Welcome to part 4 of my series on E-Commerce in Latin America. Today I’ll be talking about whether or not you should do dropshipping or private label if you plan to open an online store down here.
For those unfamiliar with these things as they relate to e-commerce, let me break it down in layman’s terms for you.
Dropshipping – Dropshipping is when the retailer (you) doesn’t keep stock but rather forwards customer orders and shipping information to a manufacturer or wholesaler who ships the customer's order directly to them.
The easiest execution of a dropshipping store is through Shopify, Obrelo and AliExpress.
It works like this.
You set up a Shopify and download the Oberlo App. Through the app, you can browse all of the products on AliExpress and add them to your shop in only a few clicks. Most products will have photos that you are free to use as your own product photos in your shop. If a customer places an order for one of these items, you simply forward the product and shipping information to AliExpress via Oberlo, order the product and pocket the price difference between the cost in your store, and the cost in AliExpress. That easy.
Private Label - Private label is when you have someone manufacture your product, and then you sell that product under your own brand. In other words, you create your own brand and (normally) hold your own stock.
It can work like this.
You find a manufacturer in China that can make cool looking dress shoes on the cheap. You order a bunch of units from them at a discount, call them Don’s shoes (maybe your name is Don) and sell them under that brand name. Maybe you get some fancy tags and boxes that say “Don’s shoes,” talk about your origin story on your website, brand yourself as a small local business… you get the drift. You’re creating a brand image.
I’ve experimented with both models in Latin America, and the good news is that both can work. The bad news is that both are far from perfect.
Let’s take a look, shall we?
Dropshipping is a fucking amazing concept. The sky is the limit on what you can earn and how many customers you can reach. It’s completely location-independent and you can run your entire business from a computer. Shit, you don’t even need a good computer! A $400 ACER would probably do the job.
It can also be a huge pain in the ass. If you’re anything like me, you’d want to know every aspect of a business you’re running. With dropshipping, you give most of that up. Best of all, you get to take all of the blame for things that your supplier has screwed up or cut corners on.
Oh well, nothing’s perfect.
Let’s take a quick look at the pros and cons of dropshipping in Latin America
pros of Dropshipping
1. Location Independent. Since you’re not holding any stock, you can run a successful dropshipping company entirely from your computer. This means you can travel or live wherever the fuck you want.
2. Low Starting Cost. Since you don’t have to invest in stock, manufacturing costs, storage space, packaging etc., you can start a dropshipping business for practically nothing. For just the cost of a domain and hosting and you can be up and running.
3. Low general costs. Again, not having to order or manufacture things wholesale, store your stuff and hire a handful of employees will cut costs magnificently.
4. Scalability. The beauty of a dropshipping store is that the bulk of your workload is handled by others. The difference between handling 10 orders a month and 100 orders a month won’t cost you much more effort (although eventually you’ll want to outsource customer service stuff to someone else). Also, with a dropshipping store you can test products and add new products quickly. Something isn’t selling? Simply replace it with a new product.
5. You can sell internationally. If you’re dropshipping from China, you can take advantage of extremely cheap worldwide shipping rates. This means that with a dropshipping store, you can easily sell to whatever country you want.
6. It’s easy. You can set up a dropshipping store in a day. And if you get an order, everything is handled for you by your supplier. The only thing you need to focus on is making sales and marketing your business.
cons Of Dropshipping
1) Smaller profit margin. When you’re ordering individual products from suppliers, it’s going to cost you more than if you were to buy wholesale. Also, without being able to brand your products, you’re not going to be able to get away with charging as much for them.
2) A serious lack of control. As a dropshipper, you have no control. I fucking hate this about dropshipping. Late shipments, dysfunctional/inaccurate products, ugly packaging. It all can (and will) happen, and there isn’t much you can do about it. This is why dropshipping stores invariably have bad reviews on the Internet. You’ll have to deal with a lot more angry and unsatisfied customers if you’re dropshipping.
3) Shipping. Let’s be honest. If you’re thinking about starting a dropshipping store in Latin America, you’re probably going to be sourcing products from China. Since Latin America is far away from China and isn’t the most prioritize market for them, shipping is going to take a long, long time. They will take longer to process your order and it will spend more time in transit. There’s no e-packet to LATAM, so forget about a two-week arrival. In fact, several items I’ve ordered have taken over 2 months to arrive to LATAM.
And that’s if they arrive at all.
Due to inadequate postal services in every single Latin American country (no exceptions), many packages will get lost or stolen somewhere on route.
Although dropshippers from AliExpress are generally good about getting you a refund or replacement product if your stuff doesn’t arrive, good luck explaining to your customer why they’ve been waiting months on end for a watch or a pair of leggings.
