Disadvantages of dropshipping include high levels of competition and slow shipping times. Upcoming risks for dropshippers in 2023 continue to be the lack of control over key aspects of your business, like inventory management and product control.
In addition, getting started with dropshipping in 2023 is about being the best marketer. So you need the skills to get your winning product in front of as many eyeballs as possible. But dropshipping is still worth it if you're prepared to do the work to establish a real online store.
This article will cover nine disadvantages and risks of drop shipping, including why people fail with the business model. But starting a lead generation business is better if you want to make money online in 2023. This is because there's less competition than drop shipping. Plus, you have full control over every aspect of your business.
What Are The Pros & Cons Of Dropshipping?
A low-cost business model with minimal risk.
A fast way to test the market.
You can scale quickly with new offers.
Super competitive with low-profit margins.
The business model is not sustainable long term.
9 Risks & Disadvantages Of Dropshipping: Don't Join the 90% Who Fail
1. Dropshipping Is Competitive
Dropshipping is competitive because it doesn't require a particular skill set and is easy to duplicate. Dropshipping is not high-risk. It's about testing the market and finding a product that sells well. But your only job is to drive online traffic to your offer. Then, your supplier handles all the order fulfillment. But because there's minimal risk with dropshipping, there's a ton of competition, which is one reason why dropshipping is hard.
Plus, the market is just getting more competitive, with growth rates of 20.7% projected from 2022-2028. But because it's so easy to copy a winning video ad, find products selling well on third-party tools like AdSpy or Ecom Hunt. Or search trends on Facebook and TikTok. Everyone is launching the same products. So to make sales, dropshippers undercut prices. But this results in the lifespan of your hot-ticket item being drastically reduced.
How Do I Succeed As A Dropshipper?
To succeed with dropshipping, you need to approach building your business in a way that is hard to copy. So concentrate on simple logistics and only worry about acquiring and selling to the end customer. Your goal is to provide the best customer experience possible. So you need to use some strategies to get ahead of the competition like:
- Better marketing techniques (learn sales, copywriting, video editing, etc.)
- Publish unique and curated content
- Host live streams on social media platforms
- Have superior creatives and original ad copy
- Create videos that go viral
Learn how to create more compelling video ads that get high conversions and a ton of engagement. Not only is this one of the best ways to separate your competition and ensure your dropshipping business stays profitable. But if your ad gets more attention than other ads, Facebook and other marketing platforms will show your ads more. Then you can scale your ad easier and for less cash.
2. Low-Profit Margins Limit Profitability
Low-profit margins limit profitability for dropshippers. Dropshippers earn between 10%-30% profits, but the average dropshipper can make between $500-$3000/month. But there are a few factors that contribute to your overall profit margin like:
- How many items you sell
- What your price point looks like
- If you dropship low-ticket or high-ticket inventory
But you need to calculate your revenue versus profit. So you need to keep track of your expenses. And you should know how much it costs to acquire a potential customer. Or how much money you're spending on paid ads. But you can use third-party software like BeProfit to calculate your margins in real-time. Of course, there are a few ways you can increase your margins. So consider adopting methods like:
Additional Ways To Increase Profit Margins:
Create a video with virality potential and drive organic (free) traffic to your dropshipping business. Then you'll make more sales and more money. Plus, because you won't need to rely on paid ads, you'll generate higher profit margins and scale faster.
3. Dishonest Dropshipping Suppliers Are A Fast Way To Fail
Dishonest drop shipping suppliers are a fast way to fail. Plus, they're one of the biggest disadvantages of the dropshipping model. Consider that you're in a physical product business but not in control of the actual product or shipment. Instead, you only have control over the marketing. So when your supplier makes a mistake, it can hurt your business. And because you don't physically deal with products, you're relying on your suppliers to fulfill orders.
