risks of dropshipping

What Are the Real Risks of Dropshipping?

risks of dropshipping

  • Is dropshipping legal?
  • Is dropshipping profitable?
  • Is dropshipping allowed on eBay?
  • Is dropshipping worth it?

These are the results that appear on Google when you start to type about dropshipping. For all the content pumped out that explains dropshipping, potential sellers are still nervous about entering the space. There are some real concerns about the legality, safety, and profitability of dropshipping. Are these fears totally unfounded? Not exactly. But the risks of dropshipping are far outweighed by the potential benefits.

I’ll start out with some straight up answers.

Yes, dropshipping is legal. At its simplest definition, it’s just a form of order fulfillment where the supplier handles shipping. Most big box stores do some dropshipping to supplement their online stores with additional low overhead products. Nothing illegal about it.

Yes, dropshipping is profitable. The supplier handles fulfillment only for orders received, which means you don’t have to invest in a bunch of inventory up front. You only pay for the products you sell. Profits can be thin (we’ll talk more about that later), but it’s definitely easier to turn a profit on a one-man dropshipping operation than a more traditional business.

Yes, dropshipping is allowed on eBay, and Amazon, and most online marketplaces. Etsy spent a long time as a major exception. They insisted all products be handmade, vintage, or otherwise one-of-a-kind. They’ve since introduced manufacturer standards that can be interpreted as dropshipper friendly.

Now, is dropshipping worth it? Well, that’s for you to decide. It’s not all puppy dogs and rainbows. There are some real risks of dropshipping involved, but each risk can be mitigated with proper education. Consider this your pro/con list for dropshipping. Here are the real risks of dropshipping and the remedies you need to know beforehand.

Risk: Getting Swindled by Suppliers

Contacting suppliers is the first part of getting your dropshipping business off the ground. Many people who start dropshipping aren’t seasoned ecommerce sellers, so there are plenty of scammers out there willing to take advantage of the naivete which is one of the major risks of dropshipping. The dropshipping horror stories you can find online are the result of inexperienced sellers getting scammed by fake suppliers.

Remedy: Know the Supplier Red Flags

Safety when finding your supplier is the same as any other place online. You need to know the red flags to look for. Don’t just pick anyone off the Google results and start giving them your credit card number. If a supplier you’re talking to demonstrates any of these red flags, avoid them:

  • Asking for subscription fees.
  • Slow to communicate.
  • They run a retail establishment alongside dropshipping.
  • They require bulk orders in advance.

There are enough suppliers out there that you don’t have to take a risk with any supplier who gives you bad vibes. Know the red flags and don’t bend on them.

Risk: Thin Profit Margins

Because suppliers only fulfill orders already paid for, they essentially take no risk in allowing anyone and everyone to list from their catalog. So, how do two retailers selling the same product differentiate themselves from each other? It’s in price. Imagine a scenario where you and another seller are both listing the same purse for $10. If you lower your price to $9, you’ll get more sales than the other seller. In response, they could lower their price to $8. Suddenly, you’re the one losing. To fight back, you lower your price to $7.50. This cycle continues until you and the other seller have priced yourselves out of profits. The thin profit margins in dropshipping pose a significant drawback to this selling method.

Remedy: Sell Only Products with MAPs

MAP stands for minimum advertised price. It’s a way for suppliers to make sure sellers don’t undercut each other to the point it hurts the brand. This is what happens when retailers selling the same product constantly lower their prices to compete against each other. Eventually the price hits a basement. MAPs prevent this by forcing sellers to never advertise a price below a certain threshold. If you only sell products with MAPs, your chances of making a significant profit are higher. Check out these additional tips on finding the best products to dropship.

Risk: Expensive Fulfillment Errors

One of the most attractive parts of dropshipping is that you only pay for products you’ve sold. This keeps your monetary investment low. Fulfillment errors erase this benefit. When you list a product, how can you know for sure that your supplier has it in stock? What if a customer places an order for a higher quantity than your supplier has? Since you don’t handle the inventory yourself, you might not know until you’ve already spent the money the customer paid. You’re then on the hook to repay them.

Remedy: Use Accurate Product Tracking

Product tracking software can mitigate most of your fears for stock outs and oversells. These systems are great at managing dropshipping for ecommere businesses. These systems scan the marketplaces or websites you sell on, and when they find sales in one place, they update your inventory quantity on all your other channels. They’ll automatically make an item unavailable if your supplier is sold out. This also helps keep your profits high, as letting a software system handle product tracking and monitoring allows you to sell more without more mistakes.

Risk: Getting Overwhelmed

There’s a lot that goes into successful dropshipping. We’ve already talked about how thin the profits are. You’ll need to make a lot of sales to produce a significant profit. That’s a lot of orders to route to your supplier, a lot of website updating to do, and a lot of account and reporting required. Before you know it, you’re knee deep in responsibilities you don’t know much about. One of the risks of dropshipping is getting overwhelmed is common for new sellers. It’s what causes many of them to quit. If that happens to you, all that money and time becomes wasted.

Remedy: Let Software Handle the Load

Don’t try and handle everything on your own. Let expert software systems handle it. For example, you can automatically route your sales to your supplier with the same dropship management software you used for product tracking. Need help with web design? Shopify and BigCommerce both offer tons of clean, modern templates you can use to take the pressure off the design pressure. It’s 2016. Whatever your issue, a computer program is likely able to automate it for you and eliminate some major risks of dropshipping.

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About the Author

Dion Beary

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Dion Beary writes about ecommerce, television, and sci-fi movies. His passions are Twitter, casseroles, and 00's rap. He uses his job as a content creator for ecomdash to prop up his addiction to Chuck Taylors and Vans.

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