KEY POINTS
- Two-step dropshipping is not an effective dropshipping model.
- Accounts using two-step dropshipping are still suspended.
- Two-step dropshipping has several issues including sustainability, profitability, and competitiveness.
If you’re familiar with dropshipping, you probably know that there are some strong restrictions on how businesses can operate this fulfillment model. One model that developed in response to those restrictions is two-step dropshipping. But what is it exactly and does it work?
Let’s explore that.
What is Two-Step Dropshipping?
Two-step dropshipping is a made-up fulfillment model used by agencies in an attempt to get around Amazon’s dropshipping policies. It operates like this:
- In this model, your supplier is a retail store like Walmart.
- A customer places an order with you, and you purchase the item from the retail store.
- Instead of shipping the product directly to the customer, you ship every product to a third-party warehouse.
- In the warehouse, the product is taken out of the Walmart box and put into a blank cardboard box, labeled, then shipped out to the customer.
Why Doesn’t Two-Step Dropshipping Work?
Profitability
Numbers don’t lie, so let’s take a look at them.
In the two-step dropshipping model, you are purchasing products at a retail price from Walmart or Sam’s Club and selling the product on Amazon, also at a retail price. Buying retail and selling retail leaves very little room for profit, especially when you consider shipping and prep.
Let’s say we can hypothetically buy a product for $30 from Walmart and sell it for $40 on Amazon. Sounds good, right?
Well, to start, Amazon will charge a 15% fee for selling a product on their platform. This is standard across the marketplace. 15% of $40 is $6, so after just product cost and the Amazon fee, you’re left with $4.
Next, you are using a service that changes the box the product ships in so your product doesn’t arrive in a Walmart box. We can estimate this to cost just $2 on the lower end for receiving the box, labor, the new box, and labels. This means you are now left with $2.
Lastly, you now need to ship the new product directly to the customer before the latest delivery date. Shipping a product across the USA is not feasible for less than $2. Realistically, it’ll cost a minimum of $6 even with discounted shipping rates. This leaves you with a loss of $3 to $4 per sale. Not to mention, we assumed shipping to the warehouse was free.
You’re probably wondering “how much do I need to mark up my product to be profitable if I do this model?” Let’s take a look at how much of a markup we need to get a slim 15% profit margin.
Sell Price: $55
- Cost of Goods Sold (COGS): $30
- Amazon Fee: 15% ($8.25)
- Repackaging and Prep: $2
- USPS Priority Mail: $6
= Total Profit: $8.75 (Profit Margin: 15%)
Now, why would someone purchase the exact same product from Amazon where it’s marked up 83% when they can just order from Walmart for almost 50% less? They simply wouldn’t. That’s one of the key reasons why two-step dropshipping on Amazon doesn’t work.
Extremely Long Delivery Times
Before you sell a product on Amazon, you need to tell your customers the latest date your product will be shipped and the latest date it will be delivered. Let’s compare two stores side by side: one store is doing two-step dropshipping and the other is a legit Amazon business like the ones built by League Of Ecom.
The two-step dropshipping store will have a delivery time of at least 7 to 8 days. This store has to wait for Walmart to ship the product, deliver it to the warehouse, be processed and repackaged, then shipped back out and wait another few days for final delivery.
A legit League Of Ecom dropshipping business using authorized dropshipping vendors in the USA will have packages delivered to the customer before the two-step dropshipping store’s product is even delivered to the prep warehouse. We can have our delivery time as 2 to 3 days and since we are using authorized vendors, we are getting business pricing. We can have products priced cheaper than the two-step dropshipping store and have a much higher return on investment (ROI) because of the discounted business pricing.
Amazon and their customers will review both stores and see that one store has a 7-day delivery time at a higher price and our store will have a 2-day delivery time at a lower price. Which store do you think Amazon will promote more and which store do you think customers will buy from?
It doesn’t stop there. There is one last reason why the two-step dropshipping method is flawed:
Stores Are Still Suspended
In the two-step dropshipping model, you still are not buying products from an authorized seller and you don’t have the licensing, distributor contracts, or authorization to sell any brands.
Even if you were hypothetically getting sales on a listing with a 50% markup from Walmart, the brand would notice you are not a licensed seller and give you an intellectual property rights violation. Amazon will quickly shut down your business.
This issue can be avoided by getting a distributor contract with dropship vendors through League Of Ecom’s programs.
SUMMARY
Two-step dropshipping on Amazon simply does not work.
It’s not profitable due to the added shipping and preparation costs involved in the program. Delivery times in the two-step dropshipping model are also double those of stores running Amazon-approved fulfillment models like League of Ecom’s stores. That’s not to mention the fact that Amazon won’t allow your business to get sales since your listings are priced 50% above other sellers and have longer delivery times.
Stores operating through two-step dropshipping still be suspended because you are not licensed to sell any brands or have the proper authorization to sell products.
You can avoid all these problems with two-step dropshipping AND grow your business exponentially by working with a qualified agency like League of Ecom. Interested in getting started? To reach out to us here to learn more, click here.
