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Disadvantages and Risks Of Dropshipping (Why People Fail With This Business Model)

May 10, 2022

Dropshipping is a fulfillment-style online business. You don't need inventory. You don't handle packaging, shipping, or delivery. Just do the marketing, get the customer to buy a product and put a order in to a supplier and they fulfill the order for you.

The disadvantage and risk of dropshipping is because you're in a physical product business, but you're not in control of the actual product or shipment. You're only in control of the marketing, so when your supplier makes a mistake, it can hurt your business. You're also completely reliant on Facebook ads for traffic so an account suspension is a big roadblock.

But with its low barrier to entry. Dropshipping has created quite a crowd. Gone are the days when you could build a quick store. Source low-quality goods from China and make a ton of money.

You can still be successful with dropshipping. But the rules of the game have changed. After reading this list, will you still think dropshipping is worth it?

1. Competitive Market

Dropshipping doesn’t require a ton of upfront capital. You don’t need a particular skill set. And it’s easy to duplicate. But this creates competition.

Anyone can go to tools like AdSpy or Ecom Hunt and find products selling well based on the FB ad that's trending with high engagement. Items that have a high social proof of success. But because everyone uses these tools. They all launch the same products.

They undercut prices, and ad costs go up. Resulting in the trend lifespan of your hot ticket item being drastically reduced. It's too easy for people to come and steal your product. Kick you out of the market. And price you out.

 “Only between 10% and 20% of dropshipping businesses succeed.” Quora

How To Gain A Competitive Edge:

You need to approach building your business in a way that's difficult to copy. Concentrate on simple logistics. And only worry about acquiring and selling to the customer. Be better than the competition with strategies 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.

Be transparent and focus on providing the best customer experience possible.

Knowing how to create more compelling video ads that get high conversions is one of the best ways to separate your competition and ensure your dropshipping business stays profitable. If your ad is showing better engagement than other ads, Facebook will prefer to show your ads off more and allow you to scale your ad easier.

How to use AdSpy to create better video ads?

2. Low-Profit Margins

Profit margins with dropshipping are based on what you sell. Average margins are typically between 10%-30%. But it depends if you're selling high ticket/low volume. Or low-ticket/high volume products (profit margins can be really slim with this dropshipping style).

You also need to take into account pricing errors. And revenue versus profit. Be sure you're calculating all your expenses. And consider using apps. BeProfit or Lifetimely to calculate your margins in real-time.

Additional Ways To Increase Profit Margins:

  • Offer quantity breaks on your landing page (example: buy one get one 1/2 price).

  • Sell products that can be sold repeatedly to the same customer.

  • Establish a high perceived value for your products.

  • Order inventory in bulk to reduce shipping and inventory costs.

  • Promote upsells or offer similar products that complement what you're selling.

  • Test different price points and sell untapped products.

3. Dishonest Suppliers

Because you don't physically deal with products. You're relying on your suppliers to fulfill orders. And this includes ensuring high-quality items with fast shipping.

Choose wholesalers who buy directly from the manufacturer. And offer the best prices (even if it means a minimum order and pre-order fees).

Unfortunately, some unethical suppliers will scam drop shippers (especially beginners). 

A few red flags to watch out for include:

  • Sell Brand Products Too Low (Buy Gold Accounts But Sell Low-Quality Inventory)

  • Increase Pricing After Ordering

  • Send Good Samples & Bad Bulk Orders

  • Use Fake Certificates & Change Products

  • Ask You To Pay Sales Reps Directly

  • Initially Accept Trade Assurance & Then Refuse

  • Disappear After Receiving Payment 

Building a relationship and regular communication is crucial. And sourcing suppliers from reputable platforms (like Shopify’s member directory) is the best way to ensure you don't get scammed.

Consider working with US dropshipping suppliers that can ship from US warehouses that ships fast instead of Chinese suppliers with 3-4+ weeks shipping times.

Questions to ask potential wholesalers:

  1. What materials do they use for packaging?
  2. What are the estimated delivery times?
  3. How long does it take to process an order?
  4. Are their prices fixed? And is there a minimum order requirement?
  5. How do they handle returns & refunds?

4. Minimal Control Over Product Quality & Availability

You don't hold any inventory. But you rely on your supplier to keep things running smoothly. Selling poor-quality items is only part of the equation.

Stock shortages and limited availability are quick ways to generate negative reviews. And lose the trust of your target market. This is why you need to build relationships. And have more than one supplier.

Regular communication will eliminate issues. But consider giving them a deposit to hold inventory or even pre-purchase items. It's your responsibility to stay ahead of these concerns.

Pro Tip: Consider investing in an automation and tracking software. Like ecomdash or Stock Sync.

image of ecomdash website

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.

