Is dropshipping still a viable business model to follow? Do we recommend it for first-time online retailers to grow their business in the long term? These are tricky questions precisely because there is no generic one-size-applies-to-all type of answer for them.
However, we do explore a few of the major challenges with dropshipping in this blog, alongside some solutions that could work if you’re trying to overcome them.
The critical point to note here is that dropshipping merits the same type of seriousness in an approach that you would give to a regular business model. Seeing it as a cheap option to make a quick buck entails a lack of commitment, which is partly why many drop shippers fail in the first place. However, assuming that you’re seriously considering getting into this space, this blog could be a helpful segue that guides you to ask the right questions.
Dilemmas that drop-shippers face:
Thin margins require high-volume orders
It has been said before dropshipping is the entire sales and marketing division minus production and fulfillment. You’re taking over the process of reaching out to leads, sealing deals, and accepting orders. So it sort of makes sense that the profit margins are relatively lower compared to a business that handles everything from procurement to delivery.
The challenge with dropshipping these days is that even running a sizable number of PPC ads and marketing campaigns that convert can cost you a great deal. You’d be competing with a huge number of similar advertisers and therefore, the conversion rates are generally low.
For every 100 ads you run, getting 2 or 3 conversions is not at all a rare occurrence. It usually is the norm for conversions for the number of ads run to be this low. Let’s say you’re adding a 20% profit margin on your price to cover expenses. If the overall cost of running a campaign is $100, and your product is priced at $10, including the 20% margin we mentioned, getting a 2% conversion will hardly help you break even.
You’d still need at least 8-9 more sales to get there and cover your running costs. Which is to say it isn’t just about the profit margins, but also the number of conversions you can acquire to exceed your expenses.
Overcoming this challenge is not an easy fix. Part of the problem lies in building a steady source of traffic from scratch. Dropshippers who try to capitalize on already existing audiences find a more favorable conversion rate than others.
Firstly, identify the niche you’re in. If you’re selling sneakers, decide what kind of audience this might attract: 40-year-old runners, or 23-year-old athletes, or 30-plus-year-old careerists.
Once you figure that out, you can decide which social platforms you’re most likely to find them on. From Instagram pages to Youtube channels, the possibilities differ. However, once you pinpoint where your target audience is likely to be, you can decide which medium of advertising is most effective. From direct dm forwards, to email marketing or an actual series of paid carousel posts featured on an influencer’s page, you can try what works best.
Getting your conversion rates up is crucial to maintaining a healthy profit margin that makes dropshipping worth it. Otherwise, you’d be pooling in your money like the rest of them, achieving more misses than hits.
Setting up a dropshipping website costs very little. This low barrier to entry naturally means that you’ll encounter an overwhelming number of competitors who are also trying to capture the same market and target audience.
Dropshippers who’ve been in the game for longer have already grown significantly up to this point. This means they have the advantage of being able to buy up more products in bulk, reduce prices, and still retain a sizable profit margin. This is an advantage that new entrants do not enjoy.
Think about your shopping process. Every time you log on to browse for a product, chances are you look up plenty of websites to compare prices. If the product is the same and all that’s different is the retailers selling it, chances are you’ll go for the more affordable option. This particular problem is huge in dropshipping, especially today, which is why it is both a highly lucrative and tough business to get into.
There are a few ways to work around this. Some entrepreneurs go the route of buying an existing thriving business that does well to take over operations. Others might try a niche product that appeals to a very exclusive set of audiences, preferably an area where you have more expertise and connections than your competitors do.
Supply chain hold-ups
Here’s the key issue with the dropshipping model. You have very limited control over multiple aspects of the business. The only dimension you are actively involved in is marketing and sales.
The remainder of the processes falls under the responsibility of your suppliers and fulfillment agents. This makes it difficult for you to directly address or solve your customer’s concerns relating to those particular areas.
Delayed delivery, damaged packaging, wrong product, etc. are all potential problems that you have no way of anticipating or preventing. This is a serious handicap that adds more liability from a business standpoint.
Despite being your customer’s go-to point of contact and mediator, you play a very marginal role in solving any issues that may arise in the supply chain. This is why the assurances you offer can fall flat and seem empty. Failed fulfillment can rapidly hurt your dropshipping business in the form of bad social responses. Communication begins to slacken in pace as you add more players into the equation: you, the customer, the supplier, the producer, the delivery agent, the shipping agent, third-party payment portals, etc.
