As a professional dropshipping sourcing and fulfillment agency, a common question we get in our inbox is, “I want to start a dropshipping business, but I’m afraid of losing my hard-earned money.”
This question is usually amusing because it is multi-dimensional, as we shall explain:
Let’s start with answering the question that brought you here:
The simple answer is YES. Yes, you can lose money with dropshipping, but only if you don’t have a good plan.
Like most other business models—or business ideas for that matter—dropshipping has its fair share of pros, cons, and challenges. If you are not diligent enough to plan for the cons and challenges and take advantage of the pros, you will lose money.
This article will discuss various ways your dropshipping business can lose money and what you can do to ensure you don’t lose money and instead create a profitable dropshipping business.
Table of Contents
8 Reasons Why You Can Lose Money With Dropshipping
Although drop shipping is a medium-risk enterprise, because drop shippers rely on paid advertising to market their products, most of the money they make goes back into advertising, which, if managed wrongly, can be very, very costly.
Additionally, if not managed well, the following critical dropshipping aspects can cause you to lose money:
1: Long waiting and shipping times
Slow order processing and shipping challenges are the major way you can lose money with dropshipping.
In an era where Amazon has made same-day delivery and prime shipping within two days a common thing, when customers have to wait 14 or more days for your dropshipping supplier to process orders and ship them from China, they can get fed. They can assume you did not process their orders and ask for costly refunds or instigate chargebacks with their banks.
Refunds are the number one reason why inexperienced dropshipping business owners lose money.
Let’s say you are selling small, inexpensive items. Most dropshipping suppliers would send your customers a new item or offer a refund if the items cost very little to send out. But what about big items, such as appliances and materials? Refunding them can be very costly, a money pit even.
Returns allow customers to exercise their consumer rights. However, in some cases, even when you provide detailed sizing charts, some consumers will still order the wrong size, even when the chart clearly shows the differences.
When customers decide to return a product, your brand has to pay the cost in additional effort and costs. If you partner with Amazon for your dropshipping business, great, you can sit back, relax, and let Amazon handle that work. However, handling returns can be tricky and costly when you get your items from a private supplier.
PRO TIP: Before signing an agreement with a dropshipping supplier, ask about the return policy. If a supplier can handle returns, inquire about the turnaround times and only continue if they are quick. If not, you will have to step in and send the customer another item at your own expense, which can get expensive and very damaging to your balance sheet.
Chargebacks occur when a customer revokes an online or card payment. Chargebacks are costly and very tricky to deal with, especially in stolen cards and stolen identity cases.
If a consumer rings up their bank to dispute a transaction made by your card processor, the bank will promptly reverse the charge without any additional investigation.
Depending on your payment gateway, chargebacks may even cost you additional hidden fees, like transaction fees, and you, the dropshipping business owner, will pay these fees.
The most common causes of chargebacks are:
- Failure to deliver the customer’s purchase (lost in transit or held at customs)
- Feeling conned because of having to wait too long for order delivery.
- Low-quality products that do not meet expectations.
- Differing prices, i.e., the product they bought had a different price than the amount charged to their card or bank account
A chargeback often carries a $30 fee, regardless of the transaction’s actual cost.
PRO TIP: Fortunately, you can dispute chargebacks by giving the appropriate transactional facts. In our experience, dropshipping orders usually win in dispute proceedings. To avoid paying those fees, choose a payment gateway that clearly states “100% FRAUD CHARGEBACK GUARANTEE” on their policy page.
5: Account Closures
Account closures can make even the most successful online business lose money, no matter how successful the business has been up to that point.
If you have a lot of chargebacks and a lot of refunds, your merchant might close your account.
Possible reasons for account closures:
- Too many negative reviews, excessive returns, or refunds
- Discrepancies in profile information
- An attempted hack on any of your accounts
Fraud and any criminal activity linked to your accounts can cause immediate account closure, often without reason and often very expensive. Account closure can be temporary and fixable, but the process still wastes a big chunk of your time and resources that you can’t get back once gone.
When account closures are permanent, they can bankrupt a dropshipping business. Imagine investing all of your efforts to establish an online presence and trust, only to see everything shut down, while you can do nothing but watch as you lose your hard-earned money.
6: Negative Return-on-Investment
Return-on-Investment (or ROI) is what every investor wants to see. On the other end of the spectrum is a negative return on investment where your money starts working against you.
Negative ROI is a state where you spend more than you can afford. Such instances put your balance sheet in the red—you don’t want to be there because a lack of cash flow can be the start of your business downfall.
