Some people would have you believe that dropshipping is a get-rich-quick scheme, but other real-life examples show you’re more likely to get unemployed quick. So which is it? Do the dropshipping risks overshadow the benefits? And if so, can they be avoided?
If you’re new to dropshipping, let’s start with some of the basics:
What is dropshipping? The dropshipping business model of ecommerce is when the seller does not store or ship their inventory, but rather the manufacturer or supplier does. In other words, you sell the products online, and the supplier ships them. The seller gets paid less, but does less work.
Is dropshipping legal? Yes, dropshipping is legal. There are even tons of apps to help you find dropshipping suppliers. However, one particular method of dropshipping — arbitrage — is banned on some major channels (see risk #4).
Is dropshipping profitable? When done correctly, dropshipping can be profitable. As opposed to other ecommerce methods, successful dropshipping requires excellent marketing and branding more than product design. However, dropshipping vendors are paid only a commission of each sale, so you’ll have to sell more items to make as much as traditional online vendors.
If you’re just getting started in dropshipping, or still deciding if it’s right for you, we wanted to give you a heads up on what to expect. Here are the 5 biggest and most common risks to dropshipping, and how to effectively avoid them.
Dropshipping Risk #1: Getting Swindled by Suppliers
Dropshipping merchants are inherently tied to their suppliers; they’re more like equal partners than a B2B service. So much of ecommerce success — shipping, timeliness, product quality — rests on their shoulders, that even if the merchant does everything perfect, the business will fail unless the supplier lives up to their end.
Unfortunately, there’s a lot of fake dropshipping suppliers who prey on inexperienced vendors. This is one of the earliest gatekeepers to breaking into dropshipping, and one of its biggest risks.
How to Avoid It
For starters, don’t just partner with any old supplier to you find on Google. Sticking to the tried-and-true methods of finding a dropshipping supplier will reduce the risk from the start.
But that’s not foolproof, and there are scammers everywhere. Train yourself to pick up on these red flags of fraudulent suppliers:
- Asking for subscription fees.
- Slow to communicate.
- They run a retail establishment alongside dropshipping.
- They require bulk orders in advance.
Remember, if a supplier seems suspicious, you don’t have to work with them — there are plenty of dropshipping suppliers to choose from, so pick one that you’re comfortable with. Because your successes are mutual, you want to improve communication with suppliers as much as you can.
You’ll also want to sign a Dropshipping Agreement Contract to remove yourself from liability of your supplier’s actions. If your supplier is doing something questionable, you could be complicit unless you protect yourself legally.
Dropshipping Risk #2: Thin Profit Margins
As we said above, dropshipping vendors make less profit per sale because they do less work. To make matters worse, however, is the competitive pricing of dropshipped goods.
Most dropshipping suppliers are working with multiple merchants, meaning other online stores are selling the same exact goods as you. Aside from branding and marketing, the only way to stand out from other dropshippers is to offer the item at a lower price — but that just means even less commission for you.
How to Avoid It
The easiest way to avoid this risk is to only sell products with a Minimum Advertised Price (MAP). A supplier can institute an MAP for their products to safeguard against competing merchants undercutting their prices to death. If you only sell products with an MAP, you never have to worry about a vicious pricing war cutting into your commission.
But you’ll still need to sell more to make as much as traditional online stores. For dropshipping, it’s recommended to target specific niches to increase customer engagement. Some popular niches for dropshipping include:
Dropshipping Risk #3: Expensive Fulfillment Errors
Outsourcing fulfillment logistics is one of the most attractive parts of dropshipping — one less thing for merchants to worry about. The downside, though, is that you have no control over the supply chain. When fulfillment errors occur, like overselling or outdated stock levels, it’s often the merchant who has to pay for them, even when the supplier is at fault.
How to Avoid It
Product tracking software works with dropshippers just as well as if you had your own warehouse. They’re able to manage all your marketplace channels, and if you sell on one, the stock levels are automatically updated on all the others. If the supplier sells out, the software removes the listing — even if the supplier doesn’t bother telling you.
Dropshipping Risk #4: Arbitrage Bans
On its own, retail arbitrage is a perfectly fine ecommerce model — the seller buys retail items from stores at a discount and sells them online at market price, pocketing the profits themselves. But merchants have started using this model for dropshipping, where they order products from a secondary online store to fulfill orders made on their own online store. This practice raises alarms on some major marketplaces.
How to Avoid It
Both Amazon and Ebay ban dropshipping arbitrage, so the only want to avoid this risk is to avoid doing it on those channels. Both of these marketplaces stipulate in the user agreements that reselling products is not permitted.
Dropshipping Risk #5: Getting Overwhelmed
Dropshipping is not as easy as it seems — we can’t stress that enough! Just because you don’t have to worry about shipping or storage doesn’t mean you can kick your shoes off just yet.
The success of dropshipping depends on your marketing endeavors — branding, advertising, social media, content strategies, customer engagement, choosing products, pricing, and more. Monitoring and staying on top of all these efforts takes constant work, especially considering that you have to sell more to earn more commission.
How to Avoid It
As with product tracking software, you can use dropshipping automation software to both consolidate your campaigns and automate some of the busy work. You can manage all your sales channels from one central dashboard, track individual shipments, and auto-route sales orders to the right suppliers, not to mention other automated services like updating stock levels on all your channels.
Editor’s Note: This blog post was originally published December 2016 and was updated in December 2019 to reflect more accurate and relevant information.