Why Most Dropshipping Businesses Will Fail!
I‘ve read few dozen articles about dropshipping and people talking about how easy or low risk it is. I’m here to stand on a different side of this and talk about some things that I haven‘t seen anyone else even mention. Specifically I’m talking about online guides, which teach you that anyone can make 25k a month by following a simple formula. Unfortunatelly, just like with most other examples and similar “easy strategies”, this carries much more risk and requires some prior knowledge about ecommerce, which usually isn’t obtained within the same guide.
What is dropshipping?
Dropshipping is an online business model, where you are selling physical products without even seeing or holding them. In most cases this is done by shipping products from manufacturer straight to end consumer, but there are some businesses that use fulfillment centers to send their items to. This is different from a standard online business sale, because you, as a business owner, don‘t get to see the product, package it or ship it from your warehouse or from your home.
If you‘re looking to start a business or have looked at it recently, more than likely you‘ve heard about dropshipping as one of the ways to lower initial financial risk, because you don‘t have to manufacture, order and ship hundreds or thousands of products to your own address before selling them. In theory it should eliminate that risk and to be honest – it does. But with that comes quite a few huge hurdles and cons.
Specifically I‘m talking about people that believe these online dropshipping „guides“, showing you „how to make $25k/mo“ and so on. This isn‘t targeted at business owners dropshipping products developed by themselves and I‘m going to explain why that‘s the case.
I understand that you might want to play it safe and start a business with low financial risk, but is that worth doing if you have very low chance of making it a long-term success? If you‘re not looking to make $100 after few weeks of hard work, then continue reading further, because you will learn why it isn‘t likely to make you more than that and why it‘s not likely going to work long-term.
What are the cons of a dropshipping business?
Most common place for people to hear about dropshipping is on YouTube or blogs about the beginning stages of your business. There are tens of thousands of articles written about this, telling you how easy it is to find a product that sells well on Amazon, Ebay or any other online channel, then create a simple online store on Shopify or WordPress and start selling your product with 10x margin, directly sourcing products from Aliexpress or Alibaba. Most common website traffic channels they are talking about are Facebook ads and Instagram influencers. Not sure how to tell you this, but that in itself is a very flawed business plan, while every „business guru“ creating these guides tells you how easy it is and that anyone can make millions doing it. Well, that‘s not even close to being the truth and I‘m going to get into the reasons why 98% of people that try this have failed or will fail within just a few months.
The concept of product life cycle
First of all, like I said, the business model itself is very flawed. You are looking to find a product that already sells well. This means you would look at current sales of that product as well as number of reviews it has on various websites. But where does that put it in the life cycle of a product? Look at the graph right below and tell me where do you think a product like that will stand.
As a best case scenario, it‘s going to be at the very end of it‘s growth period, where you have only a minor increase in annual sales volume within the upcoming few months. At that point, the only way for it to head in the future is downwards in a decline. By the time these products receive huge number of reviews, sales and are made by tens of manufacturers on Aliexpress – it becomes too late for you to get into the product development. By the time you set everything up and start running you Facebook campaigns with decent return of investment, it will be at the maturity state and that‘s not where you want to get into the market.
If you want to make a few bucks and quit, then it could be something you take on, but if you‘re looking to create a lasting and successful business – you need to look at alternatives first. I will talk about some alternatives further within this article.
Quality of „your“ products
Now let‘s talk about quality of your products as well. Most of you already know that most Chinese products lack in product quality. Do you really expect to sell a $2 product from Aliexpress for 10 times that price and people won‘t notice the lack of quality your $20 product has?
People are not stupid and you shouldn‘t think they are. Keep in mind that you‘re not looking to fool a customer, you want your customers to become your advocates and to do word-of-mouth advertising for your products, because it still is the absolute strongest force in modern marketing. So what do you think will happen when a customer receives your $2 product after paying $20 and it‘s going to break in a week or if it won‘t be made out of good materials? That person will become the exact opposite of your brand advocate, telling everyone around him that your products suck. Not only will you lose out on return customers, none of their friends or colleagues are going to purchase from you either.
