What are the risks of dropshipping? Let’s find out.
More and more people are successfully using different strategies to broaden their income base. One of these strategies is the dropshipping business model.
Running a dropshipping business eliminates the huge overheads associated with investing in a traditional store and physical supplies. This is equivalent to minimal initial investment and less risk.
What’s more, operating online also throws your store open to customers from all over the world. And this gives you scope for considerable growth.
What are the risks of dropshipping?
Although dropshipping is known to be a low-risk business model when looking at its pros and cons, there is a certain amount of risk involved in it. This means that running a dropshipping business is not all roses.
First of all, let’s clarify something. There is no such thing as a business opportunity without risk.
To start out as a dropshipping entrepreneur, you need to consider the dropshipping risks involved and weigh them against the benefits. Also, you need to know how to avoid the risks.
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Top 5 dropshipping risks to consider when starting your dropshipping business
It seems undeniable that the majority of online store owners are risk-takers by nature.
However, with little to no experience under your belt, you are probably not totally aware of all the risks you must watch out for when committing yourself to business ownership.
And here are some of the most common dropshipping risks that you need to evaluate and minimize when starting a dropshipping business.
1. Intense competition
Did you know that many dropshipping entrepreneurs are unsuccessful as dropshipping is a highly competitive industry? They think that dropshipping is easy money.
If you are one of those people, we are sad to say that it will be hard to get your dropshipping business off the ground due to the intense competition. This is one of the biggest risks of dropshipping. However, you can try to avoid it. Just read on…
How to minimize the risk:
• Be unique. Sure, this is broad advice. But we will nudge you towards the right steps. You must do your best to be different from other online stores selling the same items.
Let us give an example. Many dropshippers sell, let’s say, smartphone accessories. Still, their stores are not the same. Some have poorly designed websites, low-quality photos, terrible product descriptions, no dropshipping apps, low-quality products, long shipping times, only a few payment gateways, etc., whereas others are quite the opposite.
So, you need to be unique and go further than your competition! Also, you should provide exceptional customer service for dropshipping stores.
• Invest in marketing & advertising. To attract customers, your business must have a clear message. People like to know what you can do for them that nobody else can, and that’s how you will bring customers to you. Be creative and invest in digital marketing.
2. Low-profit margins
It is universally acknowledged that dropshipping profit margins are not very high. The average dropshipping profit margin is about 20%.
With dropshipping, you sell other people’s products and take a cut for yourself. You are actually a reseller, i.e., you sell premade items to your customers, meaning that the manufacturer and the dropshipping supplier have already built their profit margins in.
Furthermore, as we have already said, when you enter the dropshipping industry, your business will face high competition. As a result, when you add an item to your dropshipping store, you will have to ensure that your pricing is competitive in comparison to other stores selling the same item. And this may also contribute to lower profit margins.
How to minimize the risk:
Fortunately, there are several ways out there to increase your profit margins. But, now, we will focus on the most effective ones:
• Increase your prices. Yeah, we know that this may sound counter-intuitive. But the truth is that the lowest prices aren’t always the best thing. So, try to elevate your brand and increase the perceived value of your products. Then, try to increase your prices a little bit.
• Negotiate with your dropshipping suppliers. Another effective way to minimize this risk is to negotiate a better deal with your suppliers to get a bigger discount on your products.
3. Lack of control
In standard e-commerce, if a customer complains about fulfillment speed and product quality, you will be able to address the problem yourself because you have total control over the supply chain.
On the other hand, when operating a dropshipping business, you will be at the mercy of your suppliers — but you will be the one that will have to communicate with your customers directly. This means that you have no control over the supply chain and fulfilment pro.
As a dropshipper, you will have to contact your supplier and ask them to address the problem. At the same time, you will also have to reassure your customer about something that is out of your control. And this is also one of the biggest risks of dropshipping. But there is a way to minimize it.
How to minimize the risk:
• Partner with trustworthy suppliers. You do not physically hold your dropshipping products. Still, you need to make sure that products get to your customers in the same way you advertised them. Therefore, it is imperative to find and work with trustworthy suppliers. Here are some of the best dropshipping suppliers – they are also the best alternatives to AliExpress for your dropshipping business.
• Communicate with your suppliers. Be ready to ask your suppliers many questions about product quality, materials used, shipping methods, processing and shipping times, packaging, dropshipping refunds & returns, etc.
4. Scammers
Well, let us tell you this – dropshipping itself is not a scam. It is actually a legitimate business model.
The problem is that while engaging in your daily business activities, you can encounter various scammers, including dropshipping agents and suppliers. They may fool even the savvy dropshipper. Unfortunately, this is one of the risks of dropshipping.
So, you must stay vigilant when choosing new dropshipping partners to collaborate with. And do not just partner with any supplier you find on Google.
How to minimize the risk:
• Use wholesale supplier directories to find suppliers. These directories list some of the best wholesalers and dropshipping suppliers in the industry. And all these suppliers are certified. Sure, you still need to do your own research to evaluate the reliability of each supplier.
• Beware of any business that tells you profits will come with little or no work involved. Remember that any business that promises you that you will make a lot of money fast may not be legitimate. They may just want to hook you in and make you pay their upfront fees.
• Avoid dropshipping suppliers or agents without all contact information clearly listed on their websites. It’s no more complicated than that!
5. Sudden stock shortages
Dropshipping risks like sudden stock shortages are some of the most common problems dropshipping store owners have with their suppliers.
Simply imagine that your customers suddenly want to buy a certain item from your store, but your supplier has sold all of the supply that they have of that item. This will put you in a situation where you will be “out of stock” of that particular item, resulting in unhappy customers.
How to minimize the risk:
• Ask the supplier upfront how much stock they usually have on hand. Perhaps this is the best solution to the problem. Also, ask them how fast they can have the right products in the right quantity on hand when inventory runs out.
• Consider working with more than one supplier. Though this may add complexity to the supply chain, it can reduce the risk of running out of stock.
Final thoughts on the risks of dropshipping
Dropshipping business failure happens when online store owners act too late.
So, as you are a new dropshipper, it is important to be aware of and avoid the risks of dropshipping to ensure that you are on the right track for success. Luckily, you can minimize the chance of business failure if you take the above-mentioned simple, risk-reducing steps.
Also, learn how to start a dropshipping business the right way and do a few things before you launch your store.