5. Shipping & Logistics

Customers won't wait for slow shipping. With Amazon offering same and next-day delivery. You'll fail fast if you plan on settling for 20-day shipping from China for your inventory. (91% of consumers expect to receive an online order within a week). 

To get faster shipping times. 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. 

Also, get proof of tracking (include this information on your shipping policy). The longer your inventory takes to reach the customer. The higher the chances of them canceling the order. And requesting a refund. 

Pro Tip: Consider investing in a tracking system (like AfterShip). To automate the process and generate brand loyalty and consumer trust.

image of special line website

Consumers also want free shipping. And 66% of consumers expect it for every online purchase. So, streamline the process by including shipping costs per unit sold. And negotiate a flat fee with your supplier in the selling price.

How To Get Even Faster Shipping Times & Better Pricing:

Think about using an agent in China. Someone who will source and qualify your products. They're 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 and Upwork. Sites like Eperlo or HyperSKU. Or ask your supplier to recommend an agent(s). But be sure to vet potential agents and ask things like:

  • Where are they located?

  • How big is their network? Do they have access to multiple suppliers?

  • Do they speak English well? And respond quickly?

  • How long is their process time?

  • Do they need a minimum number of orders?

Just like pre-qualifying your suppliers. You need to take your time. Speak with several agents. And ensure you connect with the one that will work best for your business goals.

6. Refunds & Returns 

Too many refunds can put you out of business. But refunds are part of running a company. And drop shippers typically see return rates around 20%-25%. Returns mean you're losing money. So it's essential to have good policies and easy processes. Not only to decrease the number of returns. But to ensure you have happy customers. 

Here's when it's essential to work with quality suppliers. Wholesalers that are nearby, have inventory in stock, and sell high-quality products. But no matter where your suppliers are located. How well you address returns directly impacts the success of your dropshipping store.

Tips To Creating A Good Return Policy:

  • Know your suppliers return policy.

  • Do they charge restocking fees?

  • How long is the window for returns?

  • Who is responsible for shipping costs?

  • Are there limitations to the type of return? (example: wrong size, color, etc.)

 “14.1% of all retail purchases are done online. But  this number is projected to rise to 22% in 2023”. Reviewlution

Create a return policy that aligns with your supplier(s). This will provide consistency and less hassle for both you and your customers. To prevent losing money, offer a replacement product at no additional cost. Or a discount on future orders.

The Return Process Should Look Like This:

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. Request they purchase a tracking number if they pay for shipping.

If the product is sent to you:
  • Check for damages
  • Take photos
Ship the item to your supplier
  • If the product is sent 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.

It's your responsibility to communicate with the customer throughout the process. Ensure that their concern is addressed appropriately. And the customer is satisfied with the outcome.

7. Payment Gateways & Chargebacks

Payment gateways are responsible for the payment transactions of your store. All payment gateways charge transaction fees. And often add additional costs for chargebacks and currency conversion.

You're working with pretty thin margins. So you need to choose your payment gateway strategically. But you also want to offer your customers a payment option that they recognize and trust. Each country you sell in might have a preferred option. So be sure to do your research before you decide. 

Criteria To Consider:

  • Are they compatible with the country(s) you're selling products to?

  • How much are the transaction fees?

  • What are the added fees for conversion? Chargebacks?

  • Do they support dropshipping? Available on a global level?

  • Do they offer excellent customer service?

When setting up your store consider using two gateways. Experiment and determine which one you prefer.

One of the biggest issues with payment gateways is the risk of getting shut down. As you scale your business. Payment gateways (like PayPal, Shopify Payments, etc.) become hesitant to work with you. Because of potentially high returns and possible chargebacks.

Chargebacks are when a customer asks for a refund from their payment method (credit card, debit card, bank). They request a refund from their bank. And because the consumer has a relationship with their banking institution. They're refunded their money. 

You want to keep your chargeback ratio under 3%. Higher than this. And you might get your merchant account shut down.

Dropshippers are notorious for getting high chargebacks because customers wait too long for the product since they did not know it was getting shipped from China. They request chargeback, thinking they got scammed not expecting the shipping time to be over 4 weeks.

china shipping

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:

  • Use Shopify fraud analysis feature. And apps like Shopify's Fraud Filter.

  • Create quality content and clear product descriptions.

  • Include numerous high-def images from a variety of angles.

  • Have a clear and concise return and exchange policy.

  • Communicate with the customers and be available on several platforms.

Mitigate chargebacks by being crystal clear in your refund and return policies. Communicate with your buyers. And be visible on social media. Keep detailed records and use analysis tools to mitigate fraudulent activities.

8. Limited Customer Connection

Dropshipping is generally a hands-off business model. You rely on your supplier to handle the packaging, shipping, and even returns. But that means you're not building a customer connection. Your process might look like this:

Buy Ads + Supplier Ships Products = No Rapport With Buyer

You have limited control over product quality and shipping. So it's up to you to promote engagement and build relationships with your buyers. Your priority should be creating the best customer experience possible.

