Dropshipping can make you lose money. Dropshipping can be a very profitable business. Dropshipping is often portrayed as a ‘perfect business’ that has no risk. However, this is not the case.
This concept sounds perfect. Dropshipping allows you to sell products you don’t own or manage.
Once you have made a sale, your dropshipper will receive the order and will ship the product directly to your customer.
You get paid before you purchase stock, so there is no risk.
Imagine that you are selling cat socks at $25 each and your dropship supplier charges $10 for shipping. This means that when an order arrives, you will spend $10 and make $15.
No risk, right?
First, you get paid. Then you purchase the stock and it is shipped.
Dropshipping can lead to many pitfalls and can cause you to lose money.
Dropshipping can be a profitable business model, but you still have to lose money.
There are many ways to lose money. With refunds, chargesbacks and returns, you can easily lose several hundred dollars.
Advertising can cost you thousands, but you may lose even more if you are sued.
Dropshipping: How to Lose Money
Dropshipping can lead to 7 major losses. Dropshipping is a low-risk fulfillment method, but it’s not without risk.
Dropshipping promises of a risk-free and ‘perfect business’ are not to be believed.
Here are seven areas where you could lose money in a dropshipping company.
Slow shipping times are one of the greatest challenges for dropshipping from China. It will take your customer 14-21 days to receive their order.
Amazon delivers next-day and customers won’t be able to wait longer than two weeks.
After waiting for 2 weeks, customers become frustrated and request refunds. You must refund the entire purchase price and any COG (costs of goods) fees.
The quality of the products is another major problem with dropshipping to China.
It is possible to sell products you have not even seen, and you can rely almost entirely on the photos that the seller posts.
Sometimes, the truth is quite different. Many Chinese products are poorly made and poorly packaged. They often don’t do what they were intended to do.
A customer who receives a substandard product of poor quality will likely ask for a refund.
Although you can request a return from your supplier, it is unlikely that it makes sense to send products back to China.
You can get a full refund with Udroppy and CJ Dropshipping for damaged or defective products.
Another issue is damaged goods.
The Chinese postal system is very disrespectful of parcels. Most parcels are mishandled and arrive at the customer’s doorstep in a beaten up state.
Refund requests for fragile products will be high.
Refunds can be costly and you don’t need to get too many to begin racking up losses. While you might be able to recover some of the money, most likely not.
Dropshipping can be very tricky because returns can be difficult. Selling clothing items is a serious offense.
China sizes are very different from the US and European sizes. People will make mistakes when placing orders even though they have size charts.
People have become so used ‘free returns’ that they will ‘order and then see’ the item and request a return if it doesn’t fit.
I’ve also noticed that many people lie about their size. In the hopes of fitting in, they order a smaller size.
This leads to one problem: Dropshippers are forced to accept returns.
It is impossible to offer returns to China in a sensible way. This means that you will often have to send another order for the “return” at your expense.
This will double your COG, which can quickly eat into your profits. Certain clothing items may see high returns because of sizing or colour issues.
When a customer disputes a transaction with your store, they call their bank to file a chargeback. This is also known as a “forced refund”.
The bank will immediately reverse this charge. No questions asked. This information will be passed on to your payment processor, who will reverse the charge on you account.
A chargeback typically has a fee of $30, regardless of the transaction cost. The chargeback can be disputed by providing all details about the transaction. Dropshipping orders, however, often wins the dispute.
The $30 fee is waived if you win the dispute. It will cost you if it is not. There are many reasons to chargeback.
These are the main reasons customers request a chargeback from banks:
- The customer never received the item they purchased (lost in transit, or kept at customs).
- They waited too long to ship and thought they were being scammed.
- They were disappointed to find that the product was not of high quality.
- The customer commits fraud by claiming they received a product that was not theirs
- The customer doesn’t recognize the transaction on their bank statement
Dropshippers are often subject to chargebacks. Dropshippers are often swindled by people who have no shame. They will claim chargebacks.
A chargeback will result in the loss of the transaction value, plus the COG and $30 fees.
This can quickly add up, especially if you sell high-ticket items that have lower profit margins. You will soon find yourself in a hole and losing money quickly.
Account Closures and Sandboxing
Account closures and Sandboxing are another major problem that often result from chargebacks.
Your merchant may terminate you if you are involved in a lot more than one refund or if you have a lot chargebacks.
Dropshippers have been targeted by Stripe and Shopify Payment. However, they aren’t as severe as Paypal.
Paypal will often sandbox you and be very strict. Paypal can sandbox you by withholding a portion of your funds for as long as 3 months. Sometimes they even keep it! If they find your “business model” not suitable, they will withhold a percentage of your funds for up to 3 months.
