Why online business doesn’t drive people out of poverty
Do you know any thriving digital businesses that are NOT developed by western, white, middle or higher class, men? Amazon, E-Bay, PayPal, Facebook, Instagram, QuickBooks, MailChimp, Airbnb, Uber…the list is long. Of course, there’s nothing inherently corrupt about these men, they’ve created products that are serving us greatly. But there is, without a doubt, greater potential of service in empowering a more diverse group of people to thrive as well. The internet has shown us, countless times, amazing value of this domino effect.
What about people with no Ivy League school background and safety nets of all sorts? They’ll usually start selling stuff online, which is a virtual equivalent of that deli you have on the corner. Except, competition to online sellers is the world, not the next deli on the next corner. Do people (with no angel investors or fancy crowdsourcing campaigns) who managed to save a couple of bucks and wish to ride that all-promising, digital unicorn of prosperity, have options? Lately, an avalanche of entities was created around a thing called drop-shipping business. An online sales business you can start with only a couple of dollars. You don’t need heavy capital to buy products in bulk from wholesalers, just find the right suppliers, list their products on your website, or E-Bay/Amazon, and start making money! Whenever there’s a purchase, suppliers ship goods to customers directly. The margin goes to the merchant’s pocket. So empowering, right?! It would be, if it was true.
97% of businesses fail to succeed online. While they exists, they generate profit, just not for themselves. Given that small online sellers are competing with Walmart and Amazon they can’t really allow themselves high margins, especially given that they don’t own any storage facilities. Drop-shipping margin is typically 10–20% out of every sale. That margin they could potentially use to feed themselves and their families. Potentially, yes, but in reality they’re just helping corporations grow stronger and larger while plummeting towards inevitable financial havoc.
Let’s say our made-up online merchant, Fabian, uses Shopify as a website builder to sell gardening tools. In order to process payments online he uses services of a payment getaway (Amazon Payments, PayPal, Braintree or whatever else). After months of toiling away and setting up his business he finally gets some customers in. Once a customer makes a purchase he’s charged around 3% by the credit card processor/payment getaway. Then, he’s charged 2% by Shopify for using their checkout, these are called transaction fees. When he submits the purchase order to his supplier, guess what happens? When a customer buys a product, the payment goes to merchant’s bank account which is later billed by a supplier. The supplier charges him again for credit card processing fees, around 3%. On top of that, Fabian is also paying fixed monthly fees to Shopify and his payment getaway of choice.
Fabian is such a sucker, he works for a margin of 15% but then he gives 10% to the bank. 5% he’s left with is probably not even his break-even point.
Yes, you got this right. For every order, Fabian is paying credit card processing fees three times. His drop-shipping business will never be profitable, regardless of his passion or hard work invested.
And that’s how, ladies and gents, poor people are getting poorer and rich people are getting richer.