Dropshipping is being pitched in the last 5 years as this amazing way to build a business that is perfect for newbies and that it’s easy to get it off the ground and develop into this side hustle thing or a full-blown business in a span of a few months that generates substantial income (also with no or very little investment).
Here’s what kind of expenses you can expect, what possible profit margins are, some things that you need to do right in order to avoid common pitfalls, where a lot of people fail etc.
Drop-shipping isn’t a business model, it’s a fulfillment model.
As such, it can’t die.
I’m talking about a way that dropshipping is being promoted in the last 5 years as a super-easy way to build an e-commerce business with no experience and no to low investment.
Keep in mind that by someone showing you their Shopify screenshot you have no idea what is their actual profit, most people lie, and they are often out of business a year from now. Usually, 10-20% of that is actually profit with 25-50% of that was spent on ads.
This post is meant for someone who is brand new to e-commerce/dropshipping, probably is stranded with cash and is being fed with wrong information out there, leading to a 98% failure rate.
Yes, you can build an e-commerce business by dropshipping. However, you need to stack the deck in your favor, know what to expect, navigate the issues, have enough money to invest and make a plan with the right information.
The right information is scarce out there and courses/Youtube videos are not talking about things that can easily derail your work. Here I address those so you can approach this right and win.
I’m also not talking about making $500-1000 per month from this. You can get that working min salary job part-time or by reselling on eBay. I’m talking about developing a real business that you can scale and use that money to build other businesses.
- What is dropshipping
- Is dropshipping still profitable in 2021?
What is dropshipping
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.
The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders. Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.
1. 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.
Think about it this way: every sale you make, most of that money goes to the supplier.
What you earn is basically skimmed off the top.
That’s hardly enough to cover your expenses for marketing/advertising, maintaining your site, managing sales orders, and covering your office hours.
According to Fit Small Business, you can predict your income using these variables (they’re averages, so they’ll change depending on your industry and situation):
- 20% margin.
- 2% conversion rate.
You can then calculate a working estimate using this equation:
(Traffic x 0.02) x (Avg order value x 0.2) = Profit
While this is fine for a quick starting estimate, there are a few problems you also have to consider:
- 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.
On top of that, you’ll notice that your profit is also largely determined by your traffic, so if you’re building an ecommerce brand from scratch, you’ll be struggling for a long time as you build a client base.
Plus, according to Adam Enfroy from BigCommerce, dropshipping is a lot of work no matter how you dice it. Although it seems hands off, dropshippers always have to deal with their wholesale suppliers, order processing, returns, and customer service.
It’s much more reasonable to approach dropshipping when you already have a regular source of traffic.
2. Product quality is generally very low
From personal experience, I’d say you get what you pay for.
Chinese products are relatively much cheaper than their counterparts so a general customer shrinks his/her budget before even setting foot on sites such as AliExpress.
The result is a grumpy customer regretting having bought from AliExpress.
The reason behind the uncertainty with AliExpress’ products is because you aren’t familiar with the brands in the site because you never hear about them on the TV or the radio.
What’s even more confusing is you can’t keep up with the brands that come and go like seasons.
One of the best things about utilizing dropshipping services is that business owners no longer have to deal with product management. The dropshipping supplier provides the products the store sells.
Every business owner wants to be able to give their customers great products. That’s why it is important to make sure that you choose a service provider that only sources high-quality products.
If you choose a supplier who ships low-quality products, your business won’t be able to last long. Eventually, you’re going to lose customers and will see complaints come in about your merchandise.
3. Highly competitive.
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.
Basically, the bigger a company is, the more they can reduce their markups to offer the lowest prices.
Reiterating what we said above, smaller businesses have to cut into their profits just to stay competitive with their prices, and at a certain point, it becomes unsustainable.
To make matters worse, chances are you don’t have an exclusive deal with your suppliers.
That means any number of competitors could be selling your exact same products. And if you’re just starting out, your rivals with years of experience have the resources you don’t to undercut your prices.
That means customers can buy the exact same thing from someone else for cheaper — why would they buy from you?
4. Unprofessionalism of sellers
When you really think about it, a lot of the problems on this list come down to a lack of professionalism.
A dropshipping service should be able to provide e-commerce business owners with high-quality products at a reasonable price. They should have a solid plan for handling customer service and should be able to ship products on time.
This is why it’s very important for any business owner who’s interested in using dropshipping services to spend time researching providers.
You’ll want to make sure that you’re getting the best service possible. If you don’t, your business will end up suffering for your provider’s mistakes.
5. 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.
Dropshippers are essentially trapped, doing little more than hoping the supplier addresses the problems while simultaneously reassuring the customer about something that’s out of their control.
On top of that, there’s also a delay in communication as the dropshipper goes back-and-forth between the customer and the supplier. If one answers slowly, all communication grinds to a halt and the problems take longer to fix.