I have bought a few watches from Aliexpress as well, guess if I could tell what they were worth. Right away one of the hands on it was loose and shaky. I could rotate my watch really fast and it would move the hand by a few minutes ahead or behind. The watch itself was very uncomfortable, components were loose, button on the side of it didn‘t seem to do anything, the paint from the back of my watch scratched off within a few weeks. Is that the quality of a product your customer might expect from a $20 watch? I highly doubt that.
You might even be lucky and get higher quality products from there, but keep reading further and you will realize that it‘s not the only thing that causes a concern.
The same guides tell you „it doesn‘t matter what the shipping time is – people are willing to wait 3 weeks for their product“. I would disagree with this statement. People are used to the shipping of Amazon products, specifically Amazon Prime, where an item arrives within 72h in US and up to a week to most other regions in the world. If you have a much longer shipping time, then it might impact your conversion rates and return requests before the item arrives at the destination.
When looking at most products sold on Aliexpress and Alibaba, the best shipping you will have is with ePacket. What you will see as their primary options is 14-20 day shipping to US as the best case scenario and 40 days to some other countries. That said, the item usually arrives even later than that. Is it really something your clients will wait for, especially when the item they are going to receive is likely to be below their expected quality? This will make most of your customers absolutely furious, leaving negative public reviews everywhere they can – on your website, on your facebook page, Google business listing or anywhere else they can.
Additionally 98% of items sent from Alibaba / Aliexpress come in black trash bags. What type of client do you expect to appreciate the “packaging”? I definitely wouldn’t enjoy getting that as a paid customer.
On top of that people have absolutely no reason to come back to your store in the future, which is not something you can create a successful and lasting business on the back of. It will completely bury your business and destroy your confidence.
If people are waiting for so long to receive the product – they expect something custom-built or with exceptional quality, which isn‘t something you‘re able to offer with a dropshipping model like this. Since you don‘t get to see your products – you can‘t keep up with quality control. This is especially troubling when you are responsible for the product’s quality, even when you’re not the one selling it. You are the one that needs to make sure the quality is good before selling it to others. You will also be the one on the other end of a lawsuit, when the items causes financial damage to one of your customers. So what happens when you aren’t in any control of your product’s quality? Your business goes to shit, that’s what happens. You need to treat yourself and your customers better if you want to run a long-lasting business and that’s also one of the reasons most dropshipping businesses will fail.
What I’ve seen mentioned in these guides over and over is how fast you can set this all up. After the initial product research, they tell you that everything can be set up within 4h or so. While tools like Shopify or WordPress help you save a lot of time, even for a beginner, it’s not great to spend as much time on your future. The same way people can tell that you have a low quality product, they can also tell that your website was set up within just a few hours and a free theme design. Are they going to trust a website that was obviously set up within 2 hours or an Amazon listing with 200 reviews with an average of 4.7? More than likely most people would be willing to pay double for that Amazon listing, especially when it also means they will get it much sooner.
Realistically all you can set up within 2 hours is a website that kids might buy from. But are kids the ones that will purchase your products? I don’t think they will, especially because they need a debit or credit card to do so. To create a proper website, you need to spend quite a bit on proper design analysis to make sure it’s going to convert your website visitors into sales, you have to look at the overall aesthetics of your page to make it more appealing (yes, this does have a big impact), spend time developing long product descriptions, writing policies, creating and testing call-to-action for your website. I’d say it should take you roughly 50 hours to set up a website with up to 5 products. This is excluding all the testing you’re going to do once you start driving traffic into this website.
Value of your customers
I’ve touched a little on this already. If you’re not going to satisfy your customers, then they aren’t going to purchase from your ever again, nor will they create organic growth for your business by spreading the word about it. The #1 thing you should focus on when building a business is to satisfy your customers by producing a high quality product that solves a problem when your customers need it, which isn’t 30 days in advance. Unfortunatelly most dropshipping businesses don’t have any of those. It doesn’t arrive when your customer needs to have it, it usually isn’t of high enough quality to satisfy them and you are never going to lead the industry. People buy products they are happy about and producing something that doesn’t meet their standards isn’t going to do it.
