If you have recently discovered the dropshipping business model and have heard of pyramid schemes, you may be wondering if they are the same. Do they share similar principles and processes and do they generate income in the same way?
So, is dropshipping a pyramid scheme? No, dropshipping is not a pyramid scheme. A pyramid scheme involves recruiting people through promising future payments by enrolling others into the scheme. Dropshipping however involves the sale of products and selling physical goods to customers.
Pyramid schemes are considered fraudulent and illegal in many states and locations. They have a bad connotation and reputation and quite rightly so.
Dropshipping on the other hand is an entirely legitimate and safe business model – if done properly and appropriately.
Let us know take a closer look at the two different models. We will be seeing side by side why they are not the same and how to start dropshipping the right way if you want to get started.
What Is a Pyramid Scheme?
A pyramid scheme is a business model where a small number of high level members recruit additional members to the scheme. These new members pay fees, to those who the founding members and whom recruited them. New members are enticed to recruit others, earning a small percentage of the fees. The remaining fees are sent back up the hierarchy.
Pyramid schemes are often seen as scams, and due to their nature, have been made illegal in some countries.
Pyramid Schemes Key Points
- Most pyramid schemes generate income through recruiting new members; no goods or services are sold as such.
- Pyramid schemes mostly profit the original and founding members. With each new member invited and who signs up, they become a new ‘level’ with diminishing payments and earnings per each new referral. The bulk of the recruitment fees are sent to the top of the hierarchy.
How Does A Pyramid Scheme Work?
If we run through a scenario, we can see how the model works in practice.
The founder, is at the top of the hierarchy (position 1 in the graphic above).
The founder recruits 10, second-tier individuals who sit below the founder in the hierarchy. Each of the ten recruits will pay the founder a fee to join the scheme.
While the founder will earn 10x the recruitment fees, each new member will need to recruit their own 10 new members (totally a new 100 members in total). These 100 new members need to pay those who recruited them (the 10 second tier members) and a percentage back to the original founder.
So as you can see, the original founder can generate a lot of income, and new members are trapped and have lost money until they are able to recruit their quota.
With a pyramid scheme, they are destined to ultimately crash as the new members become harder and harder to come by. With each new tier, the harder it becomes.
The original members are those who end up disproportionately with the highest earnings, whereas most of the lower-tiered members fail to ever recover their ‘joining investment’.
Pyramid schemes will only sustain themselves as the lowest levels of the hierarchy stay larger than the upper ones (with more recruits with each ’round’). Once the pyramid fails to find enough new members, the entire scheme breaks down. Logically, and with the considerations of math, it is impossible for a pyramid scheme to be able to last forever – it is at this stage that people lose money.
What Is Dropshipping?
Dropshipping, on the other hand, is a business model that involves selling physical products to end customers. This is standard economic exchange; whereby money is exchanged for a product.
Dropshipping is essentially a fulfilment method. Global suppliers are used and a global customer base is identified.
Dropshipping can take place in any niche, and is predominantly done online. It mostly involves running and managing an online store, alongside using several marketing methods and strategies to acquire customers.
How Does Dropshipping Work?
Where dropshipping differs from regular models, is that products are never physically owned or stocked by the ‘dropshipper’.
Instead, a dropshipper researches products ahead of time with suppliers. They then build out product pages on their online store front (e.g. Shopify) and then market the products through various different marketing methods. Social Media Advertisements are perhaps some of the most commonly used and effective.
Customers will then place an order through the online storefront.
Once an order is placed, the dropshipper receives notification, payment and all the customer details. The product is ordered by the dropshipper with the supplier.
The dropshipper will supply the customer delivery details during this process.
The supplier then sends the product(s)/order directly to the customer.
Dropshippers make their money by acting as the middleman; charging a mark-up for facilitating the sale and getting the product delivered to the customer.
The customer received their product, never knowing that the product was purchased for a significantly cheaper rate.
Often products are sold from anywhere between 2-15x the cost the product was sourced for.
However, there are many fees that dropshippers face. For example, marketing costs are involved, along with store fees etc. This all affects the take home profit.
Dropshipping has been in operation since the dawn of the internet; it was the model Amazon started with and in many ways still uses today.
It is the online version of how many retail stores operate. The difference being operating online, and not stocking the products before they sell.
Suppliers can be used locally, or internationally.
Pyramid Scheme vs Dropshipping; The Main Differences
Let us know take a closer look at the differences between a pyramid scheme and dropshipping side by side so you can easily understand why they are not the same:
|• A scheme in nature; not an entity which can be easily sold.||• Business with assets, which can be sold to potential buyers at any time.|
|• No products or services are sold (some MLM Pyramid schemes may involve products, but these are not at the core of how income is generated)||• Physical products are sold legitimately to customers with a need, desire or want.|
|• Expanding structure; new members are joining all the time – all playing a role to keep the scheme going||• Just one individual can set up, manage and run a dropshipping business.|
|• Requires continued growth & new members.||• Can remain a lean organisation where run by one individual, or expanded with virtual assistants and other team members.|
|• New members are often convinced to join, pressure tactics are often used to get new members to sign up.||• Customers willingly purchase products, wanting what the dropshipper has to offer|
|• Mostly illegal, with dubious moral ways of operation||• Entirely legal|
Pyramid Scheme vs Dropshipping; What Should You Do
Hopefully by now you will have an understanding of why pyramid schemes should not be pursued. Whether you are setting one up or being enticed in. They’re mostly illegal in many countries, they do not follow moral boundaries and ultimately they are destined to fail. Even if they can generate some income in the short term; this is not a viable long term ‘business’ model.
If you are interested in building a legal online business and enterprise, one that will give you an opportunity to start small, keep costs low and scale when the time is right, dropshipping is for you.
Some people have claimed that dropshipping is a scam. I outline why this is not the case in this article here.
The reason for this position is the fact that some individuals have tried but failed with the model. To them, the fact that they were unable to succeed is reason in itself that it cannot nor does not work.
The many successful dropshippers, and many dropshipping stores that sell for hundreds of thousands of dollars on marketplace sites like Flippa and Empire Flippers are evidence that this just cannot be true.
When you compare dropshipping to many other business models, its cheap to start, has low barriers to entry and you do not need to have any technical skills or knowledge. You can build a store quickly and market products the same day.
The problem is, while starting a dropshipping store is simple to do in theory, it is quite a challenge to execute.
How To Succeed With Dropshipping
To succeed with dropshipping, you have to be aware of the many facets involved with running a successful and profitable store.
Proper niche and product research, optimizing your store, using effective marketing strategies and practices, along with knowing how to scale are all some of the areas that can go wrong.
Getting any, or one of these wrong can hamper your success.
This is why, if you want to build a successful dropshipping store, it is best to sign up to a thorough course.
A course will provide you with all the information you need, step by step, and is accessible all in one place.
You’ll learn exactly what to do and when, and you’ll be learning concepts that you can then use with any business that you go on to ultimately build online.
Online marketing for example is a skill that you can use for any business venture you pursue, or a skill you can use in any company you ever work for.
eCom Elites by Franklin Hatchett, is perhaps the best dropshipping course currently available. For a very reasonable one off price, you’ll gain access to all the information you need to build, manage and scale a dropshipping store. Irregardless of your current knowledge or skillset.
Researching for in-demand products, in hot and trending niches, building a store with no technical experience, using social media to market products are just some of the modules included.
Having taken the course myself, I decided to write up a review of my experiences, thoughts and results. If you want to start dropshipping, I would strongly recommended you take a look.