Drop shipping is a great business model if you want to be location-independent, don’t want the hassle of managing inventory, and want to be able to run your entire business from an iPad or a laptop. If you’re unsure of what drop shipping is, check out this post. A lot of online businesses drop-ship – some may rely on it completely, and some may use it for a part of their catalog – so it definitely works as a business model, but it does have its fair share of challenges.
Challenge 1: Low Profit Margin
Unlike a regular wholesaler that would sell you their merchandise in bulk, a drop-ship supplier sells you a single unit every time you place an order. Because they sell a single unit, they have to go through a lot more trouble with each order, and to justify that, their prices are higher than a regular wholesaler’s would be.
They may also charge a separate fee called a “drop-ship fee” for labor, packaging, and logistics.
For us online store owners, this burns a hole in our pockets – the average margin that we are left with is usually between 15-20%. After you subtract all expenses like shipping and fees, things start looking really bleak.
Luckily, there are a few ways to get around this problem, each with it’s own advantages.
Solution: Higher Prices
The most obvious solution is to increase your profit margin by increasing your prices! If you made $20 per order on a particular product, which you felt was a little less, you can just increase your price by $10 and start making $27(after fees) per order. This advice might seem counter-intuitive, since you may think lowest price wins, but that’s just not the case.
Even on my store, where I have terrible margins, some of my best selling products cost $10-20 more than at any of my competitors – yet I still manage to move product.
Obviously, you don’t want to increase prices TOO much, but a little bit here and there might actually increase the customer’s perceived value of the product. Lowest prices are not always the best thing.
A guy on eBay is selling a new Macbook Pro for $600 – would you buy it? Or would such a low price trigger an alert, that perhaps this Macbook was snatched off the back of a truck?
Solution: Compensate With Volume
Solution number two to the problem of low margins is to compensate for the low margins by selling a higher volume of goods. If you have a margin of 15% on a $100 item, meaning you make $15 per sale, it may not be worth your while to operate an entire store and just get 30-40 orders a month. However, if you can turn 30-40 orders a month into 300-400 orders, then you are talking business, and the low margins offset themselves with the higher volume.
It’s a lot and lot of math, but as I’m learning these days, business is nothing but math!
Solution: Talk to Your Supplier
Finally, you can negotiate a better deal with your supplier to get a deeper discount on their goods. Usually you can extract anywhere between 5-10% more margin – this makes a world of difference on your bottom line, especially if you sell pricey items like me.
The only issue here is that in order for a supplier to take your request seriously, you should have given them a decent amount of business already!
Challenge 2: Tough PPC Landscape
PPC(pay-per-click ads, Google Adwords, Bing Ads) is quite literally a dog-eat-dog world. Keywords are more expensive than they ever were, and top that off with stiff competition and low profit margins. It’s hard to turn a profit – but not impossible. I’ve heard PPC professionals say time and again that PPC is always a viable strategy, but in my current niche, I haven’t had any luck at all.
In an earlier store, PPC brought in some sales, but still not enough to really bring the business up.
To find out if PPC will work for you, it’s back to math.
If you sell a $100 product with a 15% net margin, that means that the most you will make with each sale is $15. To run ads, you have to decide how much you are willing to pay to get that one sale! If you are willing to sacrifice half of your margin, then you have $7.50 to bring in a sale – otherwise ads won’t be worth it.
That’s all good, except keywords are pretty pricey – anywhere from $0.40 to $1.50 to even $4 or $5 per click – so unless you can get one out of every three or four clicks to convert, you will lose money.
Solution: Hyper Optimize Ads
Still, I’m not going to say PPC doesn’t work – it can, and it will, if you are prepared to optimize, test, optimize, test, optimize, test, and then some before you see a profitable ad campaign. All of that optimizing and testing is going to burn a hole in your wallet, though, so you need a cash cushion in your business to start.
The idea behind optimizing your ads is that you keep weeding out keywords and ads that don’t work, until you are left with only those keywords and those ads that do, so ultimately, you have super-specific keywords with super-specific ads that target only a few products.
It’s not reasonable to expect that you can sell each one of your store’s products using ads – it’s more likely that a few will be top performers, and once you know which those are, then that’s the only few that you should throw your precious money at.
I sense that a lot of you will disagree with this statement, so if you do, please leave a comment!
Solution: Focus on Other Traffic Sources
Google Adwords is not the only traffic source in the world – there are tons of others, like other cheaper paid ads, organic, social, referral, email, and word of mouth. If you can’t afford Adwords, try your hand at Facebook ads to build your email list, guest post and build links to increase your SEO, develop a content strategy and blog to drive traffic, ramp up your email marketing, and most importantly, create happy customers that refer you to their friends and family!
