Although we‘ve discussed the common pitfalls of drop shipments for the online retail business before, you can never get enough of the fundamentals. Knowing what a drop shipment business is and making it work are two different animals; when planning to go into dropshipping, you have to have contingencies for every scenario. In an earlier article, we only discussed what these common problems are — not how to solve them. In this article, we'll tackle the possible solutions to deal with the cons of drop shipment constructively.
Pitfall #1: Low Profit Margins
Profit margins on products slated for dropshipping are typically smaller than those of traditional retailing. This is mainly because you are keeping no stock, so the manufacturer can't pass on the inventory and storage costs to you. However, while your gross profit margins are around 15 percent, you do claw back around 7 percent of that from savings on cost of goods sold (COGS). So basically, you have between 20 percent and 25 percent net profit.
That's still not the typical 35 percent net profit you get from traditional retail, but here's the solution for making up for that 10 percent shortfall: Pass on some of the shipping costs to the customer. Yeah, we know that we have pointed out before how customers typically look for free shipping, but it'll really depend on how you package it. Let's say that you charge them shipping for one item, but give them half off on shipping if they buy two, and free shipping if they buy four! Alternatively, you can offer free shipping for a minimum purchase, but this may not give you the same benefit if you have more than one supplier for the products (which you should).
It is possible for you claw back another 10 percent (more or less) profit by essentially nullifying the shipping charges your supplier tacks on to your bill. Plus, you will sell more products at one time, which is always a good thing — for you and your supplier.
Pitfall #2: Coordination
It is highly likely that you won't always be dealing with suppliers based in the US, and they may not be fluent in English. This can make problems for you when it comes to inventory levels as well as fulfillment. However, there is a solution: choose a supplier that you can communicate with by way of an inventory feed.
Some dropshipping suppliers have attained a level of sophistication in their systems such that they can loop you into their inventory systems. This is so you can see which products they have in stock, in real time. Manage to build a close relationship with a supplier like that and you won't ever sell items that are already out of stock again. Additionally, when you place an order, you can check to see if the product you selected has been deducted from the stock numbers. That way you can make sure your supplier is always sending the right item.
If your supplier isn't advanced enough that they can offer this service, the next best thing is to have more than one supplier for the same product, and always give yourself enough time to make a backup order when your initial supplier fails. Late shipments cause customer loyalty to wither like a plant without water, so do your best to apologize and make it up to them if you can. In terms of correct fulfillment, you will need to be proactive in ensuring that the right items are being shipped to the right address in the correct quantities — using email, phone calls and occasionally — until the product has been safely delivered and received.
Pitfall 3: The Competition
Because dropshipping is such a great concept (easy to get started with, low up-front costs, etc.), there are a lot of people who have gone into it full or part time, including those who already have an established e-commerce business. As a result, you're dealing with pretty stiff competition and you risk getting lost in the crowd. You won't really lose anything due to competition, because you don't have any stock to get rid of — but you won't be making as much money as you could be, either.
The best solution for this is to make it super easy for potential customers to find you by putting a major emphasis on your marketing strategies, particularly social media marketing. That means marketing to those who frequent top social networking sites by offering promos, discounts, and coupons. Fortunately, the Internet has leveled the playing field for both big and small businesses so that it's infinitely doable if you make the effort to do it right. Make sure that you are also mobile-friendly, and you have the potential to make a killing.
Pitfall 4: Customer Returns
Ah, the bane of all retailers! Customer Returns are logistically problematic for all sorts of businesses, and even more so for dropshippers. But this can be turned to your advantage, depending on the policies of your suppliers. The best solution for this is to choose suppliers that will accept returns for damaged or defective products (also known as salvage). If your supplier has no such policy, or their returns policy is so restrictive it may as well not be there, you may have to find another supplier. Another tactic is to choose suppliers of good quality products and excellent shipping practices. No returns, no problems.
There is always a workaround in any business if you make the effort to do your research and to go the extra mile. As a dropshipper, your biggest problem will be in fulfillment, mainly because it is not in your control. The best way to get back some of the control is to make improvements in the back end; meaning that you lay a good foundation by carefully selecting your suppliers and creating a proactive order processing system where you're involved in every step leading up to actual delivery.
Is it a lot of work? Oh, definitely. But like we mentioned earlier, there are no real “get-rich-quick” schemes, only great ideas that require hard work to ensure they produce excellent results. If you're not into that, then you are in the wrong business.
What ways have you found to boost your profit margins? Let us know in the comment section.