Can you lose money with dropshipping? Yes, you most certainly can lose a lot of money with dropshipping. While many guris will sell the idea of dropshipping as the ‘perfect business’ with zero risk, it is far from that.
The concept certainly does sound perfect. With dropshipping you sell products that you do not own or handle yourself.
As soon as you make a sale, you will relay the order to your dropshipper who will then proceed to ship the product to your customer.
The idea that you get paid BEFORE you buy the stock implies that there is no risk.
Suppose you sell a pair of cat socks for $25 and your cost price with your dropship supplier is $10 (including shipping). That means when the order comes in, you spend $10 and net the $15 profit.
No risk, right?
You get paid FIRST and then you buy the stock and get it shipped.
There are however a lot of pitfalls that can cost you and where you can lose money with dropshipping.
Most gurus will always harp on about how perfect dropshipping is but there are 7 ways you can still lose money with dropshipping.
How much you can lose varies. You can lose a few hundred dollars with refunds, returns and chargebacks.
You can lose a few thousand with advertising and you could lose much more if you get sued.
7 Ways In Which You Can Lose Money With Dropshipping
There are 7 main ways in which you can lose money with dropshipping. While it is a very low risk fulfillment model, it is definitely not without risk
Do not be seduced by promises that dropshipping is risk free and the ‘perfect business’.
Here are 7 areas of a dropshipping business where you can potentially lose money.
One of the biggest challenges when you dropship from China is slow shipping times. At the best of times it will take 14 to 21 days for your customer to receive their purchase.
With Amazon delivering next day, the bar is very high and most customers simply won’t have the patience to wait more than 2 weeks.
After 2 weeks of waiting customers get fed up and start requesting refunds. This means that even though they will receive the parcel, you have to refund them the full purchase price AND you are out of pocket for the COG (cost of goods) plus fees.
Another major issue with dropshipping from China is the quality of products.
You may sell products that you have never even seen yourself and you rely almost completely on the photo’s that the seller is posting.
Oftentimes the reality is very different. Many Chinese products are really poorly made, poorly packaged and often do not really do what they are intended to do.
If a customer receives an inferior product with poor quality they will most likely request a refund.
In theory you could request a refund from your supplier in turn but it rarely makes sense to return products back to China.
With CJ Dropshipping and Udroppy you could get a refund on damaged or defective products with illustrative photographs.
A further issue is with damaged goods.
The Chinese mail system show very little respect for parcels. The vast majority of parcels get mishandled and will arrive at your customer’s door all beat up.
Products that are fragile will result in a lot of refund requests.
The bottom line is that refunds will cost you and it doesn’t take too many refunds to start racking up a loss. You could recover some of it but for the most part you probably won’t.
Returns are really tricky with dropshipping. If you sell any clothing item then you are at serious risk.
Chinese sizes are vastly different from USA and European sizes and even if you have detailed size charts, people will make mistakes when they order.
Most people have become so used to ‘free returns’ that they are willing to ‘order and see’ and simply request a return if it does not fit.
I have also found that many people BS themselves about their sizes. They order a smaller size in the hope that they can squeeze in.
All this leads to one big problem and that is you as the dropshipper being stuck with having to accept returns.
The problem is that you can not sensibly offer returns to China as the coist simply won’t make any sense. The result is that you effectively have to often send another order for the ‘return’ at your own expense.
This doubles up on your COG which will eat into your profits very quickly. Some clothing items can see very high percentages of returns due to sizing and or quality and colours not meeting the customer’s expectations.
A chargeback occurs when a customer calls up their bank and disputes the transaction with your store. This is also called a ‘forced refund’.
The bank will immediately reverse the charge. No questions asked. This will then get passed down to your payment processor who will reverse the charge on your account.
A chargeback usually have a fee of around $30 regardless of the actual transaction cost. You can dispute the chargeback by providing the necessary details of the transaction but from my experience dropshipping orders often win the dispute.
If you do win the dispute the $30 fee gets waived. If not, it will cost you. There are a number of reasons for chargebacks.
Here are the main reasons why customers file for a chargeback from their bank:
- the item the customer purchased never arrived (lost in transit or held at customs)
- they waited too long for shipping and assumed they got scammed
- the product was of a poor quality and they were pissed when they received the parcel
- the customer commits fraud by claiming for a product they did receive
- the customer don’t recognize your transaction on their bank statement
Chargebacks are a big problem for dropshippers. Some people have no shame and will deliberately scam you as a dropshipper by claiming chargebacks.
With a chargeback you lose the entire transaction value plus the COG plus the $30 fee.
This can add up very quickly – especially if you sell higher ticket items with lower profit margins. Before you know it you start losing money and you are in the hole.
4. Account Closures and Sandboxing
Another major issue that is often the result of chargebacks is account closures and sandboxing.
If you process a lot of refunds and especially if there are a lot of chargebacks on your account, your merchant can shut you down.
Shopify Payment or Stripe have started to crack down quite heavily on dropshippers. They are not as bad as Paypal though.
