5 Risks That Can Negatively Impact Your Dropshipping Business

6 min read
5 Risks That Can Negatively Impact Your Dropshipping Business

In the expansive world of e-commerce, dropshipping has emerged as one of the major magic pills in the past decade. In fact, more and more people are relying on dropshipping businesses while making online purchases. In 2018, the valuation of the global dropshipping industry was USD 102.2 billion, which is expected to grow over 28% by 2025.

At the outset, dropshipping seems very simple, convenient, and even an ideal way to do business. However, there are certainly a lot of caveats to this method of e-commerce. Before we delve into the possible risks of starting a dropshipping business, let’s get the basics straight!

What is dropshipping and how does it work?

Drophipping business model

For the uninitiated, dropshipping is a method of e-commerce business where the supplier and seller are two different entities.

While the seller lists the products online, the storage, transportation and manufacturing are taken care of by the supplier. As is evident, the profit margin for the seller is less as they have fewer logistical headaches. Essentially, as a seller, you are the face of the business while the manufacturer/supplier is the backbone.

Is dropshipping profitable?

Sounds ideal, doesn’t it? If you are new to e-commerce, this might sound like a dream come true. On paper, dropshipping is extremely profitable, provided you play your cards right. As a seller, your main goal will be to appeal to the customer online. Hence, you will focus mainly on marketing and branding.

This is great from a business standpoint, as the expenses of storing and shipping products don’t fall on your shoulders. On the flip side, you will have a lesser profit margin than a conventional merchant, hence you will need to sell more products to break even and earn profit.

With all that being said, there are certainly a few risks in the dropshipping business, some of them legal in nature. So if you are new to this field and are looking to create a profitable business, then it is vital to learn about the pitfalls first.

5 risks to be aware of when dropshipping

1. Working with lower profit margins

As mentioned above, dropshipping allows you to do less work than a supplier, but it also means they take the lion’s share of the profit margins. While this doesn’t look too bad on paper, it becomes quite risky when competitive pricing is brought into the picture.

The market is already saturated with many dropshipping vendors, who sell multiple products and work with a plethora of suppliers to expand their profit margin. Thus, almost all the goods you have on offer are also sold by other websites that are already present in the market. The only way to outshine them would be to drop the prices of your goods. However, that will severely undercut your already slim profit margin.

Here are a few solutions to counter this problem:

  • To avoid competitive pricing, only sell goods that have a Minimum Advertised Price or MAP. Many reputed suppliers go for MAP to avoid lowering prices beyond a certain limit. By partnering with them, you can skirt this major risk with ease and focus only on selling more products.
  • While the main risk is avoided, there is still the problem of oversaturation. To ensure your products do well, consider specific niches which have fewer dropshipping competitors. Some great examples include home supply, pet products, computer accessories, craft supplies and more.

Don’t be alarmed, there aren’t a lot of things in the dropshipping business that can get you in legal trouble. One of the major ways of getting into such a mess is retail arbitrage. For the uninitiated, retail arbitrage is the practice of procuring products from a store at a hefty discount, which the merchants then sell at the market price and pocket the profits.

While this practice is innocuous in theory, it becomes a lot more complicated in the e-commerce world. You can still purchase from stores and list them on your website to make a sale, but in many e-commerce platforms, it’s a big no-no to indulge in this practice if you are in the dropshipping business.

One of the major reasons for this is the very nature of dropshipping. The seller already is not concerned with storing and shipping the products, hence all they need to do is order the product from a website where it is sold at a much cheaper rate and list it on their own site with a price markup. When an order is placed, it will be delivered by the original supplier, while the seller gets the profits.

If that sounds unethical, then you will be agreeing with major e-commerce websites like Amazon and Ebay, which enforce strict bans on retail arbitrage. Also, to protect the marketplace, this practice is entirely illegal in some countries if you are in the dropshipping business. To learn if retail arbitrage is legal in your country or not, contact a proficient corporate lawyer.

3. Expensive fulfillment errors

One of the best parts of dropshipping also tends to be one of its most risky aspects. This method of e-commerce takes care of fulfillment logistics without your involvement, as the supplier will be handling the storage and shipping. But if an order goes wrong, this can also backfire on you, the seller.

In dropshipping, a merchant is not in control of the supply chain. Logistical problems like delay in order, shipping of outdated stocks and similar errors will fall on the merchant’s shoulders, even if they are not handling that part of the operation. This can lead to some really expensive fulfillment errors that can jeopardize your business.

To avoid paying for the mistakes of your supplier, here is a simple solution: use order tracking software, as they work really well on dropshipping as well as conventional businesses.

4. Threat of scammers

This is perhaps one of the most obvious pitfalls to avoid, yet it is something that many new dropshipping merchants fall prey to every year. Much like scams and embezzlement in any field, this malpractice has also found its way into the e-commerce business.

Due to an overwhelming dependence on suppliers to take care of quality, shipping and timely delivery, it is easy for scammers to take advantage of drop-shipping merchants. As unfortunate and risky as it sounds, it is also easily avoidable.

Here’s how you can vet out scammers as a new seller:

  • Don’t find your supplier on Google, as there are a plethora of illegitimate businesses fronting as a supplier. It is important to vet out your supplier before striking a business relationship.
  • One of the best and easiest ways to filter out scammers is to opt for supplier directories, which will do most of your work for you.
  • If you are still adamant about finding a supplier by yourself, then watch out for a few red flags. A supplier may not be legit if they ask for a subscription fee, are irregular with their correspondence, or demand bulk orders in advance.
  • Another way to protect yourself from scammers is to work up a Dropshipping Agreement Contract. Signing this contract will save you from liabilities if your supplier indulges in unethical or illegal practices. In today’s day and age, courts are willing to accept documents with digital signatures as proof of a legal contract. Thus, you must at least enter into a digital contract with your supplier to protect your business from fraudulent scammers.

5. Losing control on quality

While dropshipping allows you to leave the logistical responsibilities to the supplier, this freedom brings its own problem with it. One of the major concerns most dropshippers have is the quality of the product they are selling. As a seller, you might market and brand your products in an excellent manner on your website or e-commerce platform. However, if the supplier delivers sub-par quality products, the customers will feel cheated.

This will hurt the reputation of the business in the long run, as quality can never be compromised. This is why it’s so essential to choose the right supplier for your brand and to build excellent rapport. While suppliers may not offer you control over shipping, delivery timings, and may run into unexpected logistical errors at times, reliable suppliers never err on the quality of the product.

Thus, partner up with only the best manufacturer or supplier who has an excellent track record to back them up. Moreover, don’t hesitate to switch to a new partner if the old one is unreliable, as ultimately your business is at stake.

The Verdict

It may seem like a daunting task to watch out for all these risks and pitfalls of dropshipping business. These potential red flags are not meant to frighten you, but to arm you with better knowledge so you can confidently venture forth into dropshipping.  

At the end of the day, dropshipping is an excellent way of doing business as it doesn’t entail a huge amount of initial capital which is required for logistical aspects such as storage and shipping. By keeping these potential hazards away from jeopardizing your business, you can stay ahead of the curve and excel in dropshipping.

This is a guest post by Cinu.

About author:
Cinu is a Blogger who has a wide experience of delivering content on law, health, finance, real estate and technical fields. He is a jack of all trades and always swims against the tides in terms of writing.

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