There are many benefits to adopting dropshipping as the model for your eCommerce business. The benefits include relatively low start-up costs; a major reduction of how much of the supply chain you need to manage; and great scalability as your business booms over time. With that said, not every business would benefit from dropshipping, and not every business owner will find it to their liking — not necessarily due to the fault of the person, but due to the nature of the model and the associated risks.
If you are curious about this method of running an online store, you cannot simply dream about the upsides and ignore everything else. It would be wise and responsible of you to also learn about the potential downsides. By arming yourself with this knowledge, you can decide whether the business model is even right for your business, and if so, you can figure out how to make the most out of it. Here is some information about the risks of dropshipping.
On the one hand, one of the biggest perks of dropshipping is that other companies will handle much of your business’s supply chain in your place. Ordinarily, when creating a plan for how to run your eCommerce enterprise, you would have to devise answers to all the thorny answers related to your products. These questions include:
- How will you create the products you want to sell?
- Where will you store them until people order them?
- How will you package them?
- How will you guarantee that they can make it to their destination?
- Most of all, how will you pay for all of this, especially at the beginning when you only have your start-up capital and do not even have customers?
Dropshipping resolves all of these questions in one fell swoop by just paying someone else to answer them for you. Suppliers in this field manufacture the products, or obtain them from a manufacturer. They then provide services for storage, packaging, and shipping. With these responsibilities off your hands and less expenses to pay, you can focus on other, more creative tasks like building up your online store.
On the other hand, one of the biggest risks of dropshipping is that other companies will handle much of your business’s supply chain in your place. This means the continued survival of your business depends largely on another business that may care far less than you. If they flounder, you will need to find a new supplier and fast. If they prove to be unreliable, problems may occur in the order fulfillment process, leaving your customers disappointed.
You might not even have control over the quality of your products, let alone the rest of the supply chain. That is why you need to put serious thought and effort into choosing your dropshipping suppliers. Find one with a reputation for being dependable, a company that will always communicate with you and care as much about your customers’ needs as you do. By handing over these duties to your partner, you will also place a great deal of trust in them, consciously or not. Make sure you work with a supplier that is worthy of that trust.
Harder to Compete
Starting a dropshipping business is relatively inexpensive and requires less work from store owners by removing many of the more time-consuming and complex responsibilities. As a result, this method makes eCommerce far more accessible than other business models. All of that together is what makes dropshipping so appealing to so many people.
If you are interested in starting such a business, you are not the first. You are likely not even the hundredth in your niche. Dropshipping profitability has inspired about a third of all online store to adopt the model, and many of your competitors are getting the same advantages out of this business model as you would be. Even in seemingly small and specialized niches, you might be surprised at the level of competition.
Of course, a little competition is inherent to commerce, whether e- or otherwise. The challenge here is standing out from the rest in your field. Instead of selling something that is completely unique because you made it yourself, you would be selling items made through mass production by a manufacturer. That same manufacturer and their suppliers may be distributing the exact same products to your rivals, giving you less power to use your inventory as a unique selling point.
Thankfully, there are plenty of ways to differentiate yourself and appeal to potential customers. Any money you would have spent on storage and shipping expenses can be funneled into optimizing your website and creating a distinct and engaging identity for your business. You could do this by:
- Creating or contracting someone to create a robust site design, including the graphics
- Writing high-quality copy and content in a voice that is different from other websites
- Running a compelling marketing campaign to attract customers before your competitors get to them first
- Posting interesting content on social media, then interacting with users who are drawn to the posts
All of this can give your store something much harder to imitate or steal than other aspects of eCommerce: a personality. If that personality is strong and appealing enough — and stronger and more appealing than your rivals — then more people will visit your website. Competing can still be tough, but this makes it much easier to hold your own.
Lower Profit Margins
You generally have to pay less for storage, packaging, and shipping with dropshipping than you would if you had to take care of all these services yourself. You might not even need to pay anything for manufacturing. However, it is more than likely that you will have to pay your dropshipping supplier something for taking on these essential services. Moreover, having to cover their charges for any products you obtain from them means that they get a cut of every order you receive.
On top of this, you may not have a choice in how many products you can order at a time from your supplier. If they only accept minimum order quantities, you may find yourself with a ton of unsold product taking up storage space — a lost investment. If they only charge you when one of your customers places an order, you resolve that issue but lose the discount for buying in bulk.
It takes money to make money, and the amount you have to pay your supplier just so your company can keep going may result in smaller profit margins for your business. You would have to make more sales under this model to gain the same amount of revenue as under other models. Harsher still, if your competitors drive the prices down even further, you might feel inclined to lower your own and miss out on the money to be made from marking up.
We must stress that dropshipping remains popular for more than a few reasons. eCommerce store owners in the past have been more than capable of recouping their start-up capital and earning significant profits under this system. At the same time, we cannot downplay that these low profit margins can be tough on a business. You need to tougher, savvier, and more willing to earn less in the short term so you can earn more in the long term.
The Threat of Scammers
Managing a supply chain from manufacture to order completion is no easy feat. That is why you are thinking of outsourcing it to another company in the first place, one that is not just extensively experienced in the task but completely oriented around doing it on behalf of others. A dropshipping supplier can perform wonders for your company every single day.
To be precise, a good dropshipping supplier can — and not all of them are. As we discussed earlier, not all suppliers are capable of consistently fulfilling orders without issue. Some cannot ship items as quickly as your customers would prefer, and some only offer products that fail to reach your quality standards. Searching for a dropshipping company that you can trust may require some intensive effort, and it should.
And then you have to take into account all the scammers.
Too many con artists present themselves as dropshipping suppliers. They count on inexperienced eCommerce store owners to trust them and hand over their payment information. Then, they hit them with subscription fees, overcharge them for products, and leave them cold when problems emerge in the supply chain. If legitimate supply companies are capable of disappointing you, illegitimate ones are capable of robbing you blind and forcing you back to square one.
There are a few bad signs that you can look for when evaluating possible partners. If you see any of the following, you can be at least a little more confident that you would lose nothing by running away:
- Does their website provide any contact information? If so, can you actually reach a representative? If not, then you cannot trust them.
- Does their website list a physical address? There is no reason why they should hide this.
- If so, is it the location from which your orders would be shipped? They should not have a physical retail location.
- Do they charge retailers monthly fees for access to their inventory, or simply for working with them? Do they charge upfront fees? These are not how legitimate suppliers make profits.
Perhaps most of all, you can avoid falling for scams by treating this business practice with the level of respect and attention that it deserves. Many would-be entrepreneurs view dropshipping as a get-rich-quick scheme, which leaves them susceptible to more experienced schemers. Do not fall into that trap. Taking a more serious attitude can save you not only from losing money to these pretenders but also from making other costly mistakes in running this special type of business.
If you wish to get into business, whether through dropshipping or anything else, you must be willing to weigh the pros and cons of your choices. This may seem obvious, but it can be surprisingly difficult to consider the negatives of something like dropshipping, which many people erroneously describe as an easy way to make money with little effort. You need to be able to keep a clear head and dismiss the seemingly easier path in favor of whatever might be the “right” path for your business.
With that said, we are not describing the risks of dropshipping in an attempt to scare anybody away from attempting this method. As we said before, dropshipping can be an excellent way to break into eCommerce. It is not easy, but it can be easier. It is not cheap, but it can be cheaper. And even with all the challenges one may face along the way, it still makes eCommerce more accessible than many other business models. We only wished to discuss all of this so you can have a better understanding of what you would be getting into if you give dropshipping support a try.