16 Dropshipping Business Risks and How to Manage Them

16 Dropshipping Business Risks and How to Manage Them

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Did you know 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. Now let's dive in!

You can sell any product you want to with a dropshipping business model. This means that your supplier or the manufacturer of the products will be responsible for all shipping and storage associated with storing inventory!

In return, they'll give you some payment each time an order is made on one of your items. Your concentration would then lie in marketing these goods so people buy them from YOU instead of other sites.

As a lucrative business model, dropshipping could have several risks one needs to be aware of to ensure the business’s success. Here are some dropshipping business risks you should watch out for:

1.Unexpected costs

While dropshipping transactions may seem like free money, there are dropshipping fees and other fees involved in the process. You will be responsible for:

  • The product price - dropshipping fees or taxes collected by the company that is dropshipping your order 
  • Product shipment cost - shipping fee from the dropshipper to your customer 
  • Return fees - return shipping cost incurred when products are returned by your customer
  • Shipping insurance - If it's not included in the carrier's rate, you'll have to pay for that.

Dropshippers usually charge dropshipping fees and dropshipping taxes. Most dropship companies pass on the shipping fee to their dropshippers, which means dropshipper will be responsible for product price + dropshipping fees (A x B) + dropshipping taxes, where A is the dropship company's profit margin and B is dropshipping fees.

However, you could also negotiate with your dropshipper to have them bear the shipping fee instead of passing it on to their customers. Shipping costs may include packaging materials plus COD or address verification fees charged by courier services like FedEx, USPS, or DHL.

To get a better estimate of the total cost involved in dropshipping, you would need to first understand dropshipping fees and dropshipping taxes. Then add the dropshipper's dropship markup price (A x B) + shipping cost + your dropship markup price + your profit = total cost involved in dropshipping an order.

  • Dropship markup price- The dropshipper's profit margin on a particular item. 
  • Shipping cost - Tax rate/FedEx shipping rate + packaging materials(if any). 

Packaging may entail a drop shipper's cardboard box or plastic bag, bubble wrap, or tape for example.

2. International transaction risks

Different international transaction risks affect dropshippers around the world including currency exchange rates fluctuations, bank fee/currency conversion rate. There may be some dropshipping customers, who may cancel their dropship orders for several reasons like receiving an item that was defective or didn't fit as expected.

Having an eye on the recent trend in Forex trading and consider the fluctuation beforehand will save you from some unnecessary risks.

3. Declining dropship demand in your country or state 

Dropshipper will experience dropship decline due to the inventory he or she has not been able to sell by the end of each year. It will result in dropship stockpiling (the process where dropshipper refuses to reorder certain items from suppliers because they do not want them taking up storage space).

In some cases, the demand for dropshipped goods could decline and so does your revenue from dropshipping transactions even when you're still getting customers. Check the supplier’s data to get an idea about which items may lose their demand during which time of the year. A thorough target audience analysis survey will also help you to get a clear picture of the order drop.

4. Failure to understand the dropshipping business model

You can't dropship like a regular online business. You're not the one who is in charge of dropshipping, you are just responsible for dropshipping vendor selection, dropship mark-up price, and dropship customer service. While dropshipping does get you more sales without increasing costs, it's important to understand that you are NOT in control of the inventory or the shipping process.

As a dropshipper, there is a lot involved in account management such as 

  • Selecting the right dropshippers (if your initial dropshipper for certain items didn't work out),
  • Negotiating with suppliers (to get cheaper prices ), 
  • Receiving and checking orders, 
  • Liaising with customers (when they contact you regarding an order) and the list goes on.

In a nutshell, dropshipping is not for everyone and dropshipping business does involve risk - so make informed dropship decisions before you start dropshipping.

5. Excessive dropshipping costs

Apart from the dropshipping fees, most dropshipper also have to pay transitional expenses which in some cases can be pretty high depending on the size of your order, transaction history, and customer relationship with dropshipper.

Some dropship service providers do not allow returns unless they are defective or incorrect (in this case, return shipping cost would be borne by dropshipper). Regular checking with your suppliers about the quality of the product and packaging can save you from hefty transitional fees.