Paypal can be ruthless and will sandbox you without warning. Sandboxing is when Paypal will withhold a percentage of your funds for up to 3 months and sometimes they even keep it! if they deem your ‘business model’ not to be of their liking.
Hundreds of dropshippers have lost thousands of dollars to Paypal shutting them down and keeping their money.
In most cases, when a payment processor shut you down, they do not pay out your last payment. This can leave you with a massive loss.
Shopify can also shut you down. While they don’t have a specific problem with dropshipping, they do have some products that are on their radar.
5. Negative ROI
I will discuss this in more detail later since it is such a pertinent issue for dropshippers. What it comes down to is that if you run paid advertising, then you could spend (much) more than you earn.
When your ROI (return on investment) becomes negative you effectively spend more on advertising that you make in profit.
This is a very common problem and one that most newbies get sucked into.
This is not limited to advertising either. If you have razor thin profit margins then you can easily have a negative ROI.
If you factor in fees and maybe development costs etc. then you could potentially run into a negative ROI.
6. Getting Screwed By Your Supplier
While it is not common, it certainly happens a lot when you deal with Chinese suppliers. Aliexpress is ruthless with their sellers and if anyone steps out of line Aliexpress will shut them down very quickly.
This offers you some level of ‘protection’ but that does not deter many Aliexpress sellers who just want to make money.
Some will not ship your orders at all. Some will ship an inferior version of the product.
Some will use a cheap shipping option (that takes much longer) while some will act as dropshippers themselves and cause complete chaos with tracking and order management.
I found that Aliexpress sellers will tell you ANYTHING just to get your business. Dedicated dropshipping companies like CJ Dropshipping, Udroppy and Spocket are much better and much more reliable.
Private dropshipping agents is probably the biggest risk. It has become a very popular option because a good agent can get you great prices and very fast shipping.
Unfortunately some agents will take your money (which you have to pay upfront) and just disappear.
If you order in bulk from Alibaba then there’s also some risk since you do bulk orders with much higher value. Alibaba does offer buyer protection so make full use of it to cover yourself against potential scams.
7. Getting Sued
While this is rare, it can happen. There are many rip-off products being sold on Aliexpress and with Chinese suppliers.
If you sell trademarked products then YOU are responsible – even if you are unaware of the trademark infringement.
There are also some more risk factors you always have to keep in mind. What if an electronic product you sell blows up in someone’s face? What of a health and beauty product scars a customer?
What if a baby toy injures a customer’s child?
With many of these dropshipping products not being the best quality, you always have to keep in mind that there are risk factors that can get you sued for big bucks.
The Great Dropshipping Conundrum
Most would-be entrepreneurs who get into dropshipping usually follow a path laid out by some 16-year-old guru posing a Lambo.
This path or method usually follows a basic plan that looks something like this:
- Pick a ‘hot’ product(s) from Aliexpress, CJ Dropshipping, Spocket etc..
- Set up your Shopify store
- Run Facebook or Google Ads
- Lose money for a few days
- Wait for Facebook or Google’s algorithm to ‘kick in’
- Start making a positive ROAS
- Increase your budgets, run retargeting ads and make even more
This is a simplistic breakdown but almost every dropshipping course follows this basic ‘blueprint’.
There’s nothing wrong with this because it is essentially the model. The real conundrum lies in the fact that you will almost never see a positive ROAS (return on ad spent) from day one.
You almost always have to spend money and lose money before you start seeing a positive ROAS.
Both Facebook and Google Ads’ algorithms need time and money to ‘learn’ and to find your customers.
Nothing is guaranteed though. You could spend a week running your ads with a negative ROI and never see it turn green. The result is that you spend a lot of money on ads only to see almost no sales.
Paid advertising is an art. It takes a lot of experience to really ‘get it’ and this often requires a lot of cash. If you go to Facebook Ads or Google Ads with $500 in your back pocket then you might not see that ever again.
The conundrum is that you have to spend money upfront without knowing if your products will sell or if you will ever see a positive return.
You might have to test 10 to 20 products before you really find a winner that starts producing a positive ROAS.
If you spend $200 to $500 testing a product then it can quickly add up.
You could lose a few thousand dollars quite quickly by following this most basic dropshipping blueprint.
It is always a tough call to know when you’ve spent enough to test a product or if you just need to keep it running and allow the Facebook or Google machines to start showing your ads to buyers.
Cut your ads too soon and you miss out on a potential winner.
Run your ads too long and you end up spending more money on a dud.
Selling dropshipping products via paid ads is not a game for the faint hearted. It takes a special mindset and nerves of steel.
A deep pocket doesn’t hurt either.
When you see your favourite guru posting Shopify screenshots of them making $30k/day it can act as a drug that inspires you to chase that dream.
Most dropshippers are actually just gambling. Pouring their money into something that they ‘hope’ will hit it big.
I want to urge you to STOP this gambking mentality. Stop being seduced by screenshots of ‘big money’ as those are often fake and the few who do reach it really do earn it.
