Whilst dropshipping may seem like one of the easiest ways to make a passive income in 2021; it also comes with its risks. This article will go through the 10 main risks to consider before starting your dropshipping store.
Before we do so, you may be asking, “What is dropshipping?” This is quite a large subject, so we suggest you visit this article first to familiarize yourself with the fundamentals.
A brief dropshipping history lesson
Back in 2010, Alibaba launched AliExpress, making it easier for individuals to sell low-cost products that they never physically hold. Shopify was also on the rise simultaneously, becoming famous for its ‘drag and drop’ style online store builder.
A few years later, in 2015, Oberlo was launched and became a popular go-between for the two, which helps automate fulfilling orders. Combined, they created the perfect scenario for a boom in dropshipping.
At around 2017, markets began to get saturated, but still possible to get into if you found a quiet niche. Where we are at today, in 2021, unfortunately, is a very different place.
The hard truth about dropshipping
Whilst dropshipping has very few financial barriers, making it attractive to people with not much cash to get started, it comes with a unique set of problems with this business model.
Firstly, dropshipping is rife with ‘gurus’ promising six-figure gains when you buy their courses.
The truth is that there is no winning solution that any of these courses will offer you, just the fundamentals which you can find for free from places such as on this blog or YouTube.
Markets also are getting further saturated each year. The costs of products and advertising have increased along with this incredible growth. This has consequently squeezed sellers’ profit margins.
We hope to not deter you from having a go at dropshipping, but instead, you are well equipped to deal with any problems that will likely arise throughout your journey. So stay with us, and we will go through the risks one by one:
1. Low Margins
The average profit margin for dropshipping is currently around 20%, and this is only if you have a good grip on your overheads. Your two largest overheads will be your product costs and your ad spend, both of which will likely increase in line with the competition.
If you are fortunate enough to make a lot of sales, you can wield your buying power between suppliers for better prices. Even if you don’t, it helps to have a few different suppliers who are selling the same products; you can then flip-flop between them depending on who is cheaper.
Unfortunately, advertisement cost is on the increase, and the only thing you can do in this case is to be aware of your cost per conversion. As you get more data coming in, this figure will become more definitive.
If you find yourself getting squeezed out of the market on advertising costs, try avoiding the more expensive countries such as the US and the UK.
We have already touched on this bit; competition is one of the biggest challenges you will encounter in dropshipping.
The recent huge influx in dropshippers over the last few years is largely due to the combination of the current financial climate and the few barriers to getting into it.
Competitors are a pain; they will drive up your CPC (cost per click), undercut your prices, and most importantly, take your customers away.
So how do you deal with this?
Well, the answer is much more straightforward than you would think, be better than them.
Try to sell your product cheaper, offer faster shipping, perhaps package your products differently. Whatever you do, do something that sets you apart from the rest; going down the branded products route will also help you stand out if done right.
Plus, don’t forget to create a unique dropshipping store instead of copying others.
3. Loss of quality control
When not physically holding the product, it is challenging to ensure that everything gets to your customers in the same way you advertised it. This is where communication with your supplier is key to mitigate this risk to your stores’ reputation.
You will need to be prepared to ask your supplier many questions such as materials used, packaging, and delivery times, to name but a few. We have compiled a list of useful questions to ask your suppliers to ensure you are as proactive as possible.
4. Shipping costs
It is easy to get caught up in the bigger subjects such as advertisement spend and product costs, so shipping costs often get neglected. This can also fluctuate just as much as the product costs and should be factored into your sell price to cover this overhead.
Fortunately, many suppliers also do the same and factor their shipping costs into the selling price to offer free shipping, which gives you one less thing to worry about.
However, when you believe that your business is in a good enough position to do so, it is advised to get a dropshipping agent. They will be able to source the quickest and cheapest shipping methods amongst many other things.
For more information about dropshipping agents, like what they are and what they can do for your business, take a look at this great article here.
5. Shipping times
Whilst this too can be reduced by hiring a dropshipping agent, we understand you may not be in a position to do so from the beginning.