A few key things to do beforehand include:
- Vetting all your suppliers thoroughly. Go through their past deals and clients. Get a proper gauge of their ratings and reviews. Never do business with a supplier you don’t trust.
- Make sure you’ll be kept in the loop throughout the process as far as information updates go. This is so that you can at least offer your customer timely estimates on product delivery, or resolution, as opposed to being completely helpless and in the dark.
- Do not engage in false advertising. In other words, don’t overhype your involvement in the business. Do not mislead customers about the extent to which you’re in charge. At the very least, be upfront and honest from the get-go about your refund and return policies, as well as how much support you can provide your customer in case something goes wrong. Customers would be more willing to trust a brand that is candid about the risks that they may have to shoulder, as opposed to deceitful ones that never disclose their true involvement until something goes awry.
The burden of branding right
Branding often devolves into storytelling. Some might argue that marketing is all about having a story worth telling. Others may contend that it is about telling a story in a way that’s worthwhile for your audience.
Either way, it is extremely difficult to build a story around a product that is neither produced, owned, shipped, or delivered by you. Any attempt at claiming ownership over a product that isn’t essentially yours in any way can potentially backfire.
Market positioning is where many drop shippers hit a wall and are also where, unsurprisingly, many of them make it big. It is the proverbial case of seeing the forest for the trees.
Let’s illustrate this with an example:
Say there’s a company called X that manufactures a product called Y. Let’s say it’s a flexible headband used to relieve stress. Now the key dilemma that most marketers solve is the way they market the product. You might think that this would go over well with hockey players and other sports enthusiasts who frequently engage in high-risk activity.
Or, depending on your research, you might decide that this product is best mediated and marketed through clinical outlets, and local doctors who recommend and advocate the product.
Depending on your approach and how well it fits into the market, your strategy could either rake in sales or hit a stagnant rough patch.
Reliance on third-party suppliers
The excessive reliance on suppliers is what deters many from dropshipping. The reason they cite is valid.
- If a supplier bails out of a deal or fails to deliver, you bear the responsibility to reach out to the customer, not them. A business where the person is 100% dependent on another party to fulfill orders is highly risk prone.
- Finding the right supplier that matches up to the standard you’ve set as a brand is the first challenge most drop shippers face. There are a few crucial factors that will inform your decision. The rates they charge, and the order minimum level are important.
But even more significant is having experience in the industry. This goes a long way in ensuring that the logistics are handled well. The challenge is primarily finding a supplier who is reliable and won’t bail on you at the very last minute.
- Just in case some of your suppliers fall short in delivery or cause an inordinate delay, it’s good to have a sizable portion of inventory in hand. You can consider this an emergency storage option, very similar to emergency funds-goods that you stock for situations where the supplier is incompetent.
- Using trustworthy sites that we’ve covered in a previous blog can be helpful. You can resort to reviews, and ratings, and directly get in touch with other drop shippers who frequent the suppliers you’re vetting.
Pricing becomes problematic
Suppliers handle every aspect of distribution to the customer in a dropshipping model. So it makes sense that when they do business with you, the price they quote is well above the wholesale price that they offer retailers who buy the physical product.
So if they quote a wholesale price to retailers that add 15% to the actual cost, you’ll be met with a price that adds at least 25%.
Now to make a profit, drop shippers will have to raise the prices that they offer customers to almost 50% or even a 100% (in some cases) above the price that it is usually traded for.
Unless it is a niche product that customers cannot access from their nearby store, they’d be unwilling to buy it from you with such a jacked-up price.
This leads us to the dilemma of unsold products with higher-than-average prices or low-priced products that sell well but barely make you any profit.
To make a profit, drop shippers often organize sales where they lower the price substantially and attempt to sell more in quantity. The resulting profit eventually justifies the low price, once your order volume crosses a certain threshold.
Transparency and trust
Another key challenge with dropshipping is the lack of transparency regarding when the supplier receives the order, prepares it, and dispatches it. Without having a detailed agreement that mandates all-around visibility into every step of the process, you won’t be able to keep your customer updated.
Implementing technology like an app or software that automates your receipt of crucial data such as order pick-up, dispatch, and drop-off is vital for your dropshipping business to be reliable. Otherwise, there’s hardly anything to differentiate you from other competitors who offer the same.