I’d say it’s better to have 10 highly satisfied customers, which you’ve sold a high quality product to than 200 angry customers that you’ve sold a low quality product to. Remember that business is a long-term play, not short-term gain. If you’re looking to make a quick buck, then flip some items of ebay or craigslist, but don’t start fooling around with your customers, thinking they aren’t smart and won’t figure out what’s going on, especially when they see another 20 companies selling the same exact item, with the same design, colors and so on. You should value your customers much more than that and put them on pedestal. Anything other than that won’t get your business anywhere and you’d be lucky to make 15 sales with a month invested into this project. While a more standard business might carry bigger financial risk or take much longer to set up - it’s worth looking into in comparison to dropshipping business.
The primary traffic source you might think about or learn about when creating dropshipping business would be Facebook advertising or Instagram influancer marketing. While I have nothing wrong to say about these traffic sources, they require prior knowledge to be successful with.
If you’ve never run a Facebook ad campaign, it will take you 20-30 different ads until you find one that brings you enough positive return on investment to properly scale it, each one requiring $40-50 to be spent on it. That’s assuming you’re looking at the right audiences, picked an item that isn’t too competitive and made sure your website converts traffic well. More than likely, you won’t know how to check all of those, because you’ve been blindly following someone else’s advice without looking at this realistically. Anyway, let’s say that you do know how to take care of those and have done everything that you can to create those sales. Let’s do some math and see if dropshipping business is truly “financial-risk-free business model”. 25 ads, each requiring $40 budget will put you $1000 behind just in advertising costs. Can you guarantee that a product you chose will be successful after spending that much on marketing? You won’t be able to, unless you’ve done some prior testing. More than likely if you’re just starting off, you don’t know how to test products properly, so you are going to need a professional to do it for you. A professional like that will take at the very least $50/h and ask to work on this for at least 10-15 hours. Can you spend $500 to test it out? I’d say you’d be better off spending that $500 on something that can actually bring you long-term value.
Let’s get into the second option - Instagram influencer marketing. This became more popular topic to talk about for more recent dropshipping articles and videos. The issue with 90% of huge instagram accounts is that they don’t have the right audience to advertise your products. I don’t mean them creating content in a different industry, I mean them having an audience that doesn’t convert into sales. What Instagram essentially is - social media to post visual content on. There are 2 types of accounts on social medias like Instagram. First account type is of someone that actually creates the content and posts it on his wall. This audience is worth looking into, especially if they’ve done a good job building a personal brand and creating an audience that trusts them. But what you will often see are huge accounts with big following, maybe even good engagement rates (likes, comments), but they never created content. They post content created by someone else and all their channel is surrounded by are creators from that industry, while they basically sit there publishing “highlights” or photos they like from other creators. These are the ones you want to avoid at all costs. While an account with 2 million followers in your industry might be tempting to work with, I wouldn’t recommend it under any circumstance. In every case that I’ve tried or looked at, these accounts have audiences that do not convert at all, because they don’t trust the decision of people running those accounts. Just because it’s posted on an account with 2 million followers, doesn’t mean you will get even 1 sale with it. I would much rather work with an influencer that has 5k followers that trust him or her than one with 2m followers, that isn’t building trust on a personal or professional level. Now it is the exact opposite of what’s told to you in majority of dropshipping guides, which is why I wanted to bring up this point. They tell you to find the biggest accounts, which will cost you 10 times more to work with and it won’t have nearly as big of an impact as smaller accounts with good audience would.
I’ve worked with several dropshipping businesses that have previous failed because of this misconception. They tried to create relationships with the wrong influencers and spent too much money on advertising without even testing their products before-hand. This is definitely not something you want to do, especially since lack of finance is one of the primary reasons you would choose a dropshipping business. If you can avoid spending thousands of dollars on marketing by having the right information brought to you, then I will do my best to bring it to you.
First issue you will face is that most manufacturers found on Aliexpress or Alibaba will not support any refunds or returns, even for damaged or broken items. They might say they do in the product listing, but 80% of them that I‘ve talked to didn‘t even think about it. So every time someone wants to return an item or make a refund – you will be losing money without getting anything in return. Since the manufacturer won‘t accept your product being sent back, you might as well tell your customers not to send it at all and that you‘re going to refund them without any packages shipped back. This might cause even more issues, because some will use your forced generocity and ask for refunds without having any issues with your product, just because they know they can get it back and keep your product. Is it something you‘re ready to deal with? Because out of every online business out there, dropshipping ones have the absolute highest rate of returns and refund requests. It‘s caused by reasons stated earlier – quality of your product and shipping length that most aren‘t used to.
