshipping is an entirely legal business model, making it a safe and secure option for individuals looking to start their own business.
Is Dropshipping Legit?
Dropshipping isn’t a scam. It’s a legit business model that’s been around for decades and used by 27% of online retailers. If it were a scam, how come so many entrepreneurs are running successful dropshipping stores without getting caught?
Shopify and WooCommerce, two popular e-commerce platforms, even have dropshipping-friendly apps and features. That’s pretty solid proof that dropshipping is a viable business model.
With over 2 billion people shopping online, there’s definitely money to be made with the right approach. To make it work, you need to do your market research and find a product that solves a problem, saves time or money, fills a gap in the market, or is hard to find. Of course, delivering top-notch customer service is key too.
However, as a dropshipper, you don’t have full control over every aspect of your business, so there’s a certain degree of risk involved.
On the flip side, you don’t have to worry about product quality, unreliable suppliers, or slow shipping times. Your focus is on ranking and renting websites that get top Google search engine results, essentially turning them into digital billboards that generate leads you can sell for profit.
In conclusion, dropshipping is a legit business model with the potential for success, but it also involves some degree of risk and uncertainty. To get started, you might check out our guide “How to Start a Dropshipping Business: 9 Proven Steps”.
Why Do Many People Believe Dropshipping Is a Scam?
People who are new to dropshipping still think it’s a scam. It’s not even worth talking about those who don’t know. People think dropshipping is a scam for these reasons:
1. Poor Product Quality
One common concern people have about dropshipping is the potential for poor quality products. When you’re running a dropshipping business, you don’t physically handle the products you sell. This can make it difficult to control the quality of the items you offer.
If you’re not careful, negative reviews and complaints from customers can really hurt your business. So, it’s important to work closely with your suppliers to make sure the products you sell are up to your customers’ standards. Unfortunately, when things go wrong, people may see this as evidence that dropshipping is a scam.
2. High Profit Margins that Fail to Deliver
Another reason people may view dropshipping as a scam is due to the overhyped promises of high profit margins. You might see ads online that boast about making big money through dropshipping, but the reality is often different.
For example, you might buy a set of earrings from a supplier for $0.10 and sell them for $5, but if you’re not the only store offering those earrings, you’ll have to adjust your price to stay competitive.
This means that the profits you make might not be as high as you expected, especially if you’re too optimistic about your earnings. If you run into this issue early on in your dropshipping journey, it’s easy to see why you might view the whole model as a scam.
6 Common Dropshipping Scams You May Encounter
It’s easy to find dropshipping suppliers online, but not all of them are honest. Here are some dropshipping scams and how to avoid them.
1. Knockoff Brands
When shopping for products on AliExpress, you may come across big name brands like Nike and Adidas selling at dirt cheap prices. Chances are, these products are fake. Don’t fall for a merchant claiming to be the OEM either. This is just a trick to get you to buy their counterfeit products. Stick with trusted manufacturers and wholesalers to avoid being scammed.
2. Deceiving Samples
Just because a supplier sends you a perfect sample, it doesn’t mean the actual product will be the same quality. Some suppliers may send deceiving samples to trick you, only to deliver low quality products to your customers. Keep an eye out for excessive quality complaints from your customers. This could be a red flag that the supplier is scamming you.
3. Fake Gold Sellers
When it comes to high-ticket dropshipping, selling gold jewelry can be tempting. However, not all gold suppliers on Alibaba are trustworthy. Some scammers sign up for the Gold Supplier membership, take people’s money, and then disappear. While most gold suppliers on Alibaba are legitimate, it’s important to be cautious and do your research before making any big investments.
4. The Vanishing Supplier
Some suppliers don’t even try to cover their tracks. They simply disappear after you’ve paid them. They’ll offer an amazing deal to win your trust and usually prefer to deal offline so they can avoid Alibaba’s Trade Assurance.
To avoid this scam, stick to using Alibaba’s Trade Assurance service, which holds the funds until the product quality and shipping time meet your expectations.
5. Sneaky Sales Rep
Beware of sales reps who may try to pull a fast one on you. They may be looking to scam money from both you and the supplier before quitting their job. They’ll offer prices too good to be true and ask you to transfer money to their personal account. Once you do that, you’ll lose the protection of Alibaba’s Trade Assurance, and you know what happens next.
6. The Get-Rich-Quick Con
You may have seen ads for get-rich-quick schemes, especially on social media. You’ll be approached by someone claiming to be a professional dropshipper with the “secret formula” to make thousands of dollars. They’ll ask you to pay a fee to learn the formula, but once you pay, they’ll block you and disappear.
Don’t fall for it. While investing in self-education is great, there are plenty of free online resources to learn about dropshipping. Anyone promising immediate riches for a fee is likely a scammer.
How To Succeed With Dropshipping?
While the idea of making money online through dropshipping may sound enticing, it’s important to remember that it’s not a get-rich-quick scheme. It takes effort, patience, and a ton of hard work. Don’t get discouraged if you encounter issues or if your account gets banned. Instead, adopt a growth mindset and focus on how to overcome these obstacles.
One key to success in dropshipping is consistency. Don’t give up too soon, and be ready to pivot quickly when things aren’t working out. It’s important to keep track of what’s working and what’s not and to constantly analyze your online business to identify areas for improvement. This includes
- Looking into your marketing strategy and making necessary changes
- Using tools like AdSpy to keep an eye on the competition
- Finding ways to add value and provide the best customer experience
When it comes to product selection, it’s crucial to assess whether you’re selling the right product, and to have a deep understanding of what makes a winning item. Don’t be afraid to test and fail, but see these failures as stepping stones to success. Once you have a solid strategy in place, you can then scale your dropshipping business.
Remember, dropshipping success takes time, so don’t expect overnight results. Stay on top of new strategies and be on the lookout for new categories or unique products that sell well. If you want more insider information, consider taking a course. We’ve put together a list of the best dropshipping courses.
With effort and hard work, you’ll be well on your way to maximizing your dropshipping success in 2023.
Why You Should Switch from Dropshipping to Branded eCommerce?
Dropshipping might seem like the cheapest and easiest way to start your online store. But, if you want your business to grow and thrive in the long run, making the switch to a branded e-commerce business is the way to go.
Why, you ask? Well, branding can seriously impact the way shoppers perceive your business. It’ll boost brand recognition, lead to more conversions, and increase customer loyalty. By pivoting from dropshipping to a branded e-commerce business, you’re essentially investing in the future of your business.
And let’s be real, having a strong brand gives you an edge in the competitive world of e-commerce. Customers are more likely to trust you and buy from you if your business is associated with a set of values and a recognizable brand. Building a brand will also increase the customer lifetime value, which is crucial for the growth and success of your business.
Want to learn more about making the switch from dropshipping to branded e-commerce? Check out Gretta’s “Start and Scale” course! She’ll walk you through all the steps you need to take to become a top player in the e-commerce world.