#15: The Fall of Dropshipping and the Rise of Brand Building
There's a new playbook in town
In the late 2010s, I saw plenty of dropshipping “gurus” pop up on YouTube claiming they cracked the code to financial freedom. Their videos were filled with exotic cars, luxury watches, and lofty promises. I’m sure some were making big bucks, while others were putting on a façade.
So… what’s dropshipping?
Well, it’s when an online store doesn’t take on inventory, but still “sells” products.
A dropshipper serves as the middleman between the factory and the customer. When an online order comes into their website, they pass the customer details to the factory and subsequently, the factory ships the product directly to the customer. Instead of focusing on product development or supply chain, the store operator focuses primarily on marketing.
There are a few different forms of dropshipping, but here’s the high-level explanation of what these masterminds were working on. They identified underserved niches in various subcategories (usually hardline goods like home décor, pet supplies, or kitchen utensils) and then found a corresponding manufacturer (typically on AliExpress) to produce the good for them in China (for a fraction of the price vs. US manufacturing). Next, they built Shopify storefronts to serve as a front-end interface for a customer to purchase the good. Furthermore, they advertised on Meta and Google to drive traffic to their website, allowing customers to ultimately buy the goods. And through a few different e-commerce technology partners, they were able to automate fulfillment of the goods.
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For a while, this business model printed cash. In the late 2010s, Amazon dominated commerce, but the Meta advertising ecosystem was still able to be gamed. If you were an elite paid media specialist, you could acquire customers both profitability and at material scale. But over the past five years, there’s been several headwinds facing dropshippers and those grandiose YouTube videos aren’t coming in at the same pace they used to.
What led to the downfall of the YouTube dropshipping community:
Advertising has become more expensive. In 2021, Apple turned the digital advertising industry on its head (via the iOS 14 update) which now requires iPhone users to opt in to data tracking when they use an app. This created a significant headwind for digital marketers as they were no longer able to collect as much data on potential customers, which subsequently led to often targeting the wrong people. Even if cost per impression (CPM) stays constant, targeting accuracy dropped significantly. You could still get impressions, but hitting the right audience became much harder.
Fulfillment by Amazon is too convenient. With Amazon’s massive push to acquire millions and millions of Prime subscribers over the past 5-7 years, consumers have become used to 1–2-day shipping. The dirty secret with dropshipping from China is that the product takes on average, 2-3 weeks to arrive at the customer’s doorstep in America. Unless you’ve landed a super niche product in a high demand market (unlikely), it’s a tough sell to get someone to wait that long when a version of the product is likely available on Amazon.
Changing regulatory/tariff environment. If your dropshipping business wasn’t on life support from the prior two topics, this one will really get you. See, Temu, Shein, and Quince built their American business around the de minimis tax exemption. This allowed many e-commerce brands/retailers to route customer orders under $800 in value to a US doorstep without having to pay US duties. The current US administration is working on closing this loophole (evolving situation, let’s see how it plays out), causing a crucial blow to those who don’t hold inventory in the US. If you are a dropshipper squeezing out a single digit profit margin, the tariffs that you’ll now have to pay on each order may increase your cost of goods sold enough to put you out of business.
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“So dropshipping isn’t the move anymore. Then how do I make money online selling physical products?”
You can still build a large digitally native CPG business; however, the playbook will look different. And the catch is, you’re not going to make a ton of money overnight (as implied by many of the YouTube dropshippers).
Going forward, building a brand needs to be at the center of your business strategy. And how do you start building a brand on day 0? Develop a community to tell your brand story.
Build a community to serve as the focal point of your business.
When I say “business”, I mean it in the broad sense of the word as what you’re really doing by fostering community is building a brand. And in my opinion, a brand is a story that evokes emotion and a sense of commonality. The business part of a company is the “how”, “what”, “where”, and “when”. But the brand is the “why”.
Business underpins the brand, but without a strong brand foundation, there’s only so much growth that can come from business optimization. A brand drives true organic growth, a coveted characteristic of view consumer companies. Also, the brand serves as a moat to protect yourself from newcomers that may come out with a better product. If people are bought into the brand story, they’re likely to stay loyal.
So, back to the community building component. Focus on creating a following of likeminded people who subscribe to a certain lifestyle. And create this following initially online.
Here’s the new playbook:
Post Content -> Foster Community -> Launch a Product
Start an Instagram or a TikTok account and begin posting regularly. You want to create a supplement brand? Learn everything about say colostrum and post videos about the benefits, drawbacks, big players, etc. Your video engagement and follower count will help validate whether this niche has a large, addressable market, as well as whether you are effectively building a following of potential core customers.
Once you believe you’ve determined that you can cultivate an online community via useful content, then you can develop a product. Your early followers should be involved in your product development process. Have them vote on flavors, packaging design, and even core ingredients. The goal is to create power users who feel invested in the product/brand you are creating. And that’s the basis for a long-lasting community.
In a world where digital advertising keeps getting more and more expensive, creating distribution via owned/organic channels is crucial for building a long-term, sustainable business. Dropshipping was mostly predicated on a distribution arbitrage, albeit savvy product opportunity exploration. Now that the dropshipping window has closed, it’s time to reinvent the digital commerce playbook.
An excellent example of the content, community, and then commerce playbook on display is Endorphins Running. This running apparel and personalized coaching company started out as a run club on Strava. Through the flywheel that became run club meetups and content posted online, Endorphins expanded its presence throughout major US cities with local ambassadors facilitating the run club. Their success wasn’t just about selling stuff; it was about creating belonging. Also, they realized the flywheel of in-person events and content velocity, which rapidly legitimized the running group.
Over time, Endorphins recognized the opportunity to create products and services for their passionate community. This is the golden goose: a loyal following that enjoys your core product (a running community) and can be monetized in complementary ways. Truly a master class of brand building in the 2020s.
In one line, build a community with good intentions. Then, and only then, layer in commerce.