Dropshippers lost thousands to Paypal, who shut them down and kept their money.
Most cases when a payment processing processor shuts you down, they don’t pay your last payment. This can result in a huge loss.
Shopify can also close you down. Dropshipping is not a problem for Shopify, but they do have products on the horizon.
This is a very important topic for dropshippers and I will be discussing it in greater detail. It boils down to this: If you do paid advertising, you can spend much more than what you earn.
If your ROI (return-on-investment) is negative, you will spend more advertising than you make in profits.
This is a common problem that many newbies fall for.
This applies to advertising too. Negative ROI is possible if you have very low profit margins.
Add fees, development costs, and other expenses. You could see a negative ROI.
Get Screwed by Your Supplier
It is rare, but it does happen when dealing with Chinese suppliers. Aliexpress is very strict with its sellers. If anyone does not follow Aliexpress’s rules, Aliexpress will immediately shut them down.
Although this provides some protection, it does not stop Aliexpress sellers from making money.
Some won’t ship your order at all. Some ship a lower quality product.
Some people will choose a cheaper shipping option, but it takes longer. Others will be dropshippers and cause chaos in order management and tracking.
Aliexpress sellers are willing to tell you anything just to make their business more profitable. Dropshipping companies such as CJ Dropshipping and Udroppy are better and more reliable.
Dropshipping private agents is the most risky option. Because of the high quality and speed of shipping, it has become very popular.
Some agents will simply disappear with your money, even though you’ve already paid upfront.
There are also risks when you place bulk orders from Alibaba. Alibaba offers buyer protection, so take advantage of it to protect yourself from potential scams.
Although it is uncommon, this can happen. Aliexpress sells many rip-off products and has Chinese suppliers.
If you sell trademarked goods, you are responsible even if the trademark infringement is not apparent to you.
You should also be aware of other risk factors. What happens if the electronic product you sell explodes in someone’s face. What if a beauty or health product causes injury to a customer’s face?
What happens if a baby-toy causes injury to a customer’s child.
Dropshipping products can be of poor quality and you could get sued for large sums.
Dropshipping: The Great Conundrum
Dropshipping is a popular route for potential entrepreneurs. It’s usually a path that has been laid out by a 16-year old guru wearing a Lambo.
This plan is the basis of the path or method. It looks like this:
- Spocket, CJ Dropshipping and Aliexpress are some of the best places to find a hot product.
- Shopify Store Setup
- Use Google Ads or Facebook to advertise
- For a few days, you can lose your money
- Wait for Facebook’s or Google’s algorithm ‘kick-in’
- Make a positive impact on your ROAS
- You can increase your budget, run retargeting ads, and make more
Although this is a simplified breakdown, almost all dropshipping courses follow the same basic blueprint.
This is the essence of the model. The problem is that almost all ads will not have a positive ROAS (return-on-adspend).
Before you can see a positive ROI, you will almost always need to make money and lose money.
Both Facebook’s and Google Ads’ algorithms require time and money to learn and find customers.
However, nothing is certain. It is possible to run your ads for a week with a negative ROI but never see the results. You could spend a lot on advertising and not see any sales.
Paid advertising can be a fine art. Paid advertising is an art that requires experience and a lot money. You might never see it again if you have $500 in your pocket when you go to Facebook Ads and Google Ads.
It is a dilemma that you must spend money upfront, without knowing if your products sell or if you will see any positive returns.
It is possible to test between 10 and 20 products before you find the winner that produces a positive ROI.
It can quickly add up if you spend $200-500 to test a product.
This is the simplest dropshipping plan that you can follow to make a quick loss of a few thousand dollars.
It can be difficult to tell when you have spent enough money to test a product, or if you need to just keep it running and let the Facebook or Google machines show your ads to buyers.
If you cut your ads too quickly, you might miss out on a possible winner.
If you run your ads for too long, you will end up spending more on a dud.
Dropshipping products through paid ads isn’t for the faint-hearted. You need to have a strong mindset and nerves of steel to do this.
A deep pocket doesn’t hurt either.
It can be a powerful drug to inspire you to pursue your dream when you see your favorite guru posting Shopify screenshots showing them earning $30k/day.
Dropshippers are often just gambling. They are putting their money into something they “hope” will make them rich.
This gambking mentality must be stopped. Don’t fall for the phony claims of “big money” as they are often fake. Only a few people who reach that level actually earn it.
Treat your dropshipping business like a business. You must work on yourself. Learn to improve your skills. Treat it as a scientific process and not as a game.