Challenge 3: Too Much Competition
Drop shipping is easy – so easy that anyone, including you and I could set up a store and start fulfilling products right away. As such, it also creates a problem.
Everyone, including you and I, end up selling the same product. So now there are 100s of people all vying to get the customers attention, and the market is really, really crowded. Not to mention that there is already Amazon and Walmart selling the same stuff(or similar stuff), too.
Solution: Be the Best of the Best
Everyone, including you and I, has a store selling blue widgets. Right?
But all stores are not the same. One store might be a cookie cutter store that looks like it’s from early 2000 and look like a mess.
One store might be a little better, but still has room for improvement.
One store might not be focusing exclusively on your product.
Yet another store might not have a blog.
Most of the stores didn’t put much effort or thought into their product descriptions.
Can you, on your store, fill up all the gaping holes left by your competitors? If you can, your store will be the best damn store period. If you can pull that off, if you can put in the effort and make your store a force to be dealt with, then you will blow everyone else out of the water.
Solution: Go Where No One Else Is
90% of running an ecommerce store is marketing it. Here lies an opportunity. Most people are trying to market themselves all in the same place, be it Google Ads, organic search, or comparison shopping sites.
What if you could find out somewhere else your potential customers hung out, and market to them there? You would effectively monopolize that entire customer base, and no one else would be the wiser. In fact, your competitors might not even know you exist, yet you are still doing very well in your niche.
Some examples of uncommon places to market yourself are Reddit and forums – especially local forums or highly specialized forums.
NOTE: Reddit and forums are very heavy handed on spammers, so focus on building trust and creating dialog, NOT pushing your wares.
Challenge 4: Very Little Branding Opportunity
With a drop ship store, you don’t have control over the merchandise, how it is packed, how it is labeled, or what goes in the box. This makes it pretty hard to do some personalized branding.
A powerful way to really leave an impression on your customer is by enclosing a handwritten thank you note, or packing the product in something memorable or outrageous. Drop shipped goods? Not so much room. Unless you are the only merchant a supplier drop ships for, your parcels are going to be ugly and generic. So how do you make yourself memorable and how do you create a brand?
Solution: Have Excellent Customer Service
Even if you don’t have control over what’s going on with the product itself, you do have control over the customer’s entire experience from finding your site, navigating it, making a purchase, and any follow up required.
Here are some ways to wow your customers:
- Have awesome product pages. Great images, powerful description, videos, the works. Make your pages so good that customers don’t need to go anywhere else for research
- Have a really easy checkout, and make it easy to contact you
- Personalize confirmation emails – match them to your site’s personality. The stock emails on shopping carts are terrible.
- For big spenders, send a personal email thanking them for their business, offering your service, and signing off as “John Doe – Founder”
- You can also call them to thank them for the order
- Communicate! One of my orders went awry, but communication with the customer turned them into a testimonial that I display on my product pages!
Solution: Be Very Active on Social Media
Another way to build a brand is to have a powerful and active social media presence. Social media isn’t so much for marketing your products as it is for interacting with customers and showing your human side. Talk, chit chat, post relevant content, make a meme, share a video – basically make new buddies!
Challenge 5: Fulfillment Issues
Everything else aside, perhaps the biggest thorn in any drop ship merchant’s side is fulfillment issues. Your store may say a product is in stock, but by the time you fulfill it, the supplier has run out of it, so now you have to email the customer telling them their purchase is on backorder and so on.
It’s a pain!
There’s also the supplier that just likes to take things easy and ships the product when they feel like it, usually a whole day or two after you’ve sent it to them. The customer gets impatient and wonders why they don’t have a tracking number yet.
These are all realities of drop shipping, and you pretty much have to live with them because they are all back end things that you have NO control over unless you stock the items yourself.
Solution: Let Customers Know the Lead Time is a Little Longer
The simplest solution here is to just give the customer a heads up that the lead time from purchase to shipment is a little longer, like one or two days. Many merchants on the Amazon marketplace show this:
Someone I know runs an online hardware store, and their lead time is 7-14 days from purchase to delivery. That’s just the reality of their business, and they are clear about that with their customers. He still manages to make a very comfortable living off of only his store.
You can also soften the blow of slow shipping by offering shipping for free – focus on the FREE part and people will be more forgiving.
Dropshipping does not come without its challenges, but there are always ways to get around them. Focus on making everything else so awesome that your customers will forgive the occasional slip up.
What solutions have you guys come up with for drop shipping woes? Please share in the comme