As an order fulfilment method, Dropshipping does not require that businesses keep stock of products with them. The dropshipper sells the products and passes the order to a third-party supplier who oversees fulfilling the order. Some dropshippers purchase goods from Amazon and sell them on their website.
While it may seem like an enticing option, Dropshipping is not a get-rick-easily scheme. It takes a lot of effort and strategic business running to continue a sustainable operation. While Dropshipping can turn out to be a viable business, it’s just not going to happen quickly. The other drawback is that just Dropshipping business might not be enough to launch a successful business. However, if you’re already established in e-commerce, it might be easier to complement your services through Dropshipping.
Here are some hard truths about the Dropshipping business:
Low Profit Margins
Since dropshippers don’t have to maintain their own inventory, the overhead is low. But that also means that the returns are low. Because the investment is low, the quantum of business needed to turn a profit is high. The Lion’s Share of every sale you make goes to the supplier. You end up with your marginal commissions – which can’t be high due to the high competition. Your profit might not be enough to cover your marketing/advertising, operational, and sales expenses in many cases.
On top of that, profits are generally dependent on the amount of traffic involved. While the operational overheads might remain constant, and the marketing expenses might be on similar levels, you can’t make enough profit to break even without sufficient traffic. If you’re building an e-commerce website, it will take you a while before you can build a client base.
It is generally reasonable to approach Dropshipping when you already have a regular source of traffic and income.
Many dropshippers might find this business lucrative because the seed capital is low. This lowers the entry bar into the business. But that also means that popular markets will be teeming with dropshippers. Many naïve dropshippers might focus on the ‘low overhead’ part without considering all the other points we’ve mentioned above. They end up failing because the bigger companies can afford to reduce their markup to offer competitive rates. Small businesses end up cutting deeply into their pockets just to stay competitive.
Additionally, there’s every chance that you don’t have an exclusive supplier agreement. That means, if a specific product is taking off, every other dropshipper can afford to sell the same product, often at lower prices. And if you’re just starting in the business, people with years of acumen can do what you might take a long time to figure out.
Basically, if customers can get the same product from everywhere, why would they single you out as their supplier?
Control Over the Supply Chain
In normal trade transactions, whenever customers complain about the product quality, order speed, or return policies, it is easy for the trader to address them. However, in Dropshipping business, the dropshipper can only hope that the supplier addresses those concerns while assuring the customer that their grievance would be addressed even though it isn’t something the dropshipper can do.
Additionally, maintaining the communication lines between the dropshipper and the customer will also be the problem. There will be much back and forth involved. If any one of them answers slowly, the entire network clogs and the problems will pile up, taking longer to fix. In e-commerce, customer service is the highest priority. If dropshippers get a reputation that they are bad businesspeople, their business could lose what little traffic they have. These little transgressions could push your customers to your competitors. And if those customers are vocal, the bad reviews can harm your business too.
Legal Liability Issues
While this problem isn’t applicable for every dropshipper, it’s still worth mentioning. There might be several instances where the suppliers might not be legitimate. Because of the lack of transparency, you can’t always know where your products come from.
Sometimes, the suppliers can use illegal means to pirate trademarked logos or copy another company’s IP to their benefit. Whatever activities the suppliers involve in, as their trader, you will be complicit in those illegalities. Problems like these can always be rectified with simple contracts and agreements, but not every tyro knows that. You just have to be extra cautious when choosing your suppliers.
Difficult to Build a Brand
Like ghostwriters or behind-the-scenes songwriters, dropshippers can’t get credit for the products they sell. If the product is amazing, the customers will look at the product and its brand but forget about the dropshipper who supplied them with those products. They tend to forget entirely about the shopping experience.
To top that off, most dropshippers don’t have their own logo or packaging. Most of them can’t afford to put in all that investment without being sure of the return or the traffic. Branding is crucial in e-commerce because shoppers tend to associate products with brands.
More often than not, the brand remains with the user longer than the product itself.
In the age of online stores, shoppers have the option of comparing many brands simultaneously. That means, for brands to stand out, they need to make sure their products stand out, and the public knows that it is its products that are standing out. In many cases, the dropshippers don’t have their logo on the product. They can’t give the customer anything to remember them by.
Besides, in today’s world of Amazon, Flipkart, Shopify, Etsy, Snapdeal, and eBay, not having a logo but having a great product means that shoppers are just going to go to those stores for identifying the products the next time rather than come back to the same dropshipper. At least, with those stores, they are assured of customer service, refunds and returns, and quality checks.
Basically, customer retention is difficult in Dropshipping business. Without customer loyalty and repeat customers, maintaining regular traffic is difficult to sustain an online business, much less a Dropshipping one. That’s another reason why Dropshipping is more viable for brands that already have an established e-commerce business.