Can you lose money with dropshipping? Yes, you can. However, If you do it right, you can make a significant profit.
New dropshippers will undoubtedly be thinking they can lose money, so it's important to first identify the potential loss areas and then take steps to mitigate any risks.
In this article, I will outline the top reasons why new dropshippers can lose money and the steps you can take to avoid this.
11 Reasons You Can Lose Money With Dropshipping
1. Poor Market Research
If you don't do proper market research which includes deciding on a niche and the individual products that are in the niche, you could lose money.
By not researching your market, you may end up trying to sell products that have no demand or interest.
If people just aren't interested in these products and if you are running paid ads to them, you will lose money this way. That's why it's important to look for trends, see what competitors are selling, and do research to see what products are selling well.
2. Poor Pricing Strategies
If you don't consider your pricing strategy, you can easily lose money with dropshipping.
When setting prices for products, it's important to take into account all of the associated costs such as shipping and product costs.
You also need to pay attention to your competition and make sure that you're not pricing yourself out of the market or pricing too low where you won't make enough profit from each sale.
Refunds are a major source of financial loss for inexperienced dropshipping business owners. Refunding small items is usually not too costly, but refunding large items (high ticket dropshipping) can be very expensive.
Dropshipping suppliers typically offer customers a new item or a refund when dealing with small items.
This isn't too problematic if you have money in reserve, but if you spent all your profits on ads and in your business, you might need to dig into your pockets to provide a refund.
If you are dropshipping products from China, sometimes the quality of the product is subpar. This can result in customers being unhappy and asking for a refund. To avoid this, it's important to check out reviews of customers that received the product to see if there are any issues with quality. If you are dropshipping from AliExpress, you can find reviews there.
4. Bad Suppliers
If you choose bad suppliers, you can lose money with dropshipping. A bad supplier will ship late, send the wrong or damaged product, or not be there to help you when needed.
This can result in poor reviews of your store which will impact your sales negatively and cost you money.
Researching potential suppliers and avoiding those with too many disputes and negative ratings can help protect your business from losses.
Therefore, it is important to do proper research on suppliers before partnering with them and make sure they are reliable and trustworthy. If they are on a platform that provides feedback, read the reviews and ask questions to ensure you are working with a good supplier.
5. Shipping & Delivery Delays
Long waiting and shipping times can be a major issue for dropshippers. Customers are used to Amazon's same-day delivery and prime shipping within two days, so when they have to wait 14 or more days for their orders from China, it can lead to frustration and costly refunds or chargebacks with banks.
Dropshipping from China usually takes at least 20 days, which might be long for some customers.
Ensure that you include the estimated shipping time in your product description so they are aware of this beforehand.
Chargebacks are a costly problem for dropshippers, as they can lose the entire transaction value plus associated costs.
A chargeback occurs when a customer disputes a transaction with their bank, resulting in an immediate reversal of the charge and usually incurring a fee of around $30.
Common reasons for chargebacks include items not arriving, long shipping times, and poor product quality. Fraudulent customers may also claim chargebacks by falsely claiming they did not receive a product.
Chargeback fees can add up quickly, especially when selling higher ticket items with lower profit margins.
Returns are a major issue for dropshippers, especially when it comes to clothing items. Customers have become accustomed to free returns and may order the wrong size or color expecting to return it.
This can be a problem for dropshippers as they often have to bear the cost of returns, which can quickly eat into profits.
Handling returns can be tricky and costly when you get your items from a private supplier.
Before signing an agreement with a dropshipping supplier, it is important to ask about their return policy in order to ensure quick turnaround times and avoid any potential losses due to customer dissatisfaction.
8. Account Closures
Account closures and sandboxing can be a major issue for online businesses, especially those that rely on payment processors such as Shopify Payment, Stripe, and Paypal.
Chargebacks are one of the most common reasons for account closures, with Paypal being particularly devastating in their sandboxing practices. This can lead to funds being withheld for up to 3 months without warning, resulting in significant losses for dropshippers.
9. Getting Sued
Getting sued is a real risk for any business, and dropshipping is no exception.
Dropshipping involves selling products that are not owned by the seller, so there is a risk of infringing on another business’s copyright or trademark. This can lead to legal action and costly lawsuits.
Additionally, electronic, health and beauty, and baby toy products can cause injury if they are not of the highest quality, leading to even more expensive lawsuits.
Businesses should take steps to protect themselves from getting sued. They should learn their legal rights and ensure they do not infringe on another business's copyright or trademark.
Additionally, it is important to make sure that all products sold are of the highest quality possible in order to avoid potential injury claims.
