Dropshipping Risks and How to Manage Them
There is a lot of contradicting information about dropshipping out there. As with all types of businesses, there are risks and there are rewards. Do dropshipping risks overshadow its benefits? More importantly, is there any way to avoid these risks entirely?
If dropshipping is new to you, here are the basics that you need to know.
With a dropshipping business model, you don't have to worry about shipping or storing your inventory. Instead, the supplier or manufacturer will do that for you. Simply said, any product that you sell online will be shipped by the supplier. This business model is completely legal.
As a dropshipper, you don't get as large of payments as you would if you manufactured the product yourself. But, you're able to concentrate on marketing and selling your product. Furthermore, if you use the high-ticket dropshipping method that we teach at Drop Ship Lifestyle, you'll find yourself netting considerable profits with every sale.
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Is a Dropshipping Venture Profitable?
If you steer clear from the risks, which we will discuss below, dropshipping can be highly profitable. To achieve success in this field, you have to focus on excellent branding and marketing rather than only paying attention to product designing. That being said, dropshipping vendors essentially receive a commission from each sale. Therefore, you must sell a decent amount of items to earn what traditional online vendors do OR sell more expensive items.
If you are still thinking about getting started and whether or not this venture would be right for you, analyzing common dropshipping risks could help you make a well-informed decision.
Common Dropshipping Risks
1. Buying Opportunities
A common mistake that quite a lot of beginners end up making is falling inside the trap of buying opportunities. The internet is full of turnkey stores on sites like eBay and Flippa. You may even come across Facebook Ads of such stores. People pitch these stores as potential opportunities. The seller will tell you that their site contains a high number of products uploaded on it, and they will transfer its ownership to you.
To anyone who does not know much about dropshipping, this might sound quite tempting. However, what ends up happening most of the time is, you get a cloned website without any potential. These clone sites are pasted copy-and-paste attempts with zero originality.
How to Manage this Risk
You can do several things to manage this risk. The first option would be to simply create your own online store from scratch. This is the most sensible option as it gives you complete liberty of what you want to keep. You can also pay someone to develop the store for you.
On the other hand, you have the option of buying an online store that already exists. Make sure that the store is already profitable and has a good track record before you choose this option. The only downside with this option is that it can be quite costly.
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2. Pricing Errors
If you are at the beginning of your journey, you have probably reached out to a variety of brands. You may also be thinking about uploading numerous product spreadsheets to your online store. Be wary of making pricing errors when uploading your inventory. Data gets mixed up quite often; maybe you edited it, or maybe someone else did, and accidentally crisscrossed the rows. The risk with pricing errors is that once someone orders a wrongly priced product for you, you either have to inform them of the correct price (if you do find out that the price is wrong) or just take the loss.
Managing Pricing Errors
Managing this risk is simple. All you need to do is thoroughly spot-check your product lists before posting their prices online. It is an obvious solution, but you’ll be surprised to see how frequently this error occurs.
3. Being Unaware of Margins
Talk to any experienced dropshipper, and they will tell you that the ideal margin to keep for your products is around 20 to 30 percent. Does this mean that if your product costs $100, you should list it for $130? Not at all. Ideally, you should offer the product to double its wholesale price. So, if you plan to sell a product that costs $100, its price should ideally be $50 or less. Why? Well, because you have to take care of other fees too. Free shipping, paid ads, credit card processing are just some of the things that you should take into consideration when determining your margins.
Be Aware of Your Margins
Once again, the fix for this problem is quite simple. Instead of randomly marking products up, it would be wise to determine other fees that you need to pay by going through the numbers thoroughly.
4. Bronze Suppliers
Be wary of bronze suppliers if you want to make it big in the dropshipping world. In case you do not know, bronze suppliers are the type of distributors that give everybody the green light when it comes to selling their stuff. You will never make good money with them. There are several ways to identify these suppliers. If a distributor charges approval fees for selling their products or for processing each order, the chances are that they are a Bronze Supplier.
Bad customer service, negative reviews, and faulty products are also clear indicators of bronze suppliers. This is perhaps one of the biggest dropshipping risks that people take and many end up paying dearly for it.
