If you’ve read my guide to dropshipping then you’re probably wondering if it’s possible to actually lose money starting a dropshipping business, I mean the concept seems so simple right? In short, you don’t buy any stock upfront. You just list items for sale on eBay, Amazon or your website and when it sells, you place the order with your chosen dropship supplier and they ship the item direct to your customer. Given that a product is sold before you actually purchase the item then is it possible to still lose money dropshipping? Unfortunately, as with any business, there are ways that you can lose money dropshipping but it doesn’t mean that it’s a failed business model. I’ll get into more detail below.
Be careful not to underprice your items
I’m going to start with the most obvious way to lose money when running a dropshipping business which is to underprice your items. This may sound like a no brainer but it’s easily done and anyone can be caught out. From human error to not accounting for seller fees, there’s a number of ways to lose money dropshipping.
First, let’s look at seller fees. At the time of writing this, eBay seller fees typically sit at around 8% if you have an eBay shop with Amazon selling fees being a little higher. Website seller fees tend to be much lower when using online payment merchants to accept payments but without advertising you aren’t going to get the sales that you would get from an already famous platform like eBay and Amazon.
When working out the prices, you need to take these fees into account to avoid losing money with dropshipping. Let’s say that you list an item for £110 which costs £100 to purchase and ship to your customer. You might be thinking ‘great!’. It’s not much but it’s an easy ‘tener’. However, if the item sold on eBay, once the 8% fee is taken then you will only be left with a profit of £1.20. OK so in this example you still made a profit, but you can see that it doesn’t take much to lose money running a dropshipping business!
Restocking fees are an easy way to lose money dropshipping
Unless your selling products to other businesses (business to business transactions) then you will have to follow the distance selling regulations which includes honoring the return of items within a minimum of 14 days from the date the item was delivered to your customer.
When choosing which dropshipping suppliers to work with, be sure to ask about any restocking fees. The majority won’t charge for the return of items but I have had a few that have. Especially those that sold larger, more expensive items such as quad bikes and commercial kitchen equipment. In fact, my biggest regret running a dropshipping business was selling those quad bikes!
They were mostly children’s quad bikes and mini pit bikes but the restocking fee was a whopping 25%! Let’s say for example that I’d purchase a bike for £200 and sell it for £250 for a £50 profit (forgetting about selling fees etc. for a moment) that’s not bad for a few clicks. But for every return, not only would I have to refund the money, thus losing any profits made, but I’d have to pay a £50 restocking fee to the dropship supplier bringing me a considerable loss.
Back to base warranty is another easy way to lose money dropshipping
Let’s be honest, all we really think about when running a dropshipping business is the volume of sales we can get without ever thinking about the warranty side of things. Small items such as giftware are never usually a cause for concern since most dropship suppliers will simply send another item out as a replacement or issue you (them) with a refund so that you can atleast break even on the sale. But what about those larger items? Going back to when I sold quad bikes and commercial kitchen equipment, amongst other larger items, many of the dropship suppliers only offered back to base warranty.
The problem with back to base warranty is that these items need to get back to the supplier. Who’s going to pay postage? Your customer isn’t going to want to. And guess what? Many dropship suppliers don’t want to either. This means that you are going to be paying for the postage. And these aren’t small items. Large pallet items cost alot of money to post! You might still be making a small profit on your first back to base postage costs, but you’re unlikely to get away with it on the next return!
Just be careful when choosing your suppliers. Ask these questions before listing a dropshipping supplier’s items online. Many will pay for the postage but each supplier will have their own unique terms and conditions.
Any business expenses can lose your dropshipping business money
As with any new business, keep your expenses down to a minimum. The whole idea of dropshipping is that you don’t need am office or Warehouse. So don’t get one, at least to begin with. If you don’t want to advertise your home address or want a more professional address to show your potential customers then why not rent a PO box?
Subscription fees such as becoming a professional Amazon seller or owning an eBay store to save money on individual listings are all expenses. If you don’t sell enough items, at least when first starting out dropshipping, then your new business will be at a loss and you’ll be paying for these out of your own pocket, therfore losing you money!
The number 1 rule is to keep a good seller feedback
You may be wondering how bad feedback can lose your dropshipping business money but a loss in sales is still a loss of money. Money that you could have had, but didn’t, is still lost money. And keeping a positive feedback is harder than you might think.
The easiest and most common way to get a bad seller feedback, especially on eBay and Amazon is by not managing your stock properly. Choose your dropship supplier carefully because your going to want one that offers a live stock feed. The more products you list, the harder it is to keep on top of your stock levels. I try to use dropship suppliers such as Puckator and Taylors Merchandise where you simply receive an email when an item goes out of stock which saves so much time compared to individually looking for each item. I mean, you could have absolutely thousands of products listed for sale! If you do sell an item that’s out of stock, don’t just cancel the order with no communication. Be sure to send an apology message. I’ve even sent free (cheap) gifts in the past as way of apology just to save my feedback!
Once you’ve mastered the art of keeping on top of your stock levels, you just need to master the art of placing your orders on time. I try to place my orders on the dropship suppliers website as and when I sell an item. As an absolute worst case scenario all of the orders for that day will be placed that same day in the late evening, ready for dispatch the next day. If you forget to place an order, your item isn’t getting delivered on time, therefore a possible negative feedback and loss of money.
The last thing I would say is to do proper checks on the dropship suppliers that you choose to work with. I’ve had a few that never had the correct stock levels or just didn’t send the items out on time. Most are great though! If your worried then just leave a comment below with the dropship supplier you’ve found and see if I have a history with them.
Bad cashflow can lose you money dropshipping
Bad cashflow can be dangerous. Gone are the days of instant PayPal payments when selling on eBay. All seller platforms tend to take 3-5 working days to pay you nowadays which means that you’re going to have to use your own money to initially purchase the items until you get paid. Ofcourse as your dropshipping business steadily grows, so will your business’s bank balance and so hopefully your business won’t need to financially rely on you. This is unless you grow too fast that your never able to catch up.
To give you a better idea, let’s say that you have £1000 in the bank and you sell £1500 worth of products in a day – You’ve made £500 in a day! That’s great, right? Wrong! Or atleast it can be. Once you spend your £1000 on fulfilling your orders, how are you going to fulfill the orders the next day if you sell another £1500 worth of items? Your owed £1500 but it’s going to take atleast 3 working days to get it! If you ever find yourself in this situation then my advice would be to pause all of your online stores whether that be on eBay, Amazon or your website. As soon as you get paid then you can set everything to live again. I’ve been in this very same situation and I would much prefer you learn from my past mistakes than to make them yourself. You can read my full dropshipping story here.