You must learn to let go of your emotions. This is the difference between an entrepreneur and a gambler. Your energy should be focused on the results and not dollar $igns or money.
Dropshipping: How to Make Sure You Don’t Lose Your Money
Dropshipping can be a profitable business model. It is not. Losing money is possible if you drive traffic via paid advertising networks such as Facebook and Google.
You must have the right mindset.
It’s not about ‘losing money’, but rather about buying data that will help you make informed decisions.
Paid advertising is evolving and it will not be easy to make money from the start.
Only sell quality products
Dropshipping is a great way to avoid losing money. You should only sell high-quality products. This can be difficult as you may sell products you haven’t seen before.
Personaly, I make it a point to order the products before I consider selling them.
You can get a better idea of your customers’ reactions by actually seeing, touching and testing the products.
Selling only high-quality products can help you avoid many chargebacks and refunds.
It is important to avoid fragile products that may not be able to withstand the dangerous journey from China. It’s not worth taking the risk.
Fast and reliable shipping
The shipping time is the next important aspect. With Epacket’s demise, there aren’t many shipping options through Aliexpress.
YunExpress or SF Express are great options for shipping from China. Both can deliver your parcels to the USA in 10 days. This method also avoids the mass mail trap that so many parcels fall into.
CJ Dropshipping has its own CJ parcels as well as their own logistics solutions. Although it is more costly, it is extremely efficient and effective. Similar features are available in eProlo and Udroppy.
The single most important aspect to reducing chargebacks and refunds is faster shipping. Dropshipping is a great way to reduce your risk of losing money.
It is important to manage your customers’ expectations in order to reduce your risk. Dropshipping can take up to three weeks to deliver a parcel. Let your customers know this.
You must be clear with your customers about the time it will take to meet their expectations.
Make sure to include accurate product descriptions. This will allow your customers to know exactly what they will be getting.
Customers have gone crazy when they didn’t get their batteries!
Communicate with your customers
Communication with customers can not only ease their mind but also prevent chargebacks and refunds.
Do not leave support tickets unanswered for longer than 24 hours. Customers who don’t get a response within 24 hours of submitting a support ticket are likely to become upset and complain.
This can lead to angry emails, and sometimes refund requests, or chargebacks.
Be professional and assure your customers whenever possible. Communication with customers is key to resolving most issues.
Keep your accounts safe and above board
It is crucial to protect your accounts and your business. Dropshippers are often considered a sitting duck.
You should never offer products to customers that may pose a risk to their health. It’s not worth it. You could be sued and ultimately held responsible.
Your Paypal accounts should be your top priority. These accounts can not only make you lose your business, but they could also mean that you may be unable to access your ‘your’ money.
You must honor refund requests and limit chargebacks. Never sell anything illegal or dodgy.
Keep your ROI in mind
It is important to keep track of your ROI. You should always ensure that you have good markups. Dropshipping requires markups that are 3x the COG.
Online selling of products can be expensive. There are many hidden fees.
You may not be making as much money as you think. This is because of taxes, currency conversion fees and Shopify processing fees.
An app such as TrueProfit is highly recommended. It will take the guesswork out all fees and charges.
TrueProfit allows you to see your exact profits as it considers all fees and costs, including advertising costs.
A stop loss is a limit that you set when trading stocks. A stop loss is a limit that you specify when placing a trade. It tells you that if the stock falls below a certain threshold it will be sold.
This will allow you to limit your losses. While you may lose some money, you can limit your losses by pre-determining the amount of loss you are willing to accept.
You must set up stop loss procedures when you are running paid ads. Facebook Ads allows you to set up rules that allow you to pause ads or campaigns that aren’t performing.
You can also use Revealbot, which is an automation tool for Facebook ads. You can control when and how you want to throttle or pause your ads.
Many Facebook Ads strategies require you to stop losing money. You can set high budgets and have rules to prevent your ads from going bust due to bad traffic.
Get Moving As Quickly as You Can
Dropshipping from China in the long-term is not a good idea. Dropshipping from Aliexpress should be stopped as soon as possible.
Shipping issues will always exist. Quality issues will always exist.
You can reduce that risk if you act quickly to get rid of Aliexpress.
Next would be a dedicated dropshipper such as CJ Dropshipping or Udroppy.
They offer faster shipping and superior quality control.
Dropshipping through these companies can you make money? You can still dropship through these companies, but it will cost you much less than through Aliexpress.
Dropshipping from China will present challenges due to distance, logistics, and customs.
These risk factors can be mitigated by obtaining your own warehouse space in America and shipping in bulk from Alibaba.