Dropshipping websites don’t require you to employ staff for logistics and storekeeping. You may not even need an accounting system or a CRM in some cases.
Our software development teams have been working on custom app development for eCommerce for over a decade. They are able to see the hidden and vivid downsides to dropshipping, which can be quite tricky.
What should you be aware? Check out the dropshipping challenges listed below.
Risk 1. Limitation of products
Merchants often buy no-name Chinese goods to resell. They stock only the most popular products, which are often in high demand. That’s all. This strategy will ensure that your customers have access to the same products and services.
How to defeat and prevent it
International suppliers are a great way to sell products from more renowned brands. We recommend that you look into your local suppliers who are within easy reach of you. You will be able to expand your product line and offer more options to your customers by collaborating with domestic suppliers.
Risk 2. Limited delivery options
Dropshipping websites do not offer a wide range of delivery options to customers. The most popular option is “cash on delivery”. It is quite slow. Customers living in remote areas are less likely to wait for their orders. Customers are more patient in big cities.
How to defeat and prevent it
When selecting suppliers for dropshipping shops, be sure to pay attention to the delivery companies you wish to work with. Ensure that trusted delivery services keep in touch with suppliers and receive timely updates.
Risk 3. There are low upselling opportunities
Dropshipping makes it difficult to increase your average order value because you will often receive suggestions from different suppliers for the main and secondary products. Customers won’t want to pay for each delivery individually and will not accept that the items will be delivered on different days.
How to defeat and prevent it
You can view the products your customers love, heart, and star ahead of time through your ecommerce website. This gives you the chance to think things through. You can offer items that customers have requested. To find out if products are available, contact the supplier immediately.
Risk 4.The need to open access to customer base
You can also save it to your device. Dropshipping means that you will share your customer base and suppliers with each other. There is no guarantee that issues won’t occur.
How to defeat and prevent it
Remember that 20% of customers are the ones who make up 80% of a store’s profits. Dropshipping is an ecommerce model that focuses only on new customers and leaves those who are returning behind.
It is important to offer special deals and offers to your customers who are loyal. Even if your customer base is being exploited, this will ensure that you still have your targeted audience for selling to.
Based on our experience with ecommerce clients, NEKLO has learned that the UX design of your ecommerce website can make a huge difference in attracting and retaining customers. Check out our article for useful tips and tricks on improving UX.
Risk 5. There is almost no control over the supplier
Dropshipping does not require that the supplier deliver on your behalf. You will still need to attach the promotional materials to your ecommerce store to the order.
Consider if the supplier’s logo is on the bag, packaging or branded bags you receive. This information could confuse a customer who may be interested in the product, or lead them to believe that they are being misled by the incorrect store name.
How to defeat and prevent it
When selecting a supplier, be careful. Talk to the supplier about all details. It will be easier to work together if you have clear rules and documents.
Drop shipping is an important part of the online eCommerce business world. Dropshipping is a popular method for adding more products to an online store. Drop shipping is a popular method of fulfillment for more than 30% of online retail shops. These business types are becoming more common every day, with very few barriers to entry. It is difficult to secure your success because of this. Drop ship business owners take many risks when they start a business. Drop shipping merchant processing is difficult to stay afloat, from order times to common eCommerce problems.
Drop Shipping is considered high risk by banks.
Drop shipping business models can be attractive because they are easy to use. However, they are also high-risk. Drop shipping businesses are often viewed as less reliable and more likely to be charged back than other industries by banks and financial institutions. Drop shipping is a viable option if you’re thinking about starting your own drop shipping company.
Drop shipping companies face risks that make it difficult for them to guarantee transactions via the integrated payments gateway. Drop shipping is a high-risk industry for the following reasons:
- Fraudulent charges
- Long order times
- Chargebacks
- Refunds & disputes
These are the factors that banks and payment processors consider when setting up merchant accounts to accept customer payments. Then, they decide if or not to support your business. Many traditional processors, tier one, refuse drop shipping accounts as they do not have the ability to reduce its risks. This is where high-risk payment gateway providers come in. They can help you get set up and reduce your risk factors.
