Compared with other ecommerce business models, dropshipping is probably the one with the least number of risks. Its low startup cost requirement makes it viable even for beginner entrepreneurs. Plus, having suppliers take care of warehousing and product fulfillment removes a significant amount of work and expenses that would otherwise be coming from your end as a store owner.
But despite its many advantages, dropshipping also has its share of risks. These include risks from ecommerce platforms, suppliers, fraudulent customers and even poor management.
Fortunately, you don’t have to go through the losses that I and many other dropshippers have been through. Proactiveness is always key to avoiding full-blown, expensive losses.
Here are some actionable tips you can follow as early as now:
1. Use multiple sales channels
Platforms like Amazon, Facebook and Instagram are no doubt great places to set up an online store. But just like how you shouldn’t put all your eggs in one basket, neither should you rely on a single sales channel — especially one that you don’t own.
Companies like Amazon and Facebook can change their policies, algorithms and advertising fees at any time. And what will you do if the changes suddenly put sellers like you at a disadvantage?
I always recommend setting up your own website, because that gives you more control and removes the need to be dependent on unpredictable platforms. Once your store is up, you can then explore selling on other places while maintaining your website as your main channel.
Bonus: there are many integration tools out there that can sync your site with social media channels and marketplaces like Amazon and eBay.
2. Set criteria for vetting products and suppliers
Product and supplier issues are common among dropshippers. However, these are also avoidable if you have the proper vetting process and criteria in place.
You’ll never run out of potential products and suppliers, so the real challenge is to filter out those that could put your business at risk and find that who will help you win.
To guide you, here are some of my recommended criteria for choosing dropship products:
- There’s an existing need or demand for the product.
- The product is lightweight but durable enough to be shipped to various places.
- It isn’t widely available in physical stores.
- It isn’t sold by big brands that are hard to compete with.
- It has interesting features that you could highlight in ads.
Meanwhile, here are some things you should look for in dropship suppliers:
- They must be a manufacturer or wholesaler.
- They have lots of positive reviews and a considerably high seller rating.
- They have various shipping options, ideally including ePacket.
- They’re willing to send you sample orders.
- They don’t impose a minimum order requirement.
- They have plausible policies for returns and refunds.
- They communicate well.
3. Develop supplier contracts and store policies
A contract might not be a necessity if you’re just starting out with dropshipping, but it will become a must once your store gains traction. After all, you wouldn’t want to scale your business without first making sure that you and your suppliers are on the same page. This is especially important for niche stores establishing a name for very specific products.
A contract will protect you and your supplier. Here are some points that a supplier contract should cover:
- Service level agreements (SLAs), such as shipping times and acceptable and unacceptable levels of service.
- It should specify the agreed wholesale price of goods, if possible.
- It should set rules for returns, refunds, chargebacks and handling fraud.
- It should set systems and/or sanctions for handling breach of contract.
Additionally, your supplier contracts should be your basis for creating your store’s policies, especially the return and refund policy. A good store policy helps boost customers’ trust, but you and your supplier should be able to back it up whenever the need arises.
4. Have primary and backup suppliers
Imagine receiving tons of orders only to realize later that your supplier doesn’t have enough inventory. Not only will you disappoint many customers, but these people might never buy from you again.
You can avoid running out of inventory by having backup suppliers, especially for your best-selling goods. Some ecommerce platforms actually let you assign multiple suppliers for a single product, so take advantage of that and always have backups in place.
Of course, you should make sure that your backup suppliers offer the same product quality as your primary suppliers. Vet them the same way you would a primary supplier.
5. Create a system for fraud detection and order screening
Fraudulent orders are one of the biggest risks that ecommerce businesses face. Some of these orders come in the form of an unusually big one-time purchase or a series of small purchases using the same credit card. However, they’ll later prove to be a scam that will leave you with chargeback notices, delivered orders that you most probably won’t get back and chargeback fees that will be a hassle to dispute.
Fraudulent orders are generally detectable with the right systems in place, so it’s best if you invest in these systems early on to prevent big losses. For one, you should use a platform that complies with PCI DSS, or the Payment Card Industry Data Security Standard.
Secondly, you should set up verification methods for card-not-present (CNP) transactions. So instead of immediately approving CNP orders, you could ask customers to first verify the address registered to their issuing bank. You could also use AVS or Address Verification Services, which should do the verification process for you.
Some ecommerce platforms could also help with analyzing orders and diagnosing details that could signal a red flag. Shopify’s fraud analysis is a good example. It automatically analyzes orders and shows you those that you might want to check manually. And if you find a transaction suspicious even after manual verification, then you might choose to cancel the order instead of risking getting scammed.
You don’t have to lose big to win big. You already know the common risks in running a dropshipping business, so it’s only wise to address them early on and protect yourself against hard-to-predict changes, low-quality products, scammy suppliers, insufficient inventory, fraudulent transactions and all other dangers you may face.
Use the above-mentioned tips as your guide, and remember that your dropship store is just like any other business: It requires proper management, including risk management.