4) More competition. Everyone and their mothers are getting in on the dropshipping game now. It’s somewhat of a saturated market. Makes sense since there are basically no barriers to entry. Although not many Latin Americans know about dropshipping, this won’t necesarrily be an advantage for you – many dropshipping stores (ZAFUL and ROMWE are two examples) already have pretty solid client bases in LATAM.
Although having your site and customer service in Spanish will be a slight advantage, you’ll find it results more in having to deal with stupid questions than in increased sales.
5) Customer retention. When your product takes months to arrive, probably doesn’t look exactly like the photos and in a black garbage bag labeled “CHINA POST” that person is probably not going to buy from you again. At least, that’s been my experience. So you’re constantly going to have to focus on acquiring new customers and, if you have a large social media, reputation management. This isn’t a huge deal – since you’re supplier takes care of everything else it will free up time to focus on things like this – but just realize that customer loyalty isn’t really going to be a thing for your dropshipping store.
***Note: I realize that many of the cons listed above can be solved by finding a reliable fulfillment center (i.e. probably not one in China). Problem is, you won’t have much luck finding a dropshipping partner in Latin America that’s going to take on anything that isn’t massive volume. This is written with the assumption that you’ll be dropshipping with AliExpress or something similar.
I’ve always had a bit of a hard-on for the idea of having my own brand; selling my own products. One thing I’ve always hated about things like affiliate marketing is that you have no control over your earnings. If all of a sudden a program shuts down or they decide to skim $100-$200 off your sales each month, there’s nothing you can do about it. Like a day job, your earnings are dependent on someone else and you have limited ability to sway things in your favor.
Dropshipping is similar in a lot of ways in terms of the lack of control – if your supplier runs out of stock, there’s not much you can do about it. Don’t like the packaging or quality control? Again, not much you can do.
Private labeling offers you the ability to control nearly every aspect of your e-commerce business: branding, shipping, the people who work for you etc. It allows you to create something that’s truly yours.
But it sure as shit isn’t easy to get going.
Unlike dropshipping, if your plan is to start a brand you’re going to have to work a lot harder, both physically and mentally. You’ll lose a lot of money in the process, testing products, figuring out how much stock to hold and where to store it, branding and hiring people.
That said, if you do things right you’ll have a sustainable money maker, as well as something you can be proud of.
Let’s dive into the pros and cons.
Pros of Private Label
1) More control. I’ve been over this so I won’t belabor it. The main advantage over a private label company is that you can control as much of it as you want. Want to ship your product in sexy boxes? Do it up. Want to include a personalized note to each customer? Fuck it, why not. Don’t like the person in charge of shipping? Fire that bitch. You’re the king.
2) Better profit margins. Since you’ll be ordering and manufacturing things on a larger scale than dropshipping, you’ll be able to pay less for your products. And because you have a unique brand, you’ll be able to charge more to your customer. I currently have one product that I get made for $2.00 a unit, and it sells for $40.00 in the local currency. And that price is considered reasonable. The biggest markup I can get away with in my dropshipping store is 150%.
Now, will these better margins make up for the additional costs incurred by starting a private label store rather than a dropshipping store? Not immediately (it will take awhile to move your stock, some of it you’ll have to move at a discount), but if you’re in it for the semi-long term, it will pay off.
3) Receiving Payments. This is a major, major issue for e-commerce in Latin America. Most people are still uncomfortable using their credit cards online, and much prefer to pay by a direct bank transfer instead. They also like to pay in their local currency. If you have a private label store targeting one country, you will be able to accept direct bank transfers (assuming you have a bank account in that country). This is massively important, as you’ll find that most customers opt to pay this way. One of the main benefits of a dropshipping store is that you can sell to any country in Latin America…until you find out that no one wants to pay you with anything other than a bank transfer. Even worse, you’ll have to pick one currency to sell in (probably USD) and this will confuse them even more.
4) Quality. The quality of everything is compromised when you run a dropshipping store. With a private label, you’ll be able to screen each product for flaws, correct size, color etc. before it ships out. This makes it much more likely that customer will tell their friends about you and/or buy from you again.
5) Shipping. You’ll be shipping domestically, so packages will arrive much, much faster than if you were dropshipping. Customers really care about this (you’ll find one of the most common questions you get is ‘how long does shipping take). People will buy from your store over a dropshipping one – even if it costs more – if it means they’ll get the package in a few days as opposed to months.
6) Less competition. With a private label you have your own unique brand. One you can develop in whatever way you like. Even if you’re selling the same product as someone else, you can differentiate yourself in any number of ways. With dropshipping, you can only go so far with this. No matter what your ‘brand image’ is on social media, your packages are still going to arrive in shitty packages from China, and made with the same shitty material as anyone else. And you’ll be stuck with their product photos. Plus, with all the new players in dropshipping, it’s pretty much a race to the bottom with razor thin margins. With a private label you don’t have to worry as much about these things. And, with a private label, you’ll also have the opportunity to have your products in stores around your chosen city.