But they need to provide high-quality items with fast shipping, or you risk getting a ton of negative reviews and customer service issues. So the key is to choose a wholesaler who buys directly from the manufacturer and can offer the best prices. (Even if it means a minimum order and pre-order fees). But unfortunately, there are unethical suppliers in the industry that will scam drop shippers (especially beginners). So you need to do research and watch out for things like:
Avoid a dropship supplier who:
Building a relationship and regular communication with your third party supplier is crucial. But you also need to source wholesalers from reputable platforms. (Like Shopify's member directory).
Using a trusted platform is one of the best ways to ensure you don't get scammed. A few other tips for choosing the right retailer include things like:
How To Choose The Right Dropshipping Supplier:
- What materials do they use for packaging?
- What are the estimated delivery times?
- How long does it take to process an order?
- Are their prices fixed? And is there a minimum order requirement? Do they add a shipping cost?
- How do they handle returns & refunds?
You should also consider working with US dropshipping suppliers that can ship from US warehouses. Then you get your product fast and don't need to worry about a Chinese dropshipping partner with 3-4+ weeks shipping times.
4. Minimal Control Over Product Quality & Availability
You don't need to own or hold any inventory. Instead, you rely on your supplier to keep things running smoothly. But you have no control over the quality of the items you sell. One of the major disadvantages and risks of drop shipping is that you're only the middleman. But things that are low and sub-par inventory won't cut it.
On the other hand, dropshipping items that sell the most are high-quality items that invoke an emotional response in your target market. The goal is to pick products that create a sense of urgency or are hard to find. But a major disadvantage of the business model in 2023 is the ongoing stock shortages and limited availability. Not only are these quick ways to generate negative reviews and lose the trust of your target market. But your small business won't last long if you don't have inventory.
What To Do If You Have Inventory Issues:
- Update your Facebook, Google Ads, etc., and exclude products on backorder.
- Update your inventory status and product pages.
- Don't turn your traffic back on until delays are only two weeks or less.
- Recommend similar products to customers.
Build relationships and have more than one wholesaler option. Or even consider having a different supplier for each item you sell in your ecommerce platform and offer different products to combat inventory issues.
Of course, regular communication will eliminate some concerns. You can also consider giving them a deposit to hold inventory or pre-purchase items. But it's your responsibility to avoid problems and have what people want to buy right now if you're going to own a profitable online store.
5. Slow Shipping Times Will Kill Your Chance At Success With Dropshipping
Slow shipping times are one of the fastest ways to kill your chance of success with the business model. Amazon offers same and next-day shipping. So your customers aren't going to wait 4-6 weeks for their items to ship from a warehouse in China. (91% of consumers expect to receive an online order within a week). In 2023, you need to either connect with a US-based wholesaler or take advantage of things like:
How To Get Even Faster Shipping Times:
To get faster shipping times, you can use services like Special Line and get delivery from China to the USA in 5-12 days. But be sure to ask your supplier the length of time for shipping for each country you sell to and get proof of tracking. (Include this information in your shipping policy). Or you can use an agent in China to source and qualify your products. (They're like the middleman between you and your supplier). But agents can also help you:
- Source inventory & provide fulfillment services
- Get the best price & fast shipping times
- Secure better quality products & customized packaging
You can find reliable agents in Facebook groups, Upwork, or sites like Eperlo or HyperSKU. Or you can ask your supplier to recommend an agent(s). But you need to vet potential agents and ask them things like:
Like pre-qualifying your suppliers, you need to speak with several agents and ensure you connect with the one that will work best for your business goals. Consumers also want free shipping, and 66% of consumers expect it for every online purchase.
You can streamline the process by including shipping costs per unit sold and then negotiate a flat fee with your supplier in the selling price. But the longer your inventory takes to reach the customer, the higher the chances of them canceling the order. Or they may even request a refund. And then you won't make any money.
