Many entrepreneurs report that they're bringing in big money by dropshipping — but is it worth pursuing?
Background: Some entrepreneurs choose to take on a dropshipping type of business model, in which they serve as a middleman, selling products to a customer but having the manufacturer ship directly to the customer. In this way, the entrepreneurs themselves don’t actually hold any inventory.
Although there are many positives to this business model, there are some downsides to dropshipping that every business owner should know. Check out some of the potential negatives before starting a dropshipping business.
Dropshipping is Not Easy
Dropshipping is not always as easy as it seems. Shipping expenses can add up quickly as you start pursuing this business model. Drop-shippers have to deal with suppliers, order processing, returns, and customer service. They should also maintain their websites, bring in online traffic, and track inventory changes and shipping costs with the manufacturer, which can be all time-consuming.
No Control over Supply Chain
Your ability to fulfill customers’ orders may depend on your suppliers’ stock availability. If suppliers run out of stock for some reason, you may have to stop selling their products temporarily. This could result in longer lead times and lost customers. When any fulfillment error occurs, even if you do everything well, the business could be at risk unless the supplier lives up to their end of the deal.
It's Challenging to Maintain Quality
Dropshipping doesn’t allow you to inspect products to make sure they’re the same as described. Therefore, it can be hard to handle customers’ requests when you have little quality control. However, for issues like late deliveries, damaged products, wrong or missing items and more, your customers will come back to you for explanations, rather than contacting the suppliers. So one bad batch of products can lead to unhappy customers, lost sales and potential negative customer feedback for reasons that are beyond your control.
May Be Tough to Build a Brand
Dropshipping provides you with limited branding opportunities for your business. Your suppliers and distributors could get the credit for all the products and services you sell to your customers.
Customer Service Issues Are Possible
With dropshipping, if customers complain about product quality, fulfillment speed or return policies, you’ll have to deal with your suppliers to solve your customers’ problems. If a supplier doesn’t process the order quickly, it can take longer to ship the product to the customer. In such cases, you’ll have to track the order with the supplier, and for some issues, you may have to refer customers to your supplier for support.
When a customer calls to inquire, the process of resolution can be slow, as you may not have the necessary information at hand. Therefore, you have to forward those queries to the supplier, which is a time-consuming process. There can also be a delay in communication as you go back and forth between the customer and the supplier. Thus, it could take longer to fix the issue, which could push customers into the hands of your competitors.
It's Highly Competitive
The need for very little capital to start a dropshipping business makes it very appealing to many entrepreneurs, thus creating heavy competition. Therefore, you’ll often find other businesses selling the same products from the same manufacturers. That means customers can buy a product from someone else for less money.
The bigger a company is, the more it can reduce the marked price to attract customers. However, smaller businesses have to cut into their profits to sell items at a lower price. This could leave smaller companies struggling to win customers.
Low Profit Margins
The profits of a dropshipping business can mostly be determined by website traffic. So if you’re building an e-commerce brand from scratch, you could be struggling for a long time before you build a client base.
In dropshipping, you probably won’t be buying products in bulk, but rather one at a time as customers order them, so you’ll have less favorable profit margins. You may also have to pay additional fees to the wholesaler to pick, pack and ship each customer order. Therefore, you won’t be able to achieve large Financial accounting gains until your business scales up and you build a large customer base so you can increase prices to make a large profit.
Source: Escalon Services