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4 Major Reasons why Drop Shipping is a Bad Business Model

As an experienced business in the manufacturing industry, we have never considered drop shipping as a profitable opportunity and offering the business model as a part of our operations. A big reason for why many of our entrepreneur clients are very successful is connected to that strict recommendations. Here are our four reasons for this business decision to advise against it. If you need a short introduction how drop shipping works in general, check this nice The Atlantic article.

Much like any other business model, a drop shipping business has its set of pros and cons. The pros include the fast set-up time and the low up-front cost. But given our experience working with contract manufacturing companies overseas, we think the cons outweigh the advantages of a drop shipping business which led us to the decision of not considering it as part of our business operations. In this wiki article, we will discuss four major reasons why we think drop shipping is a bad business model.


1. Super Competitive Business Model

The drop shipping business model has been prone to abuse and has been abused by a lot of businesses all around the world. They look at it as a lucrative business form where they can easily make lots of money overnight. The biggest problem in here is that a lot of businesses take advantage of drop shipping as a business. Many don’t really understand the ins and outs of a drop shipping business model and the vast majority of people is following the same product trends and recommendations. They simply have read or heard about the success other businesses enjoyed and right away jumped in without really getting to know the drop shipping business risks.

The markets for many e-commerce products are saturated and that holds even more true for the most common drop shipping items (usually unbranded or randomly branded private/white label products). These are mostly abundant and very common products. Many beginners even try to sell common products below the purchase price to gain traction and to get some attention. It’s cut-throat and only the factories profit. Even if you’re successful, people will notice and also sell your product.

Furthermore, you have to look at the necessary marketing expenses. It’s almost impossible to sell drop shipping products as a newcomer without any form of advertising or sponsored listings. Particularly ads in Google and Facebook that are often recommended for the drop shipping business model are expensive and the conversation rates are very low. It’s a mistake to assume that it’s close to free to run.


2. Prone to Scams & Bad Quality

E-commerce has always been a popular attraction for scammers. Consumers already know this for a fact, but scams still find its way to victimize people one after another. A drop shipping business is the most prone e-commerce business since they the seller is relying on a 3rd party for all parts of the e-commerce-customer relationships. Since there is a lot of opportunity in drop shipping, scammers have also used it as a nesting ground to attract potential victims and this gives drop shipping business a bad reputation. It doesn’t even have to be a straight-up “taking your money” scam but insufficient quality, wrong products etc. are very common and it’s hard to do something about it.

With a drop shipping business, it is inevitable to deal with scammers due to the number of 3rd party businesses you have to deal with in this business model (usually one for every product). Even if you are professional and authentic as a company, you are always at risk with drop shipping and losing money through scams and hence a bad reputation. Trust is hard to build in a virtual setting, but playing it safe by diving in a more transparent business platform is ideal.


3. Low-Profit Margins

A drop shipping business idea comes in as a fresh and innovative way to start a business which makes people think it is easy and a good cash cow to generate lots of money quickly. Then again, any form of business requires hard work, strategy and a bit of luck which also apply to the drop shipping business model. There have been people who are already in the drop shipping business and have expected way too much out of the venture yet are only enjoying limited success or worse, losing money in their current drop shipping ventures. The lack of success should ultimately be blamed to their lack of knowledge and not on the business platform.

A drop shipping business opportunity can only give you high profit margins as long as you find a unique product and you are early anticipating a trend. The main reason is that the main advantage of manufacturing and outsourcing to Asia is not realized: You can’t make use of wholesale/bulk discounts, since you are actually always only ordering a single unit from the factory. That’s also why it’s hard to negotiate about prices in this situation.


4. You Can’t Grow Your Business or Build a Brand

People are warned of drop shipping because there are aspects of the business which are beyond the control of the business owner which makes it risky. Whenever you drop ship, you allow suppliers to ship your products directly to customers. Quality control is at risk and you simply have to put good faith on your suppliers for it. You only received samples beforehand but you cannot oversee each step of the way. Being able to deal with bad suppliers is always a possibility and any form of shortcomings committed by them will right away roll over into your reputation.

The proven standard approach for growing a trading business is that you use the money you made from past orders to finance ever larger and more sophisticated orders. This is impossible to do with drop shipping. You can’t get ahead in terms of competition because you remain to get products and designs that everybody can imitate if it should go well with your sales. When doing classic bulk orders and closely working with a factory, you get in a better and better relationship over time that allows you to get better terms and also implement your very own product line with custom private label products. This allows to build your own brand.


Conclusion

Drop shipping is generally a bad business model considering all the risks and hard work you have to into it and how easy it is for anyone to just imitate that success. There is a lot of opportunity and promise in the simple setup of drop shipping business. But then again, much like any other business models out there, it would be up to you on how to achieve success in this business platform and there are no sure formulas in order to make it work. Here is another nice and detailed experience with the problems explained in detail.

It is also a risky business. It is tough to not have total control over your reputation since you are working with other people and parties as part of the business operations. If you happen to suffer bad business transactions resulting to stain your reputation, you are actually responsible for it after choosing the wrong people to work with. Putting blame on other people is never a good business practice and you can avoid this predicament by looking for alternatives to the drop shipping business model.

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