Dropshippers can make millions selling cheap products on Facebook, Instagram and TikTok, but buyers beware

Dropshippers are the ultimate middlemen.

The trendy e-commerce model is behind the ads flooding Facebook, Instagram, TikTok and Google‘s YouTube at a much higher rate since the pandemic sent online shopping demand skyrocketing.

The model relies on targeted ads designed to stop consumers from scrolling long enough to make an impulse purchase, usually from a Shopify store set up solely for that product. The dropshipper doesn’t place an order until the customer does, and rarely touches the merchandise. It’s often shipped directly from China to the customer, which can cause delivery times of more than 90 days.

Nick Peroni started dropshipping in 2016 and now does it full time from his home in the Philippines.

“I was an Army veteran living in Philadelphia and trying to figure out what I wanted to do with my life and testing around just different kinds of business model ideas,” Peroni said.

Last year, Peroni said he tried selling 10 to 20 products before finding some big hits. His sales of a garden trimming attachment topped $1.9 million in six months in 2020, and in October he sold $150,000 worth of fleece-lined leggings in three weeks. Peroni uses agents in China to vet products and sourcing companies to keep shipping times down.

But dropshipping can also be a minefield for consumers.

“A lot of people just get into the business model and they’re lazy. They’re not looking at it like a business. They’re looking at it like a cash grab, like a get-rich-quick idea where we can sell this product using Facebook ads and make a lot of money,” Peroni said.

“What happens is then a whole cascade of different events where you buy fake reviews to distinguish yourself. You buy fake ratings, fake upvotes, a lot of ads, marketing, but all that adds up,” said Saoud Khalifah, founder of consumer protection software company Fakespot.

Fakespot has a Chrome plug-in that alerts shoppers if a seller on Amazon, Walmart, Ebay, Best Buy or Sephora can’t be trusted. It recently added capabilities to detect untrustworthy stores on Shopify.

“They made this a one-stop-shop for you to set up a store, and it’s just super easy for you to start selling online and a lot of these dropshippers know it,” Khalifah said.

In an analysis of more than 124,000 Shopify stores, Fakespot found more than 25,000 that engaged in some form of fraudulent activity like counterfeits, privacy leaks, or buying fake reviews. Of those, almost 72% showed evidence of dropshipping tactics being used in their business. On Shopify’s Help Center, there’s an entire section devoted to tips and strategies for dropshipping.

Athletic apparel company Gymshark used influencer marketing to grow a cult-like following, and now dropshippers are capitalizing on that success. Gymshark CFO Niran Chana said he’s seeing more and more copycat dropshippers selling knock-offs.

“Someone else is acting as the brand at that point. And we put a lot of investment into assets, content, etc. So for someone to come and almost copy that is frustrating,” Chana said.

Gymshark is building up its legal team to protect intellectual property, but Chana also called on Shopify to help.

“Where we could really do with their help and support is actually when people are abusing those brand rights and running away with a business model that is unsustainable for both themselves and/or Gymshark is they regulate that better. They have the right to be able to say we’re going to pull this site down or you guys are trading sort of uncompetitively,” Chana said.

A Shopify spokesperson told CNBC, “We have multiple teams who handle potential violations of Shopify’s Acceptable Use Policy (AUP) which clearly outlines the activities that are not permitted on our platform, including copyright infringement, and we don’t hesitate to action stores when found in violation.”

For 21-year-old dropshipper Kamil Sattar, this iPhone privacy screen protector was his breakthrough product. He says it did $1 million of sales in less than two months. Many dropshippers find products like phone cases and Bluetooth headphones on AliExpress, a China-based online marketplace where small businesses sell products directly to international buyers. But they’re not all hits: He says this pineapple slicer and these dog grooming gloves flopped.

“Now we have software that we use where they do AI technology and they tell us what the best products of the moment, what’s trending.”

One version of this software is made by Mordechai Arba, who started the popular Ecomhunt blog after making millions as an early adopter of dropshipping. He started in 2014.

“When I first started, I thought that it’s like a side hustle, a side income that you can do in the night hours and wake up in the morning and have extra money without doing a lot of work. But when I started selling, it was not easy,” Arba said.

“If you want to have a future in this business then you need to take it seriously.”