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Dropshipping seems to be a safe business from an investment perspective as you do not need any warehouse. However, it doesn't mean that you won't face any challenges. If you have the question "can you lose money dropshipping" in your mind as a new business owner, our answer will be yes, you can.
Like any other business, a few ground rules will help you keep the risks minimum while starting a dropshipping. We will share those with you here. Let us assure you that veteran dropshippers and warehouse managers have found those rules effective and still use them while starting a new wing in their business.
8 Ways You Can Lose Money With Dropshipping
Before you get an idea about how to stop losing money in dropshipping, let's look at some of the reasons responsible for losing the money in the first place. There are seven major reasons that you need to consider seriously before thinking about is dropshipping safe.
1. Using a free dropshipping website to sell
You can lose money dropshipping by using a free dropshipping website to sell your products. Initially, you may not lose much as most of these websites will cover your basic expenses. After all, they need you to succeed to take their share of the profit. So you don't have to spend much money on advertising and marketing initiatives.
However, this doesn't mean that you can save on shipping. On the contrary, if the retailer is located far from your customers and has big orders, raising on-hand inventory will cost more than it earns amount-wise.
So more often than not, these sites make money by taking a big chunk out of order, and it doesn't even feel like you are losing some because you didn't have to pay anything upfront or during the further course of business with them.
2. Not maintaining enough back stock for all the products you sell
This is another big reason to lose money when dropshipping. When you are running out of a product, it will be difficult for you to get it even before the end of the day.
This may lead to the loss of new customers who placed an order and canceled it due to insufficient inventory. Some customers may choose other sellers if they cannot buy a particular product from you. So it is essential that you maintain a proper back stock for all products or at least those that are regular sellers in your store.
Once you have enough inventory, you can use free dropshipping sites to store your stock and ship them when there are orders placed on your site. You can save more money by using more than one dropshipper at a time as well so that different parts of your stock can be stored in different warehouses and then shipped according to orders in bulk.
Also, consider the freight costs while figuring out how much inventory should be kept at hand for each part of your stock.
3. Refunds and exchanges
It is essential to know about your terms and conditions for refunds and exchanges as many customers ask for them when they are not satisfied with the product. So you need to make sure that you can refund their money or exchange the item if it is not faulty in any manner.
This way, they will feel more confident in placing orders on your store rather than looking at other sellers who provide free shipping but don't allow refunds or exchanges.
4. Additional fees
Dropshippers charge several additional fees. First, there is a standard rate which can be anywhere between 15-30% of the product rate per order depending on the type of product found in your store.
Then there is a charge for an additional warehouse fee if you want to use more than one warehouse for a particular product and ship it according to orders received from different locations. Other charges may include custom duty, VAT, or GST charged by the warehouse. These charges do not apply to certain countries.
Various charges you will incur will depend on whether you already have an account with a particular dropshipper or not, whether you use more than one warehouse, and the type of product being handled.
So carefully consider all these factors before choosing the most suitable dropshipping partner for your business needs, and remember to shop around before selecting your preferred dropshipper, as prices can vary substantially between different providers in some cases.
5. Account Closures and Sandboxing
Suppose your account is closed by your dropshipping provider for any reason – for example, incurring too many returns, or the product has a terrible return rate. In that case, you will be refunded the order and commission you previously earned from that particular order.
The dropshipping provider may also place an indefinite “hold” on all your subsequent orders, including future sets of deposits/overrides received by them. If this happens to you, they can obviously claim your deposit with no means to contest it since they already hold it.
However, if the product was not shipped at all – i.e., a “false” order (so-called sandboxing fraud), then the dropshipping partner should issue you with a full refund (minus their usual restocking fee) immediately upon receiving an official complaint from the supplier within 30 days of placing the order with them.
If there is still time remaining on your contract when this happens, and you want to continue with the supplier, you can either view this as the cost of doing business or terminate the agreement and get a full refund.
Every case is different, so please check your dropshipping contract and/or contact your dropshipping partner for confirmation before proceeding.
6. Charges for Shipping
Suppose you place an order for a product initially sourced from another supplier. It is being shipped directly to your customer (i.e., not re-shipped from the dropshipping partner). In that case, you must pay any shipping charges associated with placing that order.
The dropshipping provider will only pay for shipments re-shipped from their warehouse within their own country. In these cases, additional shipping costs are added by the dropshipping provider above what was charged when you placed the original order. They should give you prior notice of those changes so you know them before they proceed with charging any additional shipping fees to your customer.
If you do not place orders on your own, your dropshipping provider may or may not pay for shipping charges to the customer.