6. Too Many Refunds & Returns Are A Serious Disadvantage
Refunds and returns can put you out of business, which is one reason drop shipping is a bad idea. But refunds are part of running a company, and drop shippers typically see return rates around 20%-25%. But returns mean you're losing money, so you need to have good policies and easy processes if you want to make a profit.
Systems will not only decrease the number of returns but can ensure you have happy customers. So here's when it's vital to work with quality suppliers. Or opt for wholesalers who are nearby, have inventory in stock, and sell high-quality products. But how well you address returns will directly impact your drop shipping store's success, so you need to have a clear and easy-to-understand return policy listed on your site like:
Tips For Creating A Good Return Policy:
Create a return policy that aligns with your supplier(s) to provide consistency and less hassle for you and your customers like:
The Return Process:
- What's the reason for the return?
- Contact your supplier for an RMA (Return Merchandise Authorization) number.
- Provide the customer with a return address and RMA number and request they purchase a tracking number if they pay for shipping.
- Check for damages
- Take photos
- Ship the item to your supplier
- They will refund you or send a replacement to the customer at no extra cost
- The customer will either get a new product or a refund
You can offer a replacement product at no additional cost to prevent losing money. Or you can provide people with a discount on future orders. But it's your responsibility to communicate with the customer throughout the process and address their concern appropriately. Again, your goal is to provide the best shopping experience possible. So you want your customer to be delighted with the outcome.
7. Payment Gateways Can Shut Down Your Dropshipping Store
Payment gateways can shut down your store. Gateways like dropshippers because they're considered high-risk. Financial institutions aren't going to put themselves or their customers in a situation where they don't receive what they paid for. Or deal with items that have a high return rate.
But payment gateways are responsible for your store's transactions, including all charges. There are also often add additional costs for chargebacks and currency conversion. But you're working with pretty thin margins. So you need to choose your payment gateway strategically. You want to offer your customers an option they recognize and trust. But each country you sell in might has a preferred option. So you need to do your research before you decide and access the following:
Payment Gateway Criteria To Consider:
When setting up your online business, consider using two gateways to experiment and determine which one you prefer. But one of the biggest issues with payment gateways is the risk of getting shut down as you scale your business. In addition, payment gateways (like PayPal, Shopify Payments, etc.) hesitate to work with you because of potentially high returns and possible chargebacks.
Chargebacks are when customers ask for a refund from their payment method (credit card, debit card, bank). So they request a refund from their bank. But because the consumer has a relationship with their banking institution, they're refunded their money
“72% of merchants respond to chargebacks. The average net win rate is slightly under 9%”. Chargeback Field Report
So you want to keep your chargeback ratio under 3%. Higher than this, and you might get your merchant account shut down. But dropshippers are notorious for getting high chargebacks because customers wait too long for the product. (Since they didn't know it was getting shipped from China). So, they request a chargeback, thinking they got scammed because they didn't expect the shipping time to be over 4 weeks. But there are other reasons for chargebacks, including:
What Causes Chargebacks?
- Lengthy shipping times.
- Lack of communication and less visibility between you and the customer.
- Merchant fraud.
- Duplicate orders.
- Product quality.
Reduce your number of chargebacks by implementing a tracking system like Spark Shipping to prove that your customer received their products.
Other Strategies For Reducing Chargebacks:
But you can mitigate chargebacks by clarifying your refund and return policies. In addition, you should communicate with your buyers and be visible on social media. You also need to keep detailed records and use analysis tools to reduce fraudulent activities.
8. A Limited Customer Connection
Dropshipping is a hands-off business model. You rely on your supplier to handle the packaging, shipping, and returns. But that means you're not building a customer connection.
But because you have limited control over product quality and shipping, it's up to you to promote engagement and build relationships with your buyers. The secret is to get your store to stand out and be perceived as a legit company. So you need to create the best customer experience possible and adopt engagement techniques like:
How To Improve Customer Connections:
If you want to increase profits and be successful, you need to focus on more than just the acquisition phase. Instead, concentrate on recurring customers and adding value. The goal is to make your CLV (customer lifetime value) higher. (It costs you less to get customers, but you earn more). Plus, returning customers spend more than 67% more than new customers.
