Is PPC Arbitrage a Viable Longterm Strategy for a Dropship Ecommerce Business?

Is PPC Arbitrage a Viable Longterm Strategy for a Dropship Ecommerce Business?

A DROPSHIPPERS INTERVENTION

Question:

This comes from Reddit and the Redditor asks: I’ve spent two hundred dollars on advertising with my Shopify store and I have no results, I need help and I’m dropshipping so…

Answer:

John: Do you have the dream crusher hat? I don’t have the dream crusher hat today.

John Max: it’s up there, 

John: Is it up here? Allow me to put it on today. So, you’re arbitraging a dropship business of Google or Facebook or something another, you spent two hundred dollars and you haven’t made any money, duh! of course, you haven’t!

John Max:  yeah, and this is, this is what, this is what’s so interesting, you have to have a thesis right before, like our entire rant last ten minutes on a calculator, on understanding your numbers and margins, you have to have the right thesis going into it, otherwise you’re never going to be able to succeed.

John: yes, so do that math and if it spits out something positive, do it but the problem is you’re arbitraging and that’s probably a short-lived opportunity. In fact, if you if you…if you don’t know what arbitrage is, it’s buying something cheaper than what it’s worth and so if a Forbes stock is trading on American stock exchange in the. European stock exchange and it’s two cents cheaper in Europe, you will but in Europe and you have but instantly made…and then resell it America, you’ve made two cents without any risk, so it’s basic which do, if you buy a Google click for fifty cents and you make thirty-five cents off of a profit wise, well, you’re arbitraging, that’s a pretty slim margin, it’s not going to last long, so again you’ve got to go back to how you work on those multipliers and that is through building a brand. What’s the lifetime number of purchases here? Why would someone buy from your dropship store instead of Amazon? Well, the short answer is they won’t, this was a really good model in 2001 when I, you know, really started in e-com but you can’t do this for any period of time, don’t you agree?

John Max: Yeah, exactly, I mean, if your goal is to, I mean like, you in 2001 and earlier, you’re printing money, arbitraging having AdWorks to AdSense. 

John: We sold grills and you could buy the word barbecue grill for a nickel, even a penny in some places so it’s hard not to make…when you’re making 3 or 4 bucks, you can arbitrage your way to a really nice business, and this lasted til 08.

John Max:  yeah and so if, if you’re if you’re in a, if you’re in a new space and you are arbitraging that new space, I mean look at the people who had success with bitcoin, you know, they bought it low they sold it high and so that works, but your…it doesn’t work for a super long time unless you have great pattern recognition and then you go for each new thing that’s happening. If you’re building a store, don’t, don’t get caught up in the fantasy of starting a dropshipping business and then making a million dollars. The majority of the people, and not all, and I’m not speaking, you know, in absolutes here, but the majority of people…

John: If you’re asking how to spend two hundred dollars, you’re not the guy who’s going to find that opportunity, let’s just be blunt.

John Max: Yeah and so what I would encourage you to do is think about why you make the purchases you make, it’s not because it’s an amazing product that’s dropship from Alibaba, if it’s the only product that, that is sold, it’s no longer an arbitrage, you know, but if you’re not building brand, if you’re not getting a consumer a reason to purchase from you, that differentiates you from the hundred thousand other people selling the exact same product, you’re not going to win, unless you’re the first mover in that space and you grab that market share, if you’re breaking into a market that you don’t have market share in, you’ve got to do something different, you’ve got to have free shipping both ways, you’ve got to have a return policy that’s different, you’ve got to have an amazing customer service aspect, you’ve got to do something to differentiate yourself and that’s for all e-commerce businesses, but especially in dropshipping, you’ve got to be able to do something and if you’re dropshipping and it’s a two-weekly time for delivery, you’re starting the game in a very bad spot.

John: which is hard, I mean, if you look, you know, what’s the end goal? It’s to build a business worth a lot of, a lot of money that is profitable and if you…the value of a business is a way, it is in the lifetime value of its future discounted cash flow and by that definition, if you’re building arbitrage business that’s going to last for a year, it’s not worth very much. So instead, put the same kind of effort into building a real brand, one that is uniquely differentiated that is going to be here forever and those are the types of businesses we funded in our little e-commerce fund and the types of businesses which the capitalists are capitals are funding on the east and west coast. They’re highly differentiated models, I mean with Chewy, you know they sold some other people stuff, but they also got people into a subscription, they also, once they had that arbitrage done, they would shift into selling their own dog food, 3.3 billion dollars later, I mean…right?

John Max:  Well Chewy is a great example of they use customer data to ridiculously personalize the experience and it, and next question.

Written by
John James, M.D. is the CEO of Engine, a modern cloud-hosted ecommerce platform. I paid for medical school with an ecommerce business I founded in my dorm room over twenty years ago, and eventually raised over $100 million in venture capital running Acumen Brands. Email me -- john at enginecommerce dot com.