Long Drop Shipping Order Time
Customers expect their item within a few days after placing an order. Online eCommerce merchant orders are driven by convenience. If it is less convenient, it will not last. Drop shipping businesses often ship from faraway countries, which can be a problem. When items have to cross the ocean first, it is common for them to take long lead times.
Customers have a shorter time frame for shipping. Customers expect next-day and overnight shipping to be available within 24 hours. Even waiting for a week can cause anxiety. Drop shipping is more risky because it’s harder to manage expectations. If your customers don’t know that the item may take longer than expected, they will likely be unhappy.
Lower risk of order times
There are many ways to reduce order times.
- First, let customers track your orders. Certain fulfillment services can give you the tracking information so that your customers can track their orders. They will have a current understanding of when and whereabouts their item will arrive.
- You could also have a fulfillment center in the U.S. to ship the items. While this will reduce shipping time dramatically, it also comes with its limitations. Drop shipping is a way to avoid having to purchase inventory. In this instance, however, you’ll need to decide what precedents: your customer’s convenience or your bank account.
- It is easy to reduce shipping time risks by simply informing customers the estimated delivery time. This should be done prior to the customer purchasing. It is important to manage expectations with customers.
Less Visibility for Your Consumers
This is a direct link to fulfillment and shipping, as well as quality control. This is because you are the intermediary between your customers, fulfillment companies, and you can block any communication between the first- and last steps. This may be a good thing, but it can mean less visibility for your customers.
Your customers could retaliate if you have less visibility. Drop shipping businesses should not have unhappy customers, poor reviews or returns. These are often caused by miscommunication. Drop shippers at high risk need to be more aware of this issue and take steps to avoid it.
Customers can log in to view their shipments and have direct access to your customer service line/email/chat. You can also determine your return policy. Your customers won’t have the ability to see the product in person before placing an order. Make sure your product sourcing is correct and that the customer is getting a fair price. While managing expectations can help customers see the product, it is important to allow your customers as much control and input as possible.
Common Ecommerce Fraud
Ecommerce businesses have their own set of risks. Online businesses are often deemed high-risk simply because they operate online. This is due to the high level of fraud on these platforms. Online fraud is common in the form of people using stolen information and charging back for products they have received. There are many other forms of fraud online, including…
- Refund Fraud
- Merchant Fraud
- Card Testing
- Identity Theft
- Phishing
Protect against fraud
Multi-prong strategies are necessary to protect your drop shipping business against these high risk factors. These fraudsters are difficult to spot so make sure you are PCI compliant secure. Next, verify your address and request security codes for credit card purchases.
You should only deliver packages that are signed for. This may not be an option for small or inexpensive products. However, larger items could benefit from this method of protection. You may also be able to check past purchases for suspicious activity by your customers.
Many of these items can be integrated in your account via your eCommerce Platform or through your payment processor that handles the transactions.
Online Chargeback Issues
Chargebacks can be more of an effect that they are a cause. These charges can be caused by one of the issues mentioned above. Shipping times that are too long can result in chargebacks. Customers may believe they have been conned and seek a refund from the bank. Because of the lack communication, chargebacks can be caused by a reduced customer visibility. Merchant services fraud is often the cause of chargebacks. There is little you can do to stop chargebacks from happening . You can stop chargebacks from happening by stopping them in their tracks.
You may be eligible to receive early chargeback protection by contacting your high-risk credit card processor. This will ensure that you are the first to hear if your customer contacts you. It is important to be aware of your chargebacks and try to keep them down. Banks and credit card processing firms often use chargeback percentages to assess the health of a company.
eCommerce businesses should keep their chargeback ratio below 3%. Your merchant account may be put on hold if your company exceeds this threshold. This metric should be kept in mind to ensure that you can continue processing payments for drop shipping businesses.
How to Lower the Risks of Dropshipping Merchants
Drop shipping businesses are high-risk, as you can see. However, this doesn’t mean you shouldn’t be scared to start a business in the drop shipping industry. To mitigate these risks, you should be more alert and open a merchant account.