This is something you should confirm before engaging their services in any way. Some suppliers do not like the added costs of shipping products back. It can be risky if those products are defective or damaged because they have to pay for the return shipping costs themselves.
If this is a concern of yours, then again, you should check with your dropshipping partner and make any arrangements necessary accordingly…if at all possible.
7. Negative ROI
When you receive a negative ROI for your ecommerce business, it means you are losing more money than you are making. This is not ideal by any stretch of the imagination though there are some cases where it makes sense.
If your business model requires that a certain percentage of your customers return items, then a negative ROI may be acceptable because you will still make money in the long run.
Suppose you’re an ecommerce retailer that requires customers to collect rebates and other credits when they purchase products. In that case, it’s possible to have an unfavorable ROI and still make money from the sales process.
However, if your goal is to create a highly profitable ecommerce business, then any time spent on processing returns or issuing credits will eat away at profits and drag them down significantly.
When speaking with any dropshipping provider that offers this type of return policy, be sure to understand why they have such restrictions. Are they trying to save on staffing costs, or are they trying to cut costs at the expense of your business?
If your provider doesn’t have a compelling reason for why these policies exist, then you should look for another provider.
8. Getting Sued
As part of working with a dropshipping partner, you might come across a negative review that accuses your ecommerce store of being a SCAM and worth no money. This could happen if you don’t provide reliable customer service or sell goods on sites like eBay, where users can file fake claims against sites they don’t like.
However, it is possible that the reviewer was simply paid to post negative reviews by an unscrupulous competitor. Some unscrupulous competitors buy up as many SKU and brand names as possible to confuse customers and take their business away from legitimate brands.
In both cases, it is essential to take these negative reviews seriously. No matter where the misunderstanding comes from, be sure to immediately address the concerns with your dropshipping provider.
When you first sign up for any service such as dropshipping or ecommerce distribution, you need to be sure that everything is working correctly before putting in your products. Once you have established your dropshipping relationship, you should contact your partner to find out if they have any issues that need to be addressed. If there are any problems with your product, the provider will get them solved for you.
If the contact is poor, or if the software or ecommerce platform does not work correctly, it is a good idea to take advantage of reliable dropshipping software for selling on Amazon.
As you can see, working with a third-party dropshipper can help you grow your business and provide more value, as well as improved pricing and shipping options.
How to stop losing money on dropshipping?
You already know the significant reasons behind losing your fortune in the dropshipping business. So, stopping them should be much easier. However, we have rounded up a few effective and proven methods so that you can run a sustainable business.
Sell only quality products
Sometimes, we simply forget that our customers are paying good money for the products we sell. Therefore, the first thing that we should do is ensure the quality of products to avoid losing them.
Being frank, a product that doesn't work or is not as described will hurt you in sales and pricing. Thus, it always pays off to stick to quality products to make a maximum profit. If you can't find some of them in your niches, you can always reach out to local makers for bulk purchases and resell them easily on internet platforms.
It's essential but straightforward!
Effective online marketing is often forgotten when started dropshipping online. Google has made it easier than ever with its Adwords platform, which helps businesses get more traffic in less time with less money spent on Google Adwords ads.
We suggest selling on Amazon since it has a built-in capability of tracking visitors and showing their visiting patterns for better targeting. By doing this, you can quickly know how many views your ads have and measure it against what other ads are selling.
Try varying the message
We become annoyed with people who want the same thing repeatedly over the internet. Thus, dropshipping is not different.
Some customers want to buy products from the same sellers every time, but some may be on a budget and choose to buy from different sellers depending on the product's pricing or their budget per order.
Therefore, try and vary your messaging as much as possible so that you don't lose out on prospects that can turn into regular customers.
Fast and Reliable Shipping
Don't think that you will make money just by selling a product online. You have to think of the time and effort also. If you're selling products online through dropshipping, you need some time for packaging and testing.
This can be taken for granted if you are running a dropshipping business but still think about individual sellers who buy in bulk, thinking it will save them time and effort and cut the margins.
Communication is the key in any business, and dropshipping is not different. If you have any queries like “can you lose money dropshipping” or “does dropshipping work” et professional help from DropshippingUSA.
Our expert team will help you set up an engaging website to align communication with your niche and many more. So stop worrying about is dropshipping profitable or not and let us help you to make it for you.
Don't forget, you can get a fully automated USA based dropship website, built for you, in whatever niche you want, in 72 hours or less. Go to https://learn.dropshipusa.io/webclass to register for our free webinar that will teach you our secret dropship model, and how you can get it built for you in only 3 days!