Dropshipping 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.
That’s hardly enough to cover your expenses for marketing/advertising, maintaining your site, managing sales orders, and covering your office hours. 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.
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.
It’s much more reasonable to approach dropshipping when you already have a regular source of traffic.
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.
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?
No control over supply-chain
In standard ecommerce, if customers complain about product quality, fulfillment speed, or return policies, you can address the problems yourself. 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.
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.
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.
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. Again, that’s just another reason why dropshipping makes more sense for already-established brands than new ones.