Concentrate on a niche
Many drop shippers fail to make it big in this business. Drop shipping companies attempt to sell everything to everyone like they’re Amazon. It is difficult to reach a large audience if your company has little brand recognition. A new drop shipper should focus on a niche to sell products to a small but passionate audience. Selling products for pet owners who have small dogs is a niche that can stand out despite the fact that there are millions of small dog owners. A drop shipper who focuses on a specific niche will quickly gain a following and sell quickly.
This helps to reduce risk for your business by allowing you to develop a business plan. This is good news for your business, the bank, suppliers, investors, and yourself. It’s important to keep it simple at the beginning, and then work on expanding your offerings as your business grows.
Model competitors
Drop shippers can reduce their risk by looking at the competition. While this doesn’t necessarily mean that a dropshipper should copy a competitor’s store, it does suggest that they look at what they have done well and what could be improved. Drop shipping businesses should look at the components of the competitor’s store before building their own. How many products are displayed on the homepage? What incentive is the model using to get emails? Is the competitor offering free shipping? These are the key features that a drop shipping business should emulate:
- Which are their top-selling products?
- What is the shipping time for these products?
- Are they able to call 800?
- Is it easy to use their online terminal?
- How well-written are their product descriptions?
- What number of items are they selling?
Select the right supplier
A new drop shipper will feel excited when the first orders begin to come in. But, a lot of the hard work they put into their product can be undone if they don’t source it properly or choose the wrong supplier. Drop shipping suppliers can be found overseas and shipping times can vary from 5 to 4 weeks. It is difficult to wait multiple weeks for your online order in a world that allows you to get your Amazon package within 2 days with Prime Shipping. Drop shippers should ensure that they only work with suppliers that have a proven track record of speedy shipping.
A legitimate wholesaler will buy directly from the manufacturer, and offer the best prices. Although per-order fees and minimum orders are not uncommon, they can be costly. However, it is worth the risk for a trustworthy supplier. Shopify’s member directory is another resource that can help you locate a wholesaler to support your business.
Purchase inventory
Drop shippers who want to stand out can order in bulk, have their inventory shipped to the United States, and store it in a third-party warehouse. The third-party warehouse can ship the item quickly and make sure that the customer gets it in a matter of days after the order has been placed. This requires a lot of upfront funding. A third-party warehouse in the United States is an option for drop shippers who are serious about growing their businesses.
Drop shipping sites can be reduced in risk by this. Lead times are one reason these companies get in trouble. This will ensure that your company has the ability to succeed.
Great customer service
Drop shippers should offer excellent customer service. This means that drop shippers should have contact information that can be found on the website. You should be able answer any email within 24 hours as a business owner. Virtual assistants are used by large dropshippers to answer email inquiries. Drop shippers who are serious about customer service will have a chat or 800 number on their website to answer any questions.
This aspect can be reduced, which will allow the entrepreneur to prevent problems from ever happening. A business’s ability to assist a customer who is unhappy before they resort to chargebacks could mean the difference between staying up and being closed down.
Processing high-risk credit cards
Secure credit card processing is the best way to reduce chargeback risk in your business. Because there are many threats during transactions, this is the best advice. Your merchant account should work as hard for you as you do. It will protect you from certain factors. Your merchant services provider can help you to comply with PCI compliance, credit cards fraud prevention for merchants, and a Chargeback Protection pre-detection Service. This will protect your drop shipping business.
There are some questions that you should ask before you make a decision on an online payment processor.
- You should first ask how long the company is in business. Any payment processor that is newer than 24 months will be avoided.
- A drop shipper should also inquire about how much and how long an online payment processor will keep. Virtually all online payment processors will keep a reserve. This is an amount of transactions that is kept in case of fraud or chargebacks. This reserve will be used by banks to cover losses resulting from chargebacks.
- A third option is to find an online payment processor that offers fast and easy payments for drop shippers. Customers should have an easy checkout experience to increase their chances of returning. This will be possible with an integrated payment portal.
