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Dropshipping is a major part of the online retail ecosystem, and it’s one that is only continuing to grow. The size of the global dropshipping market reached a whopping $196 billion (£159 billion) in 2022, a 23.7% year-on-year increase since 2021. That figure is expected to rise again over 2023, reaching $243.42 billion (£197 billion) by the end of 2023.
Dropshipping is becoming increasingly popular, especially among side hustlers, with a third of online stores now using the dropshipping model. If you're one of the thousands of entrepreneurs exploring this business model, read on to learn about some of the most significant barriers to success you’ll need to overcome as a dropshipper.
Navigating small profit margins
Because of the nature of the business model, the profit margins that dropshipping businesses can expect are smaller than those in other forms of online retail. As a dropshipper, you are acting essentially as a middleman between the customer and the business that holds the product inventory and fulfils the order.
The simple truth is that the best way to mitigate against low profit margins is to sell large volumes of product. Small gross profit margins of 15-20% mean that the risk of making a net loss when your marketing costs are taken into account is higher. So by selling large volumes of product, even with a small margin, you can still make a healthy profit.
By not holding your own inventory you largely remove the risk associated with over-ordering stock and not being able to sell enough to cover your outlay.
Two of the most effective ways to increase your profit margins when dropshipping are the same as for any kind of either online or offline retail:
Cross-sell and upsell
By identifying what kinds of products your customers may wish to buy together, you can offer bundles with small, marginal discounts for buying multiple products together, incentivising your customers to spend more.
Similarly, by offering upsell opportunities to customers to upgrade to more premium or larger products at checkout, you can take advantage of impulse purchasing habits and shift more stock.
Negotiate with your suppliers
The more you sell, the greater the chance of negotiating (or qualifying for) incremental discounts from your suppliers. Many suppliers that specialise in dropshipping will have well-established systems of increasingly generous discounts for retailers that sell larger volumes of stock.
Reliance on third party companies
By its nature, dropshipping outsources a great deal of your operation to suppliers, usually overseas in markets where manufacturing is cheaper. Many dropshippers also use selling platforms such as Amazon, Etsy and eBay as their shopfront.
Together, this means that you are reliant on third-party businesses at either end of the sales funnel. In order to comply with major selling platforms’ requirements, you will need to give up a degree of control over how you market your products.
As you will not hold your own inventory of stock and not fulfil deliveries yourself, you have to be prepared to hand over responsibility for ensuring product quality and timely shipping to a third-party fulfilment business. But ultimately, as the seller, you're responsible for the quality of the products your customer receives - which is why picking the right supplier is crucial (see below).
Picking the wrong niche of products to sell
Success in dropshipping depends to a large extent on finding the right niche of products to sell in order to find the right audience. For new and inexperienced dropshippers, selecting the wrong niche of products to sell is one of the biggest barriers to growth and success.
Picking the right product niche is about more than just the product itself, but also the type of consumers that might be interested in purchasing, where they live and how they interact with online retail platforms. You should consider:
- What countries your chosen product is most likely to sell in
- What age group of consumers are most likely to buy the product
- Which selling platforms those consumer groups engage with
Before you choose your product niche, do plenty of research and then test regularly once you set up your business. Study projected trends around the world to make informed and educated decisions around product choice.
Picking the wrong suppliers
As an online seller using the dropshipping method, you are reliant to a significant degree on your suppliers to be successful. Using a less reputable dropshipping supplier may be cheaper and allow you to make a bigger margin of gross profit, but you also expose yourself and your business to the risk of:
- Low-quality products
- Unreliable stock and fulfilment
- Lengthy and delayed shipping times
Here at Superscript, we conducted a survey of online retailers in November 2022 and found that 20% of ecommerce businesses struggle with the reliability of their third-party suppliers. In terms of how many suppliers each business relies on, the majority (75%) of online sellers use five suppliers or fewer while only 9% have more than 10 suppliers.
By working with a more reputable supplier, you are likely to find slimmer profit margins that affect your gross profit margin, but you may also reduce your rate of refunds and returns, which can have a positive effect on your net profit margin.
Things to look out for in a good quality dropshipping supplier include:
- Attentive and active staff
- A modern and user-friendly website
- Responsive via email and phone
- Reliable shipping times
Some of the larger and most reputable dropshipping suppliers include:
Bans or suspensions from online selling platforms
If your dropshipping business runs entirely on a platform such as Amazon, then having your seller account suspended is an obvious and immediate barrier to continued success. Major platforms don't release exact account suspension figures, but the number is likely to be in the thousands every day. There's a range of reasons why your account might get suspended, including:
- Poor seller performance – this can include consistent negative reviews, low product quality and high returns rate due to defects
- Violation of copyright – if you use images in your marketing without license or permission, then you risk your seller account being suspended
- Having multiple accounts – Amazon doesn't allow online sellers to have multiple accounts selling the same kinds of products without prior written permission
If you sell on Amazon, then be sure to check on your seller notifications regularly in case you get a notification of suspension. Amazon will give you 72 hours between notifying you and actually suspending your account, during which time you can submit a plan of action to rectify the issue.
If your account is suspended however, then the process for appealing and reactivating your account involves:
- Visiting the Amazon Seller Central site and clicking on ‘Performance notifications’ in the ‘Performance’ dropdown
- Opening the suspension notice and clicking ‘Appeal’
- Selecting from the appeal options that is most suitable to your case
- Submitting a plan of action (POA), outlining to Amazon how you intend to rectify the issues that caused your account to be suspended
- Being patient and professional, acknowledging that the appeal may take some time
As another major selling platform, eBay, has a similar process for getting your account reinstated should it be suspended.
Lacking business credibility
Expert perspective – Patrick Herrlinger, Head of Partnership Development at Cashplus Bank:
In a crowded marketplace where it is difficult to stand out, presenting a credible face and being on top of your cash flow is key.
When potential suppliers and vendors are considering how to negotiate with you, they will be forming a picture of your credibility from a variety of factors that you might not have considered, from your business name to your web presence and email signature.
Selecting the right financial tools and showing that you’re on top of your numbers will also make a notable difference to your credibility. Opening a business bank account is a great place to start, with the likes of Shopify actively recommending that sellers separate their personal and business spending to better manage their cash flow and margins.
Many banks will also offer purchase protection on card spend, which can protect you in situations such as goods not being delivered or if they’re damaged.
Reduce your exposure to risk
As with any business venture, online retail via dropshipping comes with a number of inherent risks. However, many dropshipping retail businesses find getting the right insurance for their business particularly difficult. Indeed, in a survey of nearly 700 online retail businesses, Superscript found that almost 44% did not have any insurance in place at all, and that figure rose to roughly 73% amongst retailers that use dropshipping.
So we developed a new insurance product specifically for online retail businesses and dropshippers (as long as you are able to sample just 5% of your products). With insurance in place, and an understanding of the common pitfalls and obstacles that stand in the way of a successful ecommerce business, you can reach for the stars and join the dropshipping revolution.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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