6. Dropshipping market saturation

The dropship market may become saturated if it's oversubscribed like any other business model out there.

You always have to think of dropship competition when dropshipping as the market is volatile and dropship products are easy to replicate. Offering quality products with better shipping can give you an upper hand. And regular market research and target audience survey will also make you stand alone from the other drop shippers.

7. Customer's credit risk

Dropshippers may also be responsible for dropship customer's credit risks such as the possibility of dropshipper not receiving payment from customers if they defaulted on their payments.

So you can't just drop ship anything that you want without verifying your dropship customers' credit worthiness first. And the chargebacks procedure will vary for every merchant account provider.

8. Pricing dropship prices within market margin or order volume

Please check with other dropshippers in your niche first in terms of dropship price range and dropship order volume requirement before you decide to dropship the same dropshipped item. If your price is way higher than the rest, obviously customers will switch from your products.

Contrarily, setting the price too low will put you in financial trouble along with creating an image among the customer that perhaps the products are sub-par in standard. Check our Pricing Strategy Tips to set up the best price for your products.

9. Seasonal dropship demands

Before you start dropshipping, it would always be better for your business if you can determine what is a season in the dropship industry (like for example Halloween costumes during October or Christmas stockings right after Thanksgiving).

You also have to know that there are peak periods of demand when suppliers will require dropshipper to place their drop shipping orders as early as possible. For example, B2B holiday promotional events or corporate holidays like Chinese New Year, Christmas Eve, etc.

You need to get ready with your marketing and pricing strategy before the seasonal events hit the market. It will give you an advantage over the competitors.

10. Shipping time frame

If your dropship item is shipped via parcel delivery services such as USPS or UPS, the dropship time frame can be extensive.

Some dropship providers such as Amazon also do not make dropshipper pay for dropship order processing fees unless the order is canceled by dropshipper or marked by dropship providers as a return to the warehouse (which means you would have to pay the full price of the returns).

11. Customer's preference shifts

There are some times when customers' preferences shift from one product to another (for example, if a customer likes your Christmas stocking this past December and then orders from you again in March only to find that his/her favorite stocking pattern has already been sold out).  

Although there are ways to solve this problem like dropshipping stock variation dropship (which is dropshipping with the same dropship item but in different colors, sizes, or styles).

12. Competitor's dropshipping offers and deals

Competitors' dropship offers and dropship deals can also shift customer preferences sometimes as well.

One of the most popular dropshipper out there today, Amazon, often has a few daily deal items which have fueled competition among other dropshipper trying to match their prices. Some dropshippers even dropship a slightly higher price with the hopes that they will get sales from people who are after a bargain.

13. Foreign market risks

Unlike the domestic drop shipping business model where you deal with customers face-to-face, the majority of your foreign dropshippers' dropship customers are overseas.

Foreign market risks - dropshipping business risks - Dropship USA

And since dropshipping is a global business model, there are risks involved with conducting dropship business internationally such as dropship language barrier (translating your dropshippable items), foreign currency exchange rates, fluctuation, and more.

14. Shipping carrier changes

Changes in shipment carriers for dropship orders should be communicated to dropshippers at least twenty-four hours before the estimated delivery time frame. It will help you to have enough stock of your dropship item in-house or find other means of meeting your dropship customer's needs.

The reason behind this is because it will result in delayed shipments if you do not notify them at least twenty-four hours before the estimated delivery time frame.

15. Shipping costs and taxes

We all want to dropship cheap products without the worry of dropshipping business shipping charges, dropship product taxes, dropshipper's state tax, and other dropshipping business-related shipping fees.

Unfortunately, that is not always possible, especially if you're dropshipping an item from overseas dropshippers like China or India where there are dropship import duties involved.

16. Taxation issues for dropshipped items

Just because your dropship provider does not collect state sales tax for certain states does not mean that your dropship customer will get away with skipping out on paying their local state taxes as well.

Dropshipper can use simple math calculations to calculate their liability dropship dropshipping taxes for their dropshipped items.

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!


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