Why Most Dropshipping Businesses Fail
Eighty to ninety percent of dropshipping businesses fail. That’s not an encouraging statistic if you’re keen to start an eCommerce-dropping business.
This statistic is a lot higher than the statistic for all startups. 50% of new businesses are still operating in their fifth year. With so few dropping businesses getting past the first year, they can not be blamed for the high business fail rate.
The statistic for business survival beyond 10 years is just 25 percent, but many businesses have made their fortune and exited before ten years, so should this concern budding entrepreneurs? No, entrepreneurs don’t have fears about starting a business and know the proper mechanisms and strategies for customer acquisition and retention.
Change is inevitable and external factors creating the change are hard to control; therefore, as business owners, we must focus on what we have control over and how we deal with it. For example, declining sales revenue indicates that not all is well in the business.
Changing tact to reverse the downward trend in sales is more often than not within the company’s control as they can innovate new solutions or improve their product line.
Why Dropshipping Businesses Fail
Dropshipping businesses may appear simple; however, outsourcing supply and delivery is risky. There’s a lot that can go wrong with an eCommerce dropshipping business, including:
- Lack of product supply
- Low-profit margins
- Slow product delivery to the customer
- The product is no longer in demand
- Poor marketing
- Price not competitive
If you’re the only person in the business, you will struggle to source products consumers need and want for the right price to make a healthy profit. Why? Competitors. Your competition may have many people hired with one focus – to study market analysis to find the next big thing, i.e., identify products landing on the market consumers want. Market research is time-consuming, and you have a lot of tasks to sell your existing products to keep sales happening.
Marketing is a great way to burn through your work hours. But it’s fundamental to ensuring your dropshipping business is a success. You must keep pulling customers to your online assets and dropshipping platform, so they know where to get the products you’re selling. Plus, you can make some fundamental errors setting up your dropshipping business.