9. Frustrations Over Facebook Ad Bans
Facebook ads are frustrating for even the most seasoned drop shipper. First, you lose momentum when your ads get banned. But it's worse if your account gets banned. (Then you can lose focus on fixing your ad copy). Unfortunately, for dropshippers, Facebook bans are inevitable. But you can do a few things to improve your chances of remaining compliant with the platform. Reasons for Facebook bans include things like:
Reasons for Facebook Ad Bans:
The customer belongs to Facebook. And the platform wants aesthetic, original, and engaging content. Unfortunately, if your dropshipping account gets banned, it's hard to reinstate, and you need to start over. So you need to follow the rules and adopt a few strategies to avoid being banned from Facebook like:
How To Avoid Facebook Bans:
Facebook does not like aggressive advertising that can give users a negative experience while on their platform. For example, ads that point out pain points convert well, but it has higher chances of getting shut down. So you need to create ads that focus on the positive aspects of what the product does. (Rather than highlighting the negative part of what it solves).
- Check your account quality score every three days.
- Register your business and put your ID in the settings manager.
- Get an agency account, as they're not banned as often. (Facebook appears to grant them more leniency).
What Is Dropshipping & How Does It Work?
Dropshipping is an order fulfillment method business model. You don't need to invest a ton of money to get started, and you don't need to own or house inventory. But the downside to the dropshipping business model is that because the barrier to entry is so low, anyone can become a dropshipper. Hence, the industry is super competitive, and hundreds of new people continue to enter the market. It's so easy for another dropshipper to come in and copy your video ad or creative.
Or offer a better price for your winning drop shipping product and push you out of your own market. Thus, drop shipping is hard because most hot-sellers are based on trending items. So if you want to make money, you need to be on the hustle constantly. And you need to know how to jump on trends before the market becomes saturated. So you need to pick a profitable niche with a passionate audience of people. Then you need to find products that either:
Dropshipping Product Ideas:
Personalized items (like cosmetics or big-ticket purchases like kitchen appliances) are things to avoid in dropshipping. Dropshippers should also avoid engaging in price wars. Drop shipping profit margins are already thin (10%-30%). So getting into a battle for the best deal is a quick race to the bottom.
Of course, you can still be successful with dropshipping in 2023, and if you structure your business model as a salam transaction, then you don't need to worry if dropshipping is halal or haram. But you need to learn the basics, be prepared to do the hard work and understand the risks before you start. Listed below are nine disadvantages and risks of dropshipping in 2023. So let's check it out:
Drop shipping isn't so much about being in the physical products business. Instead, it's about being a great marketer. You need to be a business owner who knows how to capture the attention of the potential buyer and convert them into sales. But this ecommerce business model takes time, capital, and an understanding of paid social media ads. So most people fail at dropshipping because they quit too soon. Or they think it's a fast way to make money online.
But in an increasingly competitive market, your edge comes from going the extra mile. So you need to learn the skills to create ads and branding. If you want to be in the 10%-20% of people who succeed with dropshipping, you need to provide your audience with a product and an offer that's more compelling than the competition. But even then, it's too easy for another dropshipper to come in and steal your winning ad creative. Or sell your product for less and push you out of the market.
Dropshipping is still profitable in 2023, but the old ways don't work anymore. So if you want to succeed and make money with the business model, you need to be the better marketer. And you need to know how to stay ahead of the curve. But with razor-thin profit margins and products with a low shelf life, I prefer the lead gen model. Not only is it a proven concept, but how I made $52K/month in passive income.
Local lead generation is a long game with less competition that's hard to copy. But, of course, if you're prepared to work 10-20+ hours a week on your drop shipping business. Or you can land a product that has the potential to go viral. Then, you can still make money with the model in 2023.