Dropshipping is an order fulfillment method that does not require a business to keep products in stock.
Instead, the store sells the product, and passes on the sales order to a third-party supplier, who then ships the order to the customer.
5 Hard Truths About Dropshipping No One Talks About
Low profit margins.
Sure, since you don’t have to manage or store your own inventory, the overhead is low — but so are the returns.You put less money in, but you get less money out. That means you have to do a lot of business just to stay afloat, let alone turn a profit.
- 20% margin.
- 2% conversion rate.
- Chances are, your discount on buying from manufacturers and wholesalers will be less than 20%.
- This doesn’t account for any of the additional expenses mentioned above that you have to pay from your end. It’s not the final profit.
- For most products, you’ll have to cut into your profits to keep your sales prices competitive. If you stubbornly hold on to your 20% margin, other companies will easily undercut you.
There will always be overly optimistic entrepreneurs who focus solely on the “low overhead” part, ignoring the clear evidence above.
Because very little capital is required to start a dropshipping business, that low barrier to entry means a lot of competition, with the most popular markets suffering more than others.
No control over supply-chain.
In dropshipping, you’re more or less at the mercy of your supplier — but you’re the one who still has to talk to your customers directly.
Legal liability issues.
Although this isn’t a common problem for dropshippers, it’s worth mentioning. Some suppliers aren’t as legitimate as they claim, and you don’t always know where the merchandise comes from.
Even more deceptive is when suppliers illegally use a trademarked logo or another company’s intellectual property, which happens more than average.
Difficult to build a brand.
Like ghostwriters or behind-the-scenes songwriters, dropshippers must understand that the credit for their work goes to someone else.
If whatever product you’re selling is so amazing, your customers are going to focus mostly on the product’s brand and forget about the shopping experience entirely.