Dropshipping has become a very popular way to run a business. In the eCommerce industry, dropship suppliers are becoming more and more popular as a way to add more products to an online store’s catalog.
It works well for store owners who want to sell more products but don’t want to add to their inventory debt. Many e-commerce sites, from “work-from-home sellers” on Shopify to large global chains like Walmart, use dropshipping because it is fast, easy, and low-risk.
Before we talk about the most common dropshipping scams you should watch out for, it’s important to answer a few basic questions.
How Does Dropshipping Work?
Dropshipping is a simple way for online stores to offer customers a wide range of products without investing in cheap inventory or the costs that come with it. When a customer orders something from a dropshipping vendor, the order goes straight to the product supplier, also known as the drop-shipping partner. The dropshipping partner then sends the products to customers on behalf of the vendor, who is the dropshipper. So, the vendor doesn’t have to keep track of inventory or worry about where to store products. Instead, they only serve as a middleman for the sale.
Dropshippers make money from the difference between the price they charge in their online store and the price their drop-shipping partner charges.
Here are the most important people in the dropshipping cycle:
- The person who makes the products. Most of the time, they don’t sell directly to consumers. Instead, they sell in bulk to wholesalers and retailers.
- When a wholesaler buys something from a manufacturer, they add a markup to the price before selling it to a retailer. A wholesaler could carry products from more than one maker, giving retailers options and variety.
- Retailer who sells goods directly to the end user and charges a markup.
- The dropshipping cycle goes like this:
- The customer places an order through the store’s website or social media page.
- Dropshipper tells the dropshipping partner, which could be the manufacturer or a wholesaler. The dropshipping partner then packages the product and sends it directly to the customer.
- The dropshipping partner bills the dropshipper for the service, and the dropshipper adds a markup to the price they charge the customer.
What are the pros of drop shipping?
Dropshipping is an easy way to start an eCommerce business if you don’t have a lot of money to start with. Or you need to see how things are going before putting a lot of your resources into the company.
Here are the main benefits of the dropshipping business model:
It costs less to start out.
There are some strange challenges that come with running an e-commerce business. And a big part of this challenge is keeping track of inventory and other costs. But if you don’t have to deal with physical goods, you can easily focus on making sure the customer gets what they ordered on time. This is possible because of drop shipping.
You don’t have to worry about managing or paying for warehousing, packaging, and shipping orders, keeping track of orders for accurate inventory accounting, taking care of returns, or shipping inbound orders. Also, you don’t have to order products and keep track of stock levels because your wholesale partner takes care of that.
Dropshipping is easy to get into because it has few barriers.
You can start a successful dropshipping business with little or no money, since you don’t have to pay for product inventory or other costs. You just need a smartphone and a good connection to the internet. As your business grows, your overhead costs will likely go up. But you can be sure that they will stay low compared to traditional stores or other types of eCommerce.
Dropshipping doesn’t have a lot of fixed costs.
Again, fixed costs are pretty low because you don’t have to buy and manage inventory. You won’t lose any money if you don’t sell anything. You would have to pay for the time it took to put them on your website or for ads to promote them on social media.
Dropshipping gives you options.
Your office is your phone or computer that can connect to the internet. A dropshipping business can be run from any place. It’s a great way for college students to make extra money to help pay for their living costs. And to help people who lost their jobs because of the pandemic stay afloat until they figure out what to do.
With dropshipping, you can sell many different things.
Dropshippers don’t have to keep products in stock. So it’s easy to sell many different kinds of goods. The problem with this is that it’s hard to find suppliers for those products and make sure you’re getting a good deal at the same time. It’s possible that the supplier you work with also works with other dropshippers.
There are fewer operational risks with dropshipping.
As a dropshipper, you also have a low operational risk. You don’t “buy” the goods until they sell, so you don’t have to deal with the costs of keeping track of them.
- Problems with the Dropshipping Business
- As you’ve probably noticed, dropshipping isn’t all fun and games. There are big risks that could hurt your success if you don’t plan for them. Here are some of the most important ones:
It’s hard to win.
Anyone can start a dropshipping business as soon as they wake up tomorrow. Making your business stand out from the many other dropshippers is the hard part. There will be a lot of competition from dropshippers who do it full-time and other eCommerce sellers who use the same sales channel.