Inventory updates are a hassle
If you’re dropshipping through multiple suppliers, you absolutely must have regular updates on their inventory. Sometimes one supplier might be low on stock and another could hoard a surplus. Their proximity to the customer can affect your pricing, which will have to undergo updates.
Just like updates on delivery and dispatch, you could implement a deal that allows access to your supplier’s inventory tracking software. You can plan your orders accordingly.
Return policies are tricky to get right
Customer returns are a huge hassle for drop shippers. This is because your delivery is handled by a third party, ie; your supplier. Likewise, the question arises: who handles the return and refund of faulty products, you or your supplier?
If your supplier is located closer to the customer, and they engage another third-party delivery team on site for fulfillment, you can simply have the team pick the product and hand it over to the supplier.
1. a no-return policy.
2. Return to the supplier. Get refunded by the drop shipper.
3. Return to the supplier. And get a replacement. No refunds.
Depending on what works for you, your choices may vary. However, it is important to note that returns are inevitable in the course of dropshipping. Unless you’re shipping pure commodities like books or magazines, you’re bound to have a policy that handles them efficiently.
Shipping costs interfere with pricing
If your store deals in multiple products, you’d have to go through several other distributors for each product. Imagine the sheer number of varied shipping costs that would arise. All of this can become a little too tedious to manage.
You could try and connect with a multi-product supplier, or impose the additional costs on the customer, with a detailed breakdown of what adds to the expenses.
Logistics setting limits on your growth
Drop shippers handle the customer-facing aspect of business, whereas suppliers are more linked to the logistics of delivering the product. The problem that arises here is that even when you might be clueless about where your product is in the fulfillment process, you’re still responsible for answering crucial questions that customers may have, such as: what time can I expect my product to be delivered?
A slight change in delivery address can be a hassle in itself to handle. This is because there are multiple parties involved in delivering the product, which leads to fragmented and often chaotic decision-making.
Unless your supplier is located in a place that’s accessible to you, such that you can give their warehouse a quick visit if things go south, there’s very little drop shippers can do about supplier negligence.
The only way to enforce standards and reduce future hassles is to carefully choose your suppliers.
Alternative approaches to dropshipping as a business
Market trial tool
Many businesses prefer dropshipping as a form of market trial. In other words, rather than turning it into a business, they use it as a means to test the market’s receptiveness to the product and gauge what kind of demand they can expect. If the product is already suffering in the dropshipping stage itself, they can cancel their order without incurring further costs in unsold inventory.
To put it another way, dropshipping can be a more viable method of testing products, as opposed to an entire business in itself.
Saving costs on storage and delivery
The real reason some e-commerce businesses adopt the dropshipping model is to save inventory costs for unpredictable products.
It also helps you shift storage elsewhere in case your warehouses are affected by a natural disaster, or if they’re situated in a high-risk, crime-ridden neighborhood where safeguarding against theft or vandalism is difficult.
Additionally, dropshipping is viable when your suppliers are located closer to your customers than you are. You can shorten steps, speed up delivery, and save money on extra shipping costs.
The same is true for areas where the tax burden is high. This is a common reason for switching to the dropshipping model so that you can cut costs in taxation.
High maintenance demands higher costs
Heavy, large, fragile, or inflammable products all incur high maintenance costs. This is compounded if you haven’t set up a warehouse that accommodates this particular type of product line already.
Valuables like jewelry or other high-cost products bring an additional burden of security. Unless you already have the infrastructure ready to combat such concerns, it makes sense to try dropshipping through legitimate suppliers as a viable option.
To sum it up, dropshipping is still a viable business model, but not for everyone. With everyone having better access, the space has gradually become more competitive. Profit margins suffer when you’re competing with other numerous drop shoppers who offer the same product for far less.
As we mentioned earlier, dropshipping works better as a model for testing products and market receptiveness, rather than as a sole business endeavor on its own. Fragmented chains of command can cause a bigger hassle for customers and create more problems than it solves.
- Dropshipping is a valid way of testing the market to see how viable your product is and to assess overall demand.
- If you’re carrying a massive investment budget, you could try running a few ads and see how the results turn out. You wouldn’t have to carry inventory or incur storage costs just yet.
- It is a great way for e-commerce beginners to test the waters and get acquainted with how business is run in the online world.