Start treating your dropshipping business as a real business. Work on yourself. Work on your skills. Learn and treat it as a scientific process rather than a gamble.
Above all you have to learn to remove your emotions from the process. This is what makes the difference between a gambler and an entrepreneur. Focus your energy on results rather than dollar $igns and money.
How To Ensure You Do Not Lose Money With Dropshipping
Is there a way to ensure you do not lose money with dropshipping? Not really. If you are driving traffic through paid ad networks like Facebook and Google then losing money is inevitable.
Your mindset needs to be right though.
You are not ‘losing money’ but rather buying data to help you make informed decisions.
Paid advertising has evolved and it will be very rare to find success without losing money in the beginning.
1. Sell only quality products
One of the best ways to protect your dropshipping business from losing money is to only sell quality products. This can be a challenge because most of the time you will sell products that you have never seen before.
Personally, I have made a point of always ordering the products myself before I even consider selling them.
Actually seeing the products, holding them and testing them gives you a much better sense of how your customers are likely to react.
If you sell only quality products you can save yourself from many, many refunds and chargebacks.
I would also add to this that you steer clear of fragile products that might not survive the perilous journey from China. Its just not worth the risk.
2. Fast and Reliable Shipping
YunExpress and SF Express are two great shipping options from China and both can get your parcels to the USA within 10 days. It also bypasses the mass mail that many other parcels tend to fall into.
If you use CJ Dropshipping, they have their own CJ parcels and have their own logistics solutions. It is more expensive but is really effective and efficient. Udroppy and eProlo have something similar.
Faster shipping is the single most important aspect of reducing refunds and chargebacks. It will take you a long way towards minimizing your risk of whether can you lose money with dropshipping.
3. Manage Expectations
Managing your customers’ expectations is an important step to mitigate your risk. If you are dropshipping and it is going to take 2 to 3 weeks for their parcel to arrive, make sure they know that.
Make it abundantly clear to your customers how long it will take so that you manage their expectations.
Also, make sure you have proper product descriptions that include all the details of exactly what your customer will receive.
I’ve seen customers go crazy because batteries were not included!
4. Communicate With Your Customers
Communicating with your customers will not only help to put their minds at ease but it can actually prevent many refunds and chargebacks.
Never let any support tickets go unanswered for more than 24 hours. When customers do not get a response, they get spooked and cry foul.
This usually results in angry emails and often in refund requests or chargebacks.
Always be professional and reassure your customers at every opportunity. Effective communication with your customers can go a long way to dealing with the most common issues.
5. Stay Above Board & Protect Your Accounts
Protecting your accounts and protecting your business is vital. As a dropshipper you are often a sitting duck.
Make sure you never sell products that could pose a health risk to a customer. Its just not worth it because ultimately you will be responsible and you can get sued.
Protecting your Stripe and Paypal accounts needs to be one of your highest priorities. Losing these accounts will not only put you out of business but you can lose a lot of ‘your’ money.
Make sure you honour refund requests, limit chargebacks and refunds as much as possible and never sell anything dodgy or illegal.
6. Mind Your ROI
Keeping on top of your ROI is really important. Make sure you always have decent markups. Most of the time you will need markups of 3x the COG if you want to make it with dropshipping.
There are a lot of fees involved and there are a lot of hidden costs that you need to take into account when selling products online.
With taxes, currency conversion fees, Shopify fees and credit card processing fees you often do not make as much as you think you make.
I highly recommend you use an app like TrueProfit which will help you take all the guesswork out of all the various fees and charges.
TrueProfit will allow you to see exactly what your profits are as it takes into account all possible fees and costs – including ad costs.
7. Stop Losses
When trading stocks there is something called a stop loss. It is a threshold that you set when you place a trade that gives a clear instruction that when and if a stock drops below a certain threshold, it gets sold automatically.
This allows you to limit your losses. You may still lose money but you limit the loss by pre-determining what loss you could stomach.
When you run paid ads, you need to put stop losses in place. With Facebook Ads you can set up rules which allows you to pause ads and/or campaigns that are not performing.
You can also use Revealbot which is a powerful automation tool for Facebook ads. It gives you a lot of control over when and how to pause and/or throttle your ads.
Stop losses are essential for many Facebook Ads strategies. If you set high budgets then having rules in place can prevent your ads from blow-outs where your budgets get burned with bad traffic.
7. Move On As Soon As You Can
In the long term, dropshipping from China is not a great idea. You need to move on from dropshipping from Aliexpress as soon as you can.
There will always be shipping issues. There will always be quality issues.
The sooner you move on from Aliexpress the sooner you can mitigate that risk.
They have much faster shipping, better quality control and better customer service (with English speaking staff).
Can you lose money with dropshipping through these companies? Yes, you most certainly still can but it will be much less than through Aliexpress.
When you dropship from China, the distance, the logistics and customs will always be an issue.
To mitigate these risk factors you need to step up to getting your own warehouse space in the USA and ship in bulk from Alibaba.