You get richer with the money you make from each sale. And because there are probably a lot of other dropshippers selling products that are similar to yours, many vendors set up shops and sell items at very low prices to make more money. Product differentiation will be a key part of your ability to stay in business.
Problems with the stock.
If you keep all the items you sell in stock, it’s easy to keep track of which ones are available and which ones aren’t. But when you work with a third-party concierge, this information isn’t always shared with your store. So you could be surprised when a customer places an order and your supplier doesn’t have what they want in stock.
Problems with the shipment.
Assuming you work with more than one supplier, as most dropshippers do, the products on your website probably come from a number of different places. That could make your shipping costs more complicated.
If a supplier sends the wrong item, the customer won’t know that it’s not your fault. They’ll blame you because they recognize your face. And you’ll have to take responsibility for the mistake.
Losses from fraudulent purchases.
The dropshipping model is easy to use, works well, and can be scaled up, which makes it perfect for credit card fraud. Many drop-shipping businesses are big, and the average transaction value is high. This means that if even one order turns out to be fake, these businesses have a lot to lose. Drop-shippers are easy prey for fraudsters who know what they’re doing. And that’s something we’ll talk about in the next section.
Common Scams in Dropshipping
Even though drop shipping is becoming more appealing to many people, there are also more people in the business who are out to scam people. These con artists are more than happy to steal money from vendors without giving them anything in return.
Dropshipping scams can trick even the most experienced retailers, so it’s in your best interest to stay alert and keep an eye out for the warning signs we’ll talk about next. If you don’t follow them, you’ll lose a lot of money.
Some retail stores pretend to be wholesalers so they can sell more, but they jack up the prices a lot. You want to work with real wholesalers who buy directly from the manufacturer and can give you much better prices.
If you are new to dropshipping and want to work with a wholesaler, it might be hard to tell which ones are real and which ones are fake. Real wholesalers tend to be less good at marketing, so fake wholesalers often look more trustworthy to people who don’t know better. On the other hand, fake suppliers are often very good at marketing, so when you search, you’ll see them a lot.
These are important signs that a dropshipping wholesaler vendor is not who they say they are:
- They are selling things to the general public. People who sell to the public pretend to be wholesalers. They make the customer think they’re getting a good deal by advertising “wholesale prices.” But what they’re really doing is selling things for too much and then putting a wholesale label on them. If you see that red flag, you know for sure that the vendor is not a real wholesaler. Any wholesaler who tells the general public what their prices are is also a fake. Most wholesalers don’t show their prices to the public.
- They don’t want to make any agreements. That’s a warning sign. You aren’t doing business with a real wholesaler. Before you buy from them, real dropshipping wholesalers always have to sign a contract to make a legally binding business deal. If a supplier won’t sign a contract or says it’s not necessary, they are probably up to no good.
- Genuine wholesalers know how much work it takes to make quality goods. Most of the time, their front page doesn’t have big promises that you’ll get rich right away.
There must be a place listed. After all, the physical location is important, which is different from most eCommerce websites. That’s where they ship your items from, and the wholesale distributor has no reason to hide this information or make it hard for prospects to find. Searching the address details on a directory site, Google Maps, Yellow Pages, etc., to make sure they match up with the supplier name for this location, is an extra layer of due diligence.
Once you’ve made sure your supply side is safe, you need to keep an eye out for fraud on the customer side. The risks here are chargebacks and fake purchases made through online shopping.
When a dropshipper gets an order, they pay the wholesale price of the order to the supplier. The supplier then sends the product to the customer.
But what happens if the customer files a chargeback because the order turned out to be fake? Unluckily, the merchant is to blame, and he or she stands to lose a lot. Not just the price of the deal, but also:
- Fees for chargebacks.
- The fees for shipping.
- The money that has already been paid to the supplier for the product that has been shipped.
The good name of the company.
If the seller loses their merchant account, it will be harder and more expensive (in the best case) or sometimes even impossible (in the worst case) to take credit cards.
But there’s more. Even if a business has proof that an online transaction was legitimate, the merchant may have to spend a lot of time and energy fighting the chargeback. That’s not the best way for a business to spend its money.
Using chargeback mitigation frameworks like Chargeflow.io is a must if you want to be able to focus on growing your business. And you won’t have to keep looking over your shoulder for the next fraud case that could hurt your business.