Inefficiencies in Retailing

There’s a drop shipping business model mania right now so I thought I would look into it. In case you’re not familiar with it the seller markets a product heavily on social media. When he gets an order he fills it by buying the item at AliExpress or Alibaba and pays for it at that time. And then it is drop shipped to the retail buyer by AliExpress or Alibaba. The social media seller never has any money in the game except for marketing expenses, carries no inventory and handles no product.

I saw one item advertised today that felt I had a use for. It was priced at $29.95, marked down from $59.95. Save $30.00! It was obviously a drop ship seller so I went to AliExpress and looked it up there. I ended up buying the same exact product for $6.00 with free shipping.

I find the drop shipping model fascinating in many ways. In essence the seller is exploiting market inefficiencies: buyers are unaware of companies like AliExpress or are uncomfortable dealing directly with an Asian company. Many retail profits, like mine, are earned by adding value. But historically, many have been gained by exploiting inefficiencies in the marketplace. For example, before the internet, many local retailers gained profits simply by geographic convenience. Or lack of pricing information on the buyers part. That of course dissolved as the internet effectively eliminated geography and made pricing information ubiquitous.

When I first got involved in the internet (in 1995) we called this disintermediation. It’s been interesting over the years to watch various layers in business models being removed (think of travel agents). Another thing that occurred to me is that as younger generations grow up with the internet as an integral part of their lives and online sophistication grows, this removal of layers will most likely accelerate. In an extreme example, who needs Amazon when you can buy bare bones wholesale one item at a time from Asia, the same place Amazon gets most of their goods?

The prices at AliExpress are mind bogglingly low. Same old junk we buy here but at a fraction of the price. That’s what happens when layers are removed.

Your thoughts?

Cheers,
JohnA

yep... about 5 years ago for my 2005 Boxster, bought an awesome 8' screen WIFI entertainment unit with back up camera from an add pushed to me as I was shopping for Pioneer units.... for $200 i got what exceeded the $1200 Pioneer unit. The guy said my unit was taken right off the production line and posted to me.... china of course…. the guy that sold it to me never even saw it , he was happy and I am still very happy....
moral of the story.... if you can set your self up for doing this and it is something you want to do for a living go for it... you might make yourself fat and happy and please some folks on the way....
P.S. soon after that was pushed an ad for Porsche key fobs. The very same ones that you see everyone selling for $35.00 , for $ 0.50 a piece. bought two of them... was tempted to buy a boat load and go into business but that's not my thing...

I was interested in looking into the drop shipping e-commerce model just out of curiosity. It’s the last business model I would ever use. I was taught by my Vermont elders that you had to *earn* your way. So I’ve always been most comfortable with a business model that included a big scoop of value add.

It would be easy to go on a tirade here (where’s Frank when we need him) but it seems like the old fashioned Yankee values are greatly diminishing. The play today is to find a way to game the system as opposed to building something of value or offering a service of value. The old win-win is devolving into a win-lose.

As the internet continues to evolve rapidly it’s going to become increasingly difficult to game an inefficiency. It’s going to become important to find a way to add value in your business model.

Cheers,
JohnA

Hmmm . . . Arbitrage has been with us as long as there have been markets. The value added is the information that shows up the pricing disparity. Maybe the arbitrager doesn't work as hard as you and me, but that doesn't mean he hasn't added value.

"Gaming" the system is a part of human existence -- didn't cave men use clubs to kill their prey? A lot easier than using their bare hands, no?

All of this ‘free shipping’ from China is heavily subsidized by the US taxpayer. The irony is that it is pushing small American businesses out of business. You can’t get something from the Far East to your door more cheaply than you can ship something cross-continent without someone getting it up the tail pipe, and that’s ultimately us as Americans.

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Originally Posted by ibmiked

All of this ‘free shipping’ from China is heavily subsidized by the US taxpayer. The irony is that it is pushing small American businesses out of business. You can’t get something from the Far East to your door more cheaply than you can ship something cross-continent without someone getting it up the tail pipe, and that’s ultimately us as Americans.

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You're exactly right. As an e-tailer, the whole thing infuriates me.

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Originally Posted by jaudette3

...When I first got involved in the internet (in 1995) we called this disintermediation. It’s been interesting over the years to watch various layers in business models being removed (think of travel agents). Another thing that occurred to me is that as younger generations grow up with the internet as an integral part of their lives and online sophistication grows, this removal of layers will most likely accelerate. In an extreme example, who needs Amazon when you can buy bare bones wholesale one item at a time from Asia, the same place Amazon gets most of their goods?

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John, this is an interesting topic, technology exploiting inefficiencies. It's my industry so I am a part of it daily.

While you can go back in 2001 Kubrick-esque fashion to the discovery of the bone tool by pre-historic humans as an early exploitation, the internet or more directly its backbone of shared compute and network has accelerated change so dramatically that most people haven't thought through the ramifications beyond the near term economic dislocation.

What happens when entire industries that took decades to solidify their processes and pay scales transform in a matter of a couple years?

Next up for massive disruption or "inefficiency exploitation" are key white collar industries such as medicine and banking. And I don't mean the banking app on your phone. I'm talking about entire swaths of white collar bankers in front of screens losing out to algorithms and automation. What does that do to metro NY real estate for instance? The AI (Artificial Intelligence) push will drastically alter how society works.

We're LinkedIn buddies so check out my world a bit; it's the tooling and operating models driving these transformations.

Bryce