Cons of Private Label
1) Not location independent. If you want to start a private label e-commerce business, you’ll have to pick a base country. There’s really no way around this. Since you’ll be responsible for holding stock and shipping, you’ll need to be present. Eventually, you can hire people to run everything for you but even if you do everything right, don’t expect to be able to distance yourself from the business for at least a year or two.
2) Higher cost. You’ll need some initial capital to get up and running. Whereas a dropshipping store can be profitable in your first month, a private label will not be. You’ll have to invest in buying your products, branding material and potentially a storage space or office unless you plan on running the whole thing out of your apartment.
3) Harder to scale. Unlike with dropshipping, if you have a product that isn’t selling, you’re stuck with that product just chilling in storage. And the money you invested into buying it will be gone. Also, if you find yourself going from 10 orders to 100 orders, it means considerably more work for you, or it means you’ll have to hire someone, which will cut into your profits.
4) Harder to sell internationally. You’re pretty much going to have to focus your sales on one country. This is because you’ll have to price your store in one currency, and you’ll only be able to accept bank transfers from the country/currency that your bank account is in (if not your customers will be charged a massive fee). Also, because of shipping costs. The reason the Chinese are able to ship stuff so cheap worldwide is because their government subsidizes shipping costs. If you try to ship things between two Latin American countries, it will cost you substantially more. Trust also comes into play here. Chileans won’t want to buy from a Peruvian company for example because they’ll deem it less trustworthy (they look down on Peruvians to a degree). Same goes with Colombians buying something from Ecuador, Peruvians buying something from Bolivia etc. etc.
5) It’s harder to execute. Dropshipping stores can be thrown up in a day. You don’t have to handle any orders. You never even have to touch the product. With a private label brand, you’ll have to handle everything. You alone are responsible for keeping things in stock, quality control, packaging, shipping etc. And you’ll need to have all of these things in order before you can start making sales. It’s much more work.
The Bottom Line
So, which kind of online store is better for Latin America, dropshipping or private label?
Although it’s harder to get up and running and will cost more money, a private label business is much more sustainable than a dropshipping store. If you’re in it for the longrun, you’re going to want to invest in your own brand.
The lack of e-packet service and the vast distance between Latin America and China makes shipping times borderline unacceptable to your clients. That, and the fact that the quality of many products is subpar, means that you won’t be getting any return business. Your reputation will eventually be shot, and people will stop buying from you altogether.
I’d say my dropshipping store has about a year shelf life before I’ll have to kill it.
Dropshipping is good for a quick buck, but it’s ultimately an unsustainable business model down here.
The Vance Solution
That being said, I absolutely recommend that any one who wants to try e-commerce down here starts with a dropshipping store.
But it may not be for the reason you think.
It's because it’s great market research.
Think about it. You can test all of the products you want for free to see what’s in demand. Even better, if you haven’t decided where is the best country to start your business in, you can see which countries or even cities where demand is highest. After running some ad campaigns (covered here) and seeing which products are purchased/garner the most interest and where, you’ll know exactly what products to sell and which market to sell them in for your private label brand.
After a few months of research, order the most popular products in bulk from China (or just order a couple if it’s something that can be easily replicated in your country of choice, like clothing or simply toys/trinkets) and voila! You can start building your brand with the confidence that people are interested in the products you’re offering.
My dropshipping store, while earning a modest amount of money, has been far more valuable in the way it has given me insight into what to sell in my private label store. It has vastly mitigated risk – I can be more or less sure that what I decide to buy in bigger quantities will sell by testing it first in the dropshipping store.
So far, it’s working like a charm.
Private label is a better long term online business model than dropshipping, but it will cost more money to start and requires more work.
Start a dropshipping store not in the hopes of sustainable long term profit, but rather to test products that you can sell for a higher markup in your private label store.
And that’s about it!
I’m a fairly risk-averse person, and trying to sell products to people whose culture and buying habits I don’t really understand made things even more intimidating. Testing products in a dropshipping store to eventually sell in a private label store was the best strategy I found to mitigate risk and be fairly sure that I could actually sell the shit I was buying.
Not being passionate about the stuff I’m selling has helped immensely – I simply respond to what other people want (I’m often baffled at the nonsense items that are popular, but I ignore that little voice in my head).
I hope this helped any of you that are interested in trying a more non-conventional way to make a living in an Latin American country.
(and for those of you who aren’t don’t worry – the series is almost done and I’ll be back to writing about the shit I was writing about before).
As always, post any thoughts, questions, ideas, complaints, praise in the comments below.
Until next time
More articles about business in Latin America