This is why it is important to ask your suppliers how long it will take to ship to the countries you plan to sell to and ask for proof of tracking to confirm this.
This will reduce the complaints you get and avoid any unnecessary chargebacks from your chosen payment gateway.
The average return rate with ecommerce stores is 20%. The reason to return may be due to a poor quality product, incorrect size, or even just buyer’s remorse.
Regardless of the reason for the return, how you handle this directly reflects your business’s image. Because of this, you have the opportunity to convert your shoppers into repeat customers if handled right.
Having a crystal clear and water-tight returns policy is key here whilst ensuring you are adhering to local online retail laws. Just because you write something into your returns policy, it doesn’t mean it is legally binding.
We also have an amazing article on how to handle returns in much more detail!
Plus, you can check out this article here, which will cover how to create a return policy for your dropshipping store. We even included a template!
Scammers will come in all shapes and sizes, and it’s difficult to tell them when you first see them. They could come in the form of a dropshipping agent, supplier, marketing agency, or even a customer.
The advice we will offer on this is to be on your guard at all times, always deal within secure platforms and ask as many questions as possible. If it sounds too good to be true, then it probably is.
8. Stock availability
Imagine being in the position that the sales are finally rolling in, and suddenly you realize that your supplier has run out of products. You may then have to go to another supplier who could charge you more, even resulting in a loss.
The best solution to this is asking your supplier upfront how much stock they typically have at hand and how quickly they can turn it around if they run out.
You can also mitigate the risk of running out of stock by having a back-up supplier at hand, just in case.
This is a broad subject that will differ depending on which countries your customers are in; you simply cannot ignore this one. Always be aware of what taxes need to be paid if applicable.
We have an in-depth article on what you need to know about taxes when dropshipping.
However, we would always suggest you speak to an accountant if unsure about your own current situation.
10. Payment Gateways
A payment gateway lets your customer buy something on your online store by handling the payment transactions. Working with wafer-thin profit margins is already part and parcel of dropshipping, and payment gateways can take up to 4% of that for doing so.
This can be further complicated when buyers are doing so from another country, and currency exchanges are required. It is always advised to shop around before choosing one for this reason alone as this can really eat into your margins if not managed well.
Some payment gateways also have fines for chargebacks, and some are very quick to hold funds when the chargebacks happen.
PayPal, in particular, is quick to do this and will provide a slow resolution to this. In more extreme cases, a payment gateway may limit/close your account with little notice.
We have more information on this in our article on the 7 Best Payment Gateways for Dropshipping, where we go over each’s pros and cons.
Whilst starting dropshipping may appear on the surface to be an easy business model, it doesn’t come without risk. It has also become progressively harder to squeeze yourself into a market that isn’t already saturated.
Some of the risks we went through are completely out of your control; all you can really do is expect them and know what to do when they happen. However, most of them can be mitigated and even removed completely with careful planning.
Remember that each risk you will encounter, so will your competitors; how you handle them is what can make you stand out from the others. This is how you turn a risk into an opportunity for success.
If it wasn’t hard, everyone would do it. It’s the hard that makes it great.Tom Hanks
Getting Started with Dropshipping in 2021
So, are you ready to get started with dropshipping? Or maybe you have already started, but you’re looking to get some inspiration?
If so, then I suggest reading this complete Shopify dropshipping guide.
It’s a huge article, but it contains everything that you need to know to create your own Shopify dropshipping store in 2021. It’s like a dropshipping course, but then for free!
Reading this article will surely help you to get started and to stay motivated while beginning and continuing your dropshipping journey.
Just don’t forget that success takes time. Keep improving each and every day!
And here are the articles I suggest you read next:
- Top 10 Dropshipping Niches to Avoid as a Beginner
- Dropshipping Mindset: 6 Things to Know Before You Start
- Dropshipping vs. Private Labeling: What Is the Difference?
- Unique Dropshipping Store: 11 Amazing Tips to Create One