Nowadays, all seller networks require 3-5 working days to process payments. Therefore, you’ll need to have enough cash at hand (cash flow) to pay for products until your next payment sails through processing.
Essentially, a negative return on investment and low cash flow may cause you to take out loans to purchase products and sustain your business, creating an unsustainable cycle and business model.
PRO TIP: You do not want to buy more than you can sell.
Let’s say you are buying $2,000 worth of products to sell. You should plan out your sales volume each day and account for whatever time it takes to move all your products. If you order another $2000 while the previous one is still collecting dust, that’s a negative return on investment, and you risk losing a lot of money.
7: Unreliable Dropshipping Suppliers
Suppliers can lead to some of the most significant potential losses you could ever face as a dropshipping business owner. The whole dropshipping business model and its success rely on having trustworthy and reliable suppliers.
If you order from suspicious merchants, they won’t ship your orders. Other times, merchants will supply lower-quality products that differ from what you had promised customers, costing you time, energy, and money —in returns, chargebacks, etc.
PRO TIP: Before trusting a dropshipping supplier with your business and hard-earned money, conduct proper and thorough research. Know where the products come from, their quality—always ask for samples periodically—and reach out to other business owners to learn about their experience with a specific supplier you want to use.
Trust your instincts and walk away from suppliers with too many disputes and negative ratings. Remember that failing to protect yourself against unreliable, unscrupulous suppliers will cost you money.
People always think they won’t get sued until it happens. Lawsuits are common, especially in dropshipping, where product overlaps are the order of the day, and it’s easy to infringe on another business’s trademarked name brands or something else. In the modern business landscape, businesses get sued for the tiniest reasons, and, as you know, lawsuits are uber costly.
PRO TIP: Learn your legal rights as a dropshipping business owner and do everything to avoid costly lawsuits. For example, ensure your business does not infringe on another business’s copyright. AliExpress is home to a slew of counterfeit goods, and if you’re selling branded items, you’re still guilty, even if you don’t know about the trademark violation. You don’t want to find yourself in such a costly situation.
How to Avoid Losing Money with Dropshipping
Now you know how you can lose money with dropshipping. Let’s focus on a few key things you can do to protect yourself and safeguard your business profits:
1: Only sell high-quality products
Selling high-quality products guarantees your business sustainability because such products reduce returns, refunds, and chargeback rates. That is why it is always best to ask your dropshipping supplier for samples: to ensure your customers are getting their money’s worth.
If customers let you know about a drop in product quality, find out why and notify your suppliers. If quality does not improve after the discussion, cut ties as soon as possible and look for another supplier who guarantees the quality of the products they drop-ship to your customers.
2: Offer fast and reliable order processing and shipping methods
Modern customers have high expectations. They want to see fast and reliable shipping everywhere they shop. Thus, please do your best to offer customers the most reliable and fast shipping options available to you and manage their delivery expectations.
Offering fast order processing, fulfillment, and shipping options will build trust, and customers will be less inclined to chargeback or leave costly negative reviews.
3: Manage your business reputation
Maintain good seller feedback. For example, communicating with your customers about their orders, including informing them of delays and providing periodic order updates, may avert many refunds and chargeback cases.
Always respond to support tickets within 24 hours. When customers don’t get a response, they freak out, complain, and often take matters into their hands, aka refund requests and chargebacks.
Remember that your reputation as a business is everything. Please do everything you can to safeguard it; your balance sheet will thank you handsomely if you do.
4: Stay Above Board & Protect Your Accounts
Never sell a consumer anything that could jeopardize their health or life. It’s not worth it because you’ll be held liable and might get sued if something goes wrong.
Always honor refund requests, minimize chargebacks and refunds, and never offer unlawful or shady products.
Pay particular attention to safeguarding the security of your Stripe and Paypal accounts. You might lose a lot of ‘your’ money if you lose these accounts.
5: Use the stop loss tactic for PPC ads
Stock trading has a concept called a stop loss, where you can specify a loss level below which your trading system will automatically sell a stock if its price falls below that level. A stop-loss allows traders to keep losses at a manageable level. A stop-loss must be in place if you use paid ads to generate sales for your dropshipping business.
For example, you can stop nonperforming ad campaigns when running Facebook Ads. A stop-loss ensures you don’t continue spending and losing money on ads that don’t generate revenue.
Another great way to avoid losing money is to work with a reliable, professional dropshipping and order fulfillment agency. Professional dropshipping agencies like Bestfulfill have the in-house expertise to help you manage your dropshipping business to profitability.