Many of the questions that I receive in my inbox at MyWifeQuitHerJob.com are related to opening a dropshipping store and I can definitely see the appeal.
When you run an online store that only offers dropshipped products, you don’t have to worry about inventory and you don’t have to worry about product fulfillment.
All you have to do is sell the product, take orders and make a decent profit. Easy right?
Unfortunately, it’s not that simple and with anything that sounds too good to be true, there are always gotchas.
In theory, dropshipping sounds like a great idea because it’s inherently scalable without you having to do a lot of work up front. But when you dig down a bit further, it becomes obvious why dropshipping isn’t so great.
Most people try to open up a dropshipped shop expecting it to be easy, but in reality it’s much harder to operate a dropshipped shop than a traditional online store and I will explain the reasons why below.
You Won’t Be Getting The Lowest Price
Most people open up a dropshipped online store with the misconception that they will be receiving the same wholesale pricing as everyone else for their products.
In reality however, dropship distributors often charge extra fees and/or tack these fees onto the quoted wholesale price.
Put yourself in your distributor’s shoes for a moment.
Would you prefer to sell a large bulk quantity of products all at once to a store or would you rather sell onesy, twosy amounts to individual customers and be forced to individually ship and pack each item?
The distributor is doing all of the work here and this will be certainly be reflected in your wholesale price.
To throw out some numbers, most dropship stores get between 10-30% gross margins whereas most traditional shops that carry inventory have 50% gross margins. It’s a huge difference!
Because your wholesale prices are higher than a traditional store, you will not be able to compete as effectively on price unless you take a good sized profit hit.
In addition, lower margins will inhibit your ability to advertise on sites like Facebook and Google. Not only that, but less profit per sale also makes customer service problematic.
For example with our online store, our margins are between 70-90%. As a result whenever we get an angry customer, we simply give them a refund AND let them keep the product.
Because our margins are so high, we can afford to take the hit. With dropshipping, the convenience of not having to fulfill orders comes at a cost.
You Will Need To Charge Higher Shipping Costs
Often times, you will require the use of several dropship distributors to fully flesh out the product selection for your store.
Using 2 or more different dropshippers means that 2 or more companies will be making separate shipments to your customers, which means that 2 or more companies will be charging you their own separate shipping costs.
If I’m a customer and I buy products from your store across 3 different distributors, you will have to charge me a much higher shipping cost just so you can break even.
The only way around this is to only use one dropship distributor which may not carry the breadth of products that you need. The result is that you will have to pass these extra costs onto the consumer which reduces your price competitiveness.
Dropshipping Can Be A Logistical Nightmare
You might think that since the dropship distributor is doing all the work that you can sit back and relax. Unfortunately, you have to deal with your customer base.
You have to be the one that answers all of the questions. You have to be the one to apologize when an order doesn’t arrive on time.
The main problem is that when you use several different dropship distributors, getting the entire order to the end customer can be a logistical nightmare.
All distributors will have different shipping times and will be shipping from completely different locations.
If a customer orders products across 3 different distributors, they will end up receiving 3 different packages at varying times.
If an order is particularly time sensitive and needs to be rushed, you will have to make sure that all of your distributors can deliver the product on time.
In effect, you are staking the reputation of your online store and linking yourself to all of your dropship distributors in a single chain. If even a single distributor is unreliable, then it will reflect negatively on your online store.
Your Customer Service Will Be Out Of Your Hands
Customer service and your online reputation can make or break your business. With the world wide web, social media and Twitter, news of a botched transaction can spread extremely fast so it is absolutely crucial that you maintain a great image for your online store.
Whenever I receive a call for our online wedding linens store, I always take the time to ask how they found us. And the majority of the time, the people who find us do so because they were referred to us by one of their friends.
Word travels fast.
Our customer service is one of the main reasons why we have grown over 3x in the past 3 years.
With dropshipping, you unfortunately have very little control over your customer service. Since you are not in charge of product fulfillment, you can’t control when a customer will receive their product.
If a customer wants to make a return, it’s a major pain because you have to make sure that you get your money back before you can provide a refund.
Sure, there are always ways to mitigate these problems but the solution inevitably involves either raising prices or taking a profit hit at the expense of customer satisfaction.
Amazon Makes Dropshipping Even Less Attractive
Prior to Amazon, it was much harder for companies to sell their goods to the masses. As a result, distributors had to rely on traditional retailers and dropshippers to help them move product.
Today, Amazon controls such a large piece of the ecommerce pie that most companies can get by with just selling on Amazon as a 3rd party seller.
Amazon handles your sales, your product fulfillment, your customer service…basically everything that a traditional retailer would typically take care of. But the difference is that the distributor gets to keep all of the extra profit!
If you are a dropshipped store selling the exact same products that can be found on Amazon, it will be impossible to compete on price. As a result, you will have very little leverage.
After all, would you rather buy from Amazon at a lower price or pay more to buy from an unknown shop?
Editor’s Note: If you are interested in selling on Amazon, check out my article on How To Sell Private Label Products On Amazon – The Definitive Guide
When Dropshipping Makes Sense
While I would never start a pure dropshipped store today, there are many ways to use dropshipping to your advantage.
Because you don’t have to carry inventory, you can instantly throw up an online store with hundreds of products in a short period of time.
Then, you can use this shop to conduct market research. Based on which products sell well, you can pick and choose the most successful products to buy inventory for and enjoy higher margins.
Dropshipping is best used as a vehicle for product validation or for fleshing out an online store that is sparse in certain categories.
Editor’s Note: If you are interested in learning how to start your own online store, click here to take my FREE 6 day mini course on ecommerce.
Is Dropshipping Really Less Work?
It really depends. Arguably, the time that you save in not having to deal with inventory and fulfillment will be spent dealing with customers unless you have a reliable core of dropship distributors.
One thing that I forgot to mention is that many drop shippers don’t use automated supply chain technology with a real time API. What this means is that you may not be alerted in real time whether a particular product is available for sale or not.
Therefore if an item is out of stock, you will have to interface with the customer to let them know when they can have their items. Unless your shopping cart is closely tied with your dropshipper’s database, it will be difficult to maintain an accurate inventory count.
With dropshipping, you are trading off not having to deal with fulfillment logistics with having to deal with more customer headaches. And depending on your personality, this may or may not be a wise tradeoff.
While the tone of this article has been anti-dropshipping in general, don’t get me wrong. Many people have been successful with dropshipping as it works very well with small niche stores but my personal opinion is to avoid it if you can.
However if you insist on going the dropshipping route, I suggest that you give Worldwide Brands a try.
WWB vets and pre-verifies dropship vendors so you don’t get scammed or ripped off. Good luck with your shop!
- Create A Profitable Online Store In 5 Easy Steps
- Dropshipping Vs Affiliate Marketing: Which Online Business Will Make You More Money?
- Dropshipping Vs Carrying Inventory – An Inside Look At The Financials Of Two Live Online Shops
- How Much It Costs To Start An Online Store And Should I Dropship Or Carry Inventory
- Private Label vs Retail Arbitrage vs Dropshipping vs Wholesale – 8 Ecommerce Business Models Compared
Have you read these?
- 5 Amazon Alerts That Will Change The Way You Manage Negative Feedback, Inventory And Sales
- What Everyone Should Know About Starting A Business Vs Working A Day Job
- Mid Year Income Report: How Our Online Store Performed In The First Half Of 2013
- 5 Ingenious Sales Tactics That Disney World Uses That Can Be Applied To Your Ecommerce Store
- 6 Simple Strategies To Get Repeat Customers And Why You Must Look Beyond Amazon