In ecommerce, customer service is paramount.
Even the slightest transgression — such as a delay in communication — pushes your customers right into the hands of your competitors.
And if they’re vocal about it, those bad reviews early on could end your business before it even starts.
6. Long shipping times
There are obvious problems that are plaguing dropshipping businesses. Most blogs you’ll find out there are not talking about them at all or are not addressing them as real issues that can easily collapse the entire business overnight. People who are pushing courses in order to capitalize on the trend are not helping as well.
Let’s be real, would anyone in 2021 buy something if it says on the product page that it’ll take 20-45 days to arrive?
I know that I wouldn’t.
Especially in the US, customers are used to Amazon which offers next day free shipping.
While it’s not impossible to sell something when you offer long shipping times, it’s becoming extremely difficult and it’ll just create a ton of problems for you down the line. Many sellers try to hide the shipping time as well but that just leads to disputes and complaints.
Anyone who thinks that this is the way that a business should be run is delusional and is setting himself for failure.
A solution to long shipping times could be a fulfilment center in the US where you buy products in bulk and then ship it to them. They will then dropship the product for you from a US warehouse via USPS. Sellers who are not located in the US could experience additional difficulties in this case due to tax laws, business certificates for individual states, etc.
Long shipping times which will cause a customer support nightmare and bad reviews all across the internet are just the beginning.
7. Lack of proper customer support
Your supplier must be able to provide assistance should any problems arise with your orders. Dropshippers should be supported by their supplier in handling problematic orders or refunds.
Bad customer service can do a lot of harm to your business. This is why it’s important to make sure you look into how your dropshipping service provider can assist you in the management of problems with customers.
Some dropshipping service providers may have inadequate customer service, while others may take too long to process requests. If the service provider isn’t efficient, the resolution of problems may take weeks. This is another surefire way to end up with angry customers.
8. High refund and chargeback rates
Nobody talks much about chargebacks, but this is a hiccup we see several newbies complain about.
Credit card companies let customers chargeback for a range of things.
Not recognizing your store’s bill on their statement
Unclear about shipping times
Essentially, whenever they feel cheated out of
The reality is every business has to face chargebacks from customers. It’s simply out of your control. No matter how amazing your business is, there’s always going to be an unhappy customer.
9. 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.
Whatever illegal activities your suppliers are up to, as their vendor you’re automatically complicit.
This potential problem can be rectified with a solid Dropshipping Agreement Contract, but not every dropshipping upstart knows that.
It’s something you’ll want to keep in mind when choosing suppliers.
10. 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.
After all, it’s not your logo on the box.
Branding is crucial in ecommerce, as shoppers tend to go to their favorite online stores first. Without customer loyalty, you’ll never get the regular traffic needed to sustain an online business, especially a dropshipping one.
Again, that’s just another reason why dropshipping makes more sense for already-established brands than new ones.
Numbers don’t lie. Here’s what statistics have to say:
- Number of digital buyers to increase from 1.52b in 2016 to 2.41b in 2021
- Retail e-commerce sales in 2017 to hit $2.290tr and $4.08tr by 2020
- Around 27% of online retailers have adopted dropshipping
Still, need some more convincing?
1. Low Startup Cost
How much do I need to start dropshipping is one of the popular questions I get asked a lot.
According to reports, 82% of businesses fail due to cashflow issues. Another major challenge entrepreneurs face is startup funding, but with dropshipping, this barrier is either removed or greatly lowered.
Here are basic things you need to start:
- Platform e.g. Shopify (including domain name, hosting)
- PC or Smartphone
- Internet Connection
- Automation Apps
- Wholesale Suppliers Directory
These are some of the essential things you need to start dropshipping ecommerce business.
2. Zero Need for Stock/Inventory
One of the major investments in running a retail business is buying stock and keeping inventory.
Usually smaller retailers seek out loans or other sources of funding to finance this aspect of their business.
With dropshipping, on the other hand, all you need is the product image on your website. Stock images can replace actual stock, isn’t that cool?
And since you don’t own physical stock, you can’t invent inventory either.
In any case, apps help to update your virtual stock and inventory.
3. Who Needs a Warehouse?
Yeah, who needs a warehouse when your supplier already has one or more?
Storage is a major issue for small retailers but not dropshippers.
See some of what dropshipping saves you:
- warehouse rentage
- warehouse management software
- warehouse staff salaries
- cooling and other temperature control measures, etc.
Now you can run your business in space with zero worries about storage space.
4. Low Running Cost
Dropshipping can be done from home in your PJs, from your smartphone, tablet or PC; you save on office rent.
Except you’re growing fast and ready to scale you may not need to hire support staff just yet; you save on HR, staff salaries, retirement plan, and staff disputes.
Most of the ICT infrastructure you need like PC and internet connection you probably already own, further lowering your startup cost.