How To Improve Customer Connections:

  • Collect emails and send marketing content, discounts, promos, etc.

  • Create a Facebook group.

  • Live videos on your site or social platforms showcasing you using the products you sell.

  • Storytelling copy on your website or blog (don't just focus on impulse buying strategies).

  • Chatbots & FAQs.

  • Communicate and be available on multiple platforms.

  • Quick response times.

Pro Tip: Focus on more than just the acquisition phase. Concentrate on recurring customers. 

 “Returning customers spend more than 67% more than new customers and cost 5-10X less to acquire." Business.com

9. Facebook Ad Bans

Facebook ads are a source of frustration for even the most seasoned drop shipper. When your ads get banned, you lose momentum. And it's worse if your account gets banned (you can lose your focus on actually fixing your ad copy). Plus they're hard to get reinstated.

But Facebook bans are inevitable. Facebook wants aesthetic and engaging content. And you need to have a high account quality score.

Pro Tips: Check your account quality score every three days.

Register your business and put your ID in settings manager.

Get an agency account. They don't get banned as often (Facebook appears to grant them more leniency).

Reasons for Facebook Ad Bans:

  • Poor quality products.

  • Lengthy shipping times.

  • Negative reviews.

  • Low-quality or copyright content.

  • Using factory or other people's thumbnails.

  • Creating ads that go against Facebook's terms of service. FB does not like ads that gives people negative emotions.

There are a few things you can do to stay compliant. And lower the chances of getting banned from Facebook.

How To Avoid Facebook Bans:

Have a good landing experience.

Don't post anything sexual or related to drugs.

Make sure you have proper customer service channels.

Take advantage of other platforms (like Tik Tok).

Share a blog on your site.

Only publish custom content (including video and images).

Avoid using images that can give the customer a negative feeling. IE: showing a customer an overweight person.

Facebook does not like aggressive advertising that can give users a negative experience while on their platform. Ads that point out pain points convert well, but it has higher chances of getting shut down. 

Try to create ads that focuses on the positive aspects of what the product does rather than highlighting the negative aspect of what it solves.

Consider Building A Brand:

Drop shippers earning six and seven figures are all saying the same thing. Dropshipping is not a sustainable business model. And it's not a long-term solution to making money online. It's only the first stage of building your brand. And not the entire business model.

It can be a good side hustle, but you're not building any assets that you own as a drop shipper. It's a constant rinse & repeat of duplicating trending product & ads, starting over from scratch each time. You're getting better at social media marketing skills, that's about it.

Instead, you can view dropshipping as a product validation stage. After you've sold 30-100 products, and you have a good hunch that there will be demand for this product long-term, then consider truly branding your product. And get out of the dropshipping phase. You have proof of concept and know the product well. So now you need to order in bulk. Consider private-label and secure a reliable supplier.

Building a brand takes time and money. You need excellent designers for your website, logo, packaging, and great copywriters to get the message out in a memorable way. But branding is the best way to differentiate your product and your business.  Stores that move to private labels. And brand their products generate higher profit margins (around 25%-40%).

Why Building A Brand Will Make You More $$$:

  • Get higher conversions for cheaper ad costs.

  • Establish better consumer trust (more repeat customers).

Source unique products that solve a problem. Not just fads. Check out negative reviews on your competitor's sites. And make changes based on what those customers are saying.

Custom content, professional images, and videos will enhance the customer experience. And set you apart from the competition. Plus, they'll secure loyal customers and make you higher profit margins.

Josh Snow used influencer marketing to build his teeth whitening brand that's now worth high 7 figures. He even changed his last name to Snow the brand name, now that's dedication.

Conclusion:

Dropshipping isn't so much about being in the physical products business, its more about being a great marketer that knows how to capture attention and convert into sales. It takes time, capital, and an understanding of paid social media ads. In an increasingly competitive market. Your competitive advantage comes from going the extra mile to create ads, branding & stores that are more compelling than the competition. 

The major disadvantage & risks for dropshipping is that because you're only the middleman, you have little control over the business. Customer can have poor experience of long-shipping time and it was mostly your supplier's fault. The only benefit is that most dropshippers are not on the hook because they never put a face behind their stores so if one store has bad reputation, they can simply start another one under a different name.

Ultimately, this leads to a business where you're starting over from scratch constantly which can become monotonous.

This leads to many dropshippers eventually creating their own physical products business that they can be proud of. Or we have many becoming a coach and selling their dropshipping courses.

Check out Dropshipping vs. E-Commerce to see just what it takes to start your own ecom business in 2022.

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Ippei Kanehara
Founder/CEO

$52K per month providing lead generation services to small businesses

Ippei.com is for digital hustlers, industry leaders and online business owners.

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