Do Your Research
Take your time and conduct extensive research before signing a contract with a supplier. Check their brand name and reputation online. Only then should you make a final decision. We have an entire blog post on finding quality dropshipping suppliers.
5. Ad Spend Returns
Not being aware of your returns is another dropshipping risk. What this means is – the amount of money you can use for ads and the potential returns that you expect from it. Knowing this figure is extremely important. In fact, you should monitor it from the first day. Every dropshipper worth their salt wants a minimum return of 10 times over. This means, for every product that costs $1000, you should be willing to spend around $100 to achieve that sale through paid traffic.
This does not imply that you must spend your money blindly and wait for sales to happen. Instead, it would be wise to actively manage your ad account, which is also called “self-auditing.”
Managing the Risk with Self Auditing
Make adjustments to your ad account regularly. If you are a beginner, checking your numbers after every couple of days is ideal. It would also be best to determine what you expect your ad spend returns to be. If they aren’t, make necessary adjustments so that things work in your favor.
Chargebacks happen when your customer does not like the product they bought from you. They believe that they were scammed out of their money and tell their credit card company that they want their cashback. This will lead to the credit card getting the money back from you and returning it to the buyer.
Chargebacks only happen if a dropshipper messes up. Taking preventative measures can significantly reduce or even eliminate them from happening.
Here is an image from Chargeback Gurus that explains chargebacks:
Being responsive is one of the best things you can do to prevent people from asking you to return their money. Respond to their email as soon as you receive them. Because if you don’t, the customer will call their bank, and once that happens – it isn’t a good look for you.
Another obvious solution to this dropshipping risk is to only offer high-quality products. So, partnering with bronze suppliers is out of the question. Once again, doing some good old research can save you a lot of trouble.
Disgruntled customers are not the only ones who ask for their money back. Sometimes, they also happen because of fraudulent schemes made by someone with a stolen credit card. You can manage this risk by using Shopify’s fraud prevention tool. This built-in tool will alert you if it deems an order to be high risk. Always double-check high-risk orders by calling the person who made the order. You can always cancel the order if you think it’s too risky.
7. Outsourcing to the Wrong Parties
You can put a significant dent in your e-commerce business by choosing the wrong people for your outsourcing needs. There is no shortage of companies offering social media marketing, content marketing, and other forms of digital marketing services for drop shippers. A lot of these companies fail to deliver results. This dropshipping risk only leads to losses. Luckily, you can avoid these losses by trying things out for yourself.
Choose Someone Reliable or Better Yet, Do it yourself
As mentioned earlier, a large number of companies that dropshippers outsource their tasks to do not have the slightest idea of what they should do. You can do the job for half the price (maybe even less) if you work on it by yourself. No, you do not have to become an expert, but having knowledge about each task before paying somebody can really help you negotiate a better deal.
It will also help you determine whether the person or company you have appointed is doing a good job or not. You will be able to call them out if you notice mistakes, inconsistencies, or even fraud. So, yes, acquiring some base level knowledge will never hurt and prevent dropshipping risks by tenfold.
8. Being Hasty In Choosing Business Partners
Being eager to take on a business partner rarely works out. So, before someone’s online resume or proposal impresses you in your private message, take a step back and think things through rationally. More often than not, people who choose their business partners too early realize later on that they are putting in most of the work while the profit is division is equal. Confronting partners about these situations rarely goes well, and what you end up with is a problem that would have never happened if you were not hasty in choosing your partner.
Take Your Time
As we discussed earlier, take your time to figure things out yourself. Determine the vision that you have for your business before letting someone else dictate or alter it later on. Also, it would be best to choose a business partner who shares the same vision as yours so that you operate on the same wavelength and are able to avoid and resolve conflicts later on.
The Bottom Line
Again, although there is an abundance of dropshipping risks, know that they are manageable. Having this knowledge and experiencing everything that we discussed will allow you to avoid pitfalls and make wiser decisions. Once you get the hang of things and display patience during your dropshipping journey, nothing will stop you from making considerable profits.
HERE ARE YOUR NEXT STEPS...
Be sure to register for our next free web class. Then, check out our Ultimate Dropshipping Guide for some of our best tips and tricks for dropshippers.