These and more keep your overhead down so you can invest your funds where it matters more.
5. You’re the Boss
Not only are you the boss, you equally don’t have to share space or cubicle with nosy or noisy coworkers.
Being the boss of your business means you’re totally responsible for outcomes, which will require your best input.
Similarly, all the risks and rewards are yours to bear. It is both exciting and daunting to be a sole entrepreneur, but the benefits of running a successful dropshipping ecommerce business outweigh any drawbacks.
6. Ability to Work From Anywhere
A dropshipper can operate from California, ship from suppliers in China and deliver to customers in Nigeria without moving an inch, just by moving computer mouse.
If you love the location independent lifestyle, then dropshipping should be on your to-do list.
Now you can travel the world like you’ve always wanted to, visit Everest, come down to Africa or visit your Grandma in Scandinavia.
The best part, your business travels with you wherever you go, plus you can discover new in-demand products you should be selling on one of your trips abroad.
7. Plenty of Options to Choose From
From platform to suppliers to products; all essential aspects of dropshipping- there are plenty of options to choose from, thousands in some cases.
There are also so many niches to pick from. Whether you’re interested in maternity, babies, toys or automobiles, there’s something for everyone.
This means you have room to reasonably experiment with options new to you, as long as they’re viable and have potential based on your research findings.
8. Ability to Automate
Automation makes dropshipping even easier than you can imagine. Usually, product importation into your Shopify store, for instance, can be a real hassle if done manually.
Apps like Oberlo and others help you completely automate your entire dropshipping business so you can focus on the marketing.
With automation, costly avoidable errors like inventory or pricing mistakes can be prevented, you save time, money and improve efficiency.
There are also a host of other apps and plugins in the Shopify store that extends the functionalities of your e-store.
9. Cross-Border Opportunities
Dropshipping allows you sell and ship globally to any location. In some cases, merchants do not ship to certain locations.
With cross-border commerce, you earn foreign exchange, expand your customer base and reach new markets.
Reports indicate that 28% of Americans, 58% of Canadians, 29% of Britons, and 67% of Irish citizens, among others, shop domestically and cross-border.
These are potential markets for discerning dropshippers.
Is dropshipping still profitable in 2020?
For a select few people, yes.
For the big majority, not really.
What most people don’t realize is that this is a margin and volume game.
You know all those screenshots you see in Facebook groups where people show off their Shopify stats?
Well, you have no idea what’s behind that. In a lot of cases, the person spent thousands or, most likely, more than 5 figures on testing different products, losing money on unconverting audiences, bad performing days, and so on.
The game is won by people who can sell the most products at the lowest costs.
Margins in dropshipping are razor-thin and sellers need to move huge volumes in order to hit high 5 or low 6 figures profit.
They get dragged down into a false sense of profitability. Almost all e-commerce business owners underestimate costs, especially the newer ones.
Here are some of the costs that you’ll be faced with and that you have to account for:
Cost of products
Advertising costs (a huge one)
Software costs (Shopify, apps, phone numbers…)
Hiring (advertising and email marketing specialists, VA’s, customer support…)
Inbound freight costs (e.g. from China to the US fulfillment center)
Outbound freight costs (e.g. from the US fulfillment center to the customer)
Product pricing changes from the manufacturer
Other misc costs
Now, just to illustrate, let’s do some simple math to see how this would look like (numbers are made up but realistic).
You buy a product from AliExpress for $10 and sell it for $30. The shipping costs are $5 for ePacket. Your actual profit here would be $15.
Ad costs will vary a lot and can be $5-10 per purchase, but this is quite a low number and most newbies will struggle to hit a CPA this low consistently and over a long period of time. Let’s stick with $10. If you manage to consistently hit $10 CPA on Facebook ads, then your profit per sale is $5.
In order to make $10k profit per month you’ll need to:
Sell 2000 products
Spend $20k on ads
Maintain a max CPA of $10 on ads consistently
Then deduct costs of hires (VA’s, marketers, etc.), returns, chargebacks. Lastly, calculate taxes on the profit and you’ll be left with probably sub $5-7k.
Savvy people will work on upselling and increasing the AOV and backend marketing. That obviously increases the profit margins but that’s a story for another day.
Is dropshipping dead? Not really.
It’s just struggling really hard.
There are people who have legit dropshipping businesses. Keep in mind that this is a minority that either got into it at the right moment in the past or they had a substantial budget and previous knowledge.
The margins are continuing to go down, big brands are moving their large budgets to Facebook plus many people are trying to advertise as well which creates competition and increases ad costs.
Bootstrapping it and freaking out when you spend $250 on ads with no returns shows that you should look for business ideas somewhere else. It’s just the reality.
The golden era of dropshipping is behind us and believing that you can build a sustainable business out of it and scale it to very decent figures in your spare time with zero knowledge and without a substantial budget is crazy.