Don't Go Broke Running a Dropshipping Business

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March 1, 2021
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When you watch YouTube or read blogs you will find that many people will speak about how easy it is to make hundreds to thousands of dollars each month, but if this is true is the opposite true too, can you lose money dropshipping?

There are three huge issues that lead to dropshipping to financial losses which include returns and refunds, picking poor supply chains and poorly handling your ad spending on platforms like Facebook leading to a failing ROI and mounting losses that add up very fast.

There are definitely some serious issues with dropshipping, but none of them are business stoppers. Just like any business you start you will find that there are pitfalls and to be successful you will need to learn to maneuver around them.

How to Lose Money Dropshipping

There are so many ways to lose money it isn't easy to succinctly state how, I can tell you that many of them come specifically from not controlling expenses and having a stash of money to use in the first months.

The easiest way to lose money when dropshipping is in having an uncontrolled ad spend, this is one big part of the business that new dropshippers don't always manage correctly.

This can lead to a spend budget cost exceeding any revenue, and profit, that the ads are costing. This can take any new person to dropshipping into debt incredibly fast, then they double down and if not controlled can spiral out of control.

The other quick way you lose money will be in not having the capital up front to purchase the items you sell to send to the customer.

The money you use to buy the products will not come from your customers as you typically will have a delay before their money becomes available to you to use.

So having at least a few months worth of money can come in useful to keep you afloat while in this income purgatory timeframe.

Let's take a look at some of the more devastating ways you could experience dropship losses in launching your business to allow you time for proper planning.

7 Devastating Ways You Can Experience Dropship Losses

There are many dropshipping mistakes you can make on the course to a successful store. In addition to your mistakes there can be issues from the outside that influence your success from customers to suppliers and beyond.

Many of these aspects are why is dropshipping so hard for people to master and be truly successful at, learn from them and make better judgements to be stronger.

Customer Refunds and Returns

One huge impact that will hit a dropshipper may be in the form of customer returns, since you never physically handle the product this can cost you a large sum of money if you are unprepared.

This is one of the reasons why I prefer Shopify for running my stores as they have a return policy template that actually helps defend you versus refunds, stating refunds will be done once product is shipped back at customer expense.

This policy is standard for well researched store owners to defend against fake returns and bully tactics from people, known as scam refunders, looking to take advantage of your online shop.

Overall returns can impact you also which can heavily be impacted by your choice of suppliers, this is the issue with many who only use AliExpress or other Chinese goods.

These can sometimes be portrayed as one quality but what is shipped many times will be much worse and if this happens you will see return numbers skyrocket and your costs explode, always order a product before selling when at all possible.

Chargebacks

Chargebacks are a bane on many online stores and not only limited to dropshipping businesses, learning what they are and how they can be done can give you a head start to your journey.

A "chargeback" or "forced refund" happens when your customer calls up their bank and starts a dispute on the transaction with your store.

Their bank will immediately reverse the charge without any question. This then is passed down directly to your payment processor who will reverse the charge and in effect bill your account.

The danger to you though comes in the charge that hits you as a fee, this is somewhere around $30 depending on the bank and processor.

You can open a dispute on this chargeback by giving the bank all the details on the transaction but these are frequently lost meaning you lose the cost of the item, the item itself, along with the fee.

Should you win your dispute the fee gets waived and you don't lose this fee money but the sale and item aren't given back to you.

Below I have some of the most typical reasons for why a customer would file for a chargeback:

  • Item Lost in Shipping - The purchased item the customer never received.
  • Shipping Expectations - The customer believes they have waited too long for shipping and has assumed they got scammed by you.
  • Poor Supplier Quality - The received product was considered poor quality and they believe they were scammed.
  • Customer Fraud - The customer just decides they don't want to pay for the item and commits fraud by claiming they didn't receive the goods ordered.
  • Customer Confusion - Typically a poorly labelled store description on their bank statement looks like theft. The customer don’t recognize your transaction on their bank statement

Unfortunately for us dropshippers chargebacks are almost a way of life and something you just need to learn to manage.

There are just people in the world who have no issue with theft and will deliberately scam you by claiming chargebacks.

Account Closures, Sandboxing, and More

There are a few accounts that you will have that can bring your business to a screeching halt should they be impacted, your bank accounts and your ad accounts.

The bank account issues are typically grown from the overall chargebacks on your account which is why you really want to manage them cautiously.

Many times to protect themselves if you face constant refunds and chargebacks the merchant may just decide to close and terminate the account.

Paypal does something very similar to closing the account but it is called "sandboxing" which basically means they start to restrict giving you access to funds making you wait months to gain access.

The next closure that can impact you hard is the locking or complete shutdown of your ad account. Without being able to place and get traffic via ads your income will typically drop like a rock.

To keep yourself safe here you need your ad to be on the up and up and not stretch the truth on the items, though this may not always protect you I would say always stay up to date on the ad terms of service for safety.

Negative Cash Flow

One of the scary parts of dropshipping is that you have to pay out a lot before any money will ever make it back into your pockets.

The main output of your funds will be first in advertising, whether you choose to use Facebook ads, Instagram shout outs, or other methods to advertise to your customers these costs can wreak havoc if not on a controlled budget.

The next big area of concern in a negative cash flow is that you will need to purchase the item the customer bought to ship it to them, most often the customer money won't be deposited for up to a month or sometimes longer.

This means you are going negative in cash flow until they clear their order and the money is deposited into your account, this is vital to your business, you don't have the cash to buy and ship the item then you could cascade returns.

Supplier Issues Including Closure

Choosing suppliers may seem like a simple part of the dropshipping business as many will point to AliExpress to get products from that they can sell without concern.

The issues with this approach is that you don't know the quality of the manufacturing process, this is why I always suggest ordering a product if at all possible to validate quality concerns.

The next concern is to have the same supplier hopefully provide multiple items from your store as this means less orders and packaging leading to less issues with shipping.

Another issue to think about with a supplier is their overall reliability, do they stay stocked and have they been selling this item for a decent length of time.

Sometimes the supplier who charges a little more may be the better option for your business as they may have more reliability as a sales partner.

Your final concern should be over the stability of your supply partner as you wouldn't want to be fulfilling offers and the company shuts the doors leaving you with unfulfilled orders.

Legal Issues (Lawsuits)

This is a scary thing to think about but in using Chinese vendors who don't follow trademark rules of the United States you can find yourself open to lawsuits for selling something you aren't licensed to sell.

Should you sell trademarked products on your store then YOU are the responsible party no matter if you were aware of this trademark infringement or not.

Make sure that you take time with sites from China to make sure you don't see something was stolen, sometimes these products could be from big vendors like Disney, other times down to a simple seller on Etsy or other site.

Abusing Scarcity Marketing

One big thing used in eCommerce is a scarcity timer on a product, this is something like the (sale lasts only one hour) which can help push a customer to make their purchase.

An issue though is that many dropshippers will be lazy and have this same timer running on multiple products on their page leading consumers to understand it is a ploy and to leave without purchase.

I think a scarcity timer can help you and your business to make more sales and to increase overall revenue figures, just carefully use this tool for your business and you will love the results.

Final Thoughts on Can You Lose Money Dropshipping

While you can experience amazing highs with large revenue numbers you need to balance this with an understanding of your actual profit margins.

It is very easy to lose money even with high revenue numbers when you lose track of the costs associated in attaining those high figures.

If you can master keeping accurate measure of your costs to your revenue you will find the right mix to become successfully profitable.

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