10. Negative ROI
Negative ROI is a common problem for new dropshippers, as they often have to invest a lot of money in advertising and inventory before they start to see any return on their investment.
This leads to a negative ROI, meaning the seller has lost money.
Negative ROI is largely due to inexperience with the business model. Dropshippers must do extensive research to find the right products, suppliers, and prices that are most likely to generate profits.
They must also know when it is safe to scale up their operations in order to maximize their profits.
Without proper research and understanding, dropshippers can quickly fall deep into debt by investing too much in ads or inventory without seeing any returns on their investments.
11. Lack of Automation
Failing to automate processes like order tracking & inventory management is a common mistake with new dropshippers. It takes away valuable time that could otherwise be used for marketing activities leading directly towards increasing revenue growth opportunities.
When starting out, you don't necessarily need to automate, but as you grow and scale up your dropshipping business, automation becomes essential, so you can focus on growing other parts of your business.
Steps To Take To Not Lose Money With Dropshipping
Now that you understand the ways how you can lose money with dropshipping, let's look at the things you can do to avoid this.
Use Product Research Tools
Selling products that you think are cool or things you think people might like because you like them is the wrong approach. You need to know the exact market you’re targeting and the products they will buy.
To start, identify trends within your niche. Search social networks or look at what competitors are selling and then find out if it is a viable product to sell.
Find Reliable Suppliers
Once you have identified some potential products, you need to find reliable suppliers. Check supplier reviews where available and use a tool like SaleHoo to vet suppliers.
Having a reliable supplier can spare you from refunds, returns, customer dissatisfaction, and of course, losing money.
Try to Get Faster Shipping
If you are shipping products from China to the US for example, shipping could take 2-3 weeks.
However, if you can find the same product from a local supplier, you can significantly reduce the shipping time to 2-5 days, thus avoiding losing money due to long delivery times from potential refunds.
Understand Your Legal Responsibilities
When dropshipping, you are responsible for ensuring that taxes are paid, and goods meet any legal requirements of the country they’re shipped to. Make sure you understand your legal responsibilities before you start.
This includes any trademark or copyright issues on the products you’re selling - make sure they don't infringe on other brands and you are allowed to sell them.
Pay Close Attention to Your Ads
Always make sure you are monitoring your ads. You should do this daily to ensure that you are reaching your desired ROI. If you’re not, tweak or pause the advertisement.
If you don't make any sales from a particular ad within 3 days whether it's a Facebook or Google ad, you should either kill the ad or make some adjustments. Never let ads run without keeping on top of them.
Consider Moving to a Wholesale Model
If you find a winning product but know that long shipping times is reducing the orders you could potentially get, consider moving to a wholesale model for that product. This would involve ordering that product from the seller in bulk and having it shipped to either yourself or a fulfillment center.
As long as it is close to your buyers, you can then offer much quicker shipping times which results in more orders and more profits for you.
You can learn more about this in the eCommerce Accelerator course.
You can also look for dedicated dropshippers like CJ Dropshipping, Udroppy, or Spocket. These companies offer faster shipping times, better quality control, and customer service with English-speaking staff.
Stay on Top of Customer Service
Customer satisfaction is what keeps your customers happy and also has the potential for them to buy from you a lot more. Make sure that you are always responding to customer inquiries and complaints in a timely manner.
This will make the customers feel valued, which can lead to more sales and more loyal customers.
Be Upfront With Your Customers
Managing customer expectations is an important part of running a successful business.
It is essential to clearly communicate to customers how long it will take for their parcel to arrive, as well as provide detailed product descriptions that include all the details of what the customer will receive.
This includes any necessary items such as batteries, so customers know exactly what they are getting.
Only Sell Quality Products
Selling quality products is essential for any business to be successful. Quality products will ensure customer satisfaction and loyalty, which in turn will lead to repeat customers and more sales.
It is important to test and inspect the products before selling them (when possible) to get a better sense of customer reaction. Fragile items should be avoided as they may not survive shipping from China.
Asking your dropshipping supplier for samples is also a great way to ensure product quality. If the product quality does not improve after discussion, it might be time to look for another supplier who can provide better quality products.
So there you have it. It's possible to lose money doing dropshipping and now you understand the reasons why many dropshippers fail. I also outlined what you can do to mitigate your losses as much as possible.
By paying attention to things like ROI, suppliers, products you dropship, and doing proper product research, you will be setting yourself up for success from the beginning.
To start off on the right path, get some proper training. There's a few dropshipping courses I fully vetted that you should check out.
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