Unfortunatelly your returns will be causing a different issue as well. When you reach a certain threshold of refunds, your payment provider (Stripe, PayPal and most others) will start freezing your money. So what will happen with your business – it will continue to receive income from sales, but won‘t allow you to spend the money to purchase those products, to spend on marketing or to transfer to another account. The freezes usually last anywhere between 3 to 6 months at a time, which means you are going to need enough working capital to pay for every product sold in up to 6 month period and your marketing expenses as well. Would you call it risk-free at this point? I definitely wouldn‘t. This is something that most people don‘t even know about, but getting higher than 2% refund rate on these payment providers land you roughly an 80% chance to receive this temporary freeze on your business account. From my experience, an average dropshipping business has between 3% and 4.5% refund rates, which makes it the primary target for these.
And it makes sense to do that from payment processor‘s perspective. All they are trying to do is to protect their end consumers, which purchase those products. If your business has high refund rates, this means you have some issues with your business and they need to make sure that you‘re going to have enough money to issue refunds with, therefore issuing that freeze and trust me – it‘s not a great situation to be in. The only thing you can do with that money during freeze is to refund it yourself, so if working capital is not something you have a lot of – you might want to reconsider your approach and business model of your choice.
So if you‘ve got or looking to get into this business because you‘re not willing to spend your own money and want to make it risk-free, this dropshipping method is not for you. To be honest I wouldn‘t recommend it to anyone, unless you know exactly what you‘re doing, you have years of experience running ecommerce stores for others or you‘re looking to develop your own product and dropship it.
Exclusions to these rules of thumb
I‘ve gone through the processes that most dropshipping guides explain and told you why they aren‘t going to work in most cases. Obviously there are some cases where you might be successful running a dropshipping business, sourcing products from mass production Chinese manufacturers. But running a successful business like that often requires you to have prior knowledge about your industry or some experience working in customer acquisition. What most guides are talking about is that everyone can create a store in 2 hours and make tens of thousands a month by selling such products. This is the only type of business I‘m talking about in this article.
If you have a business let‘s say dropshipping from US manufacturers, where you‘ve built your own connections and work on your own products, then this article won‘t apply to you. If you manage to set up any dropshipping manufacturer for your very own product (not one you‘ve found being manufactured and sold by others), then I applaud you and I hope you will have a great time selling it. In that case, this article is not for you and I‘m not trying to tell you that your business model won‘t work. This is specifically targeted at people looking at these dropshipping „guides“ and expecting to make huge long-lasting businesses by sourcing the same products as everyone else.
Honestly I believe dropshipping business that every online guide talks about is the most difficult online business model to be successful with long-term and the strategy they tell you to use for website traffic is the lowest long-term impact having one as well. If you‘re looking to create a lasting successful business, then you really need to look at some of your alternative and at the things that your customers actually want, which isn‘t a cheap Chinese product delivered to their doorstep within a month for 10 times it‘s original price. With a dropshipping model you’re going to fight an uphill battle, where all the chances are against you. Each seller will cut each other’s throats with pricing in order to continue generating sales and staying competitive.
While in most guides dropshipping is advertised as financial-risk-free business, that’s not at all the case. You will spend hundreds if not thousands of dollars on advertising alone, where it could be spent on much better things. The next article I will write will talk about some alternatives you could look into when building an online business, because as someone without great experience running ecommerce stores, you don’t want to get into dropshipping businesses. On top of spending a lot of money on marketing, you will leave your customers angry, spend dozens if not hundreds of hours on a project that won’t yield any long-term results, lie to your customers about product quality, make them wait weeks for an item to arrive, potentially even leave your PayPal / Stripe account with frozen funds or hundreds of returns to take care of, when your manufacturer was the one who delivered low quality products and isn’t taking any of them back. Is this the type of situation you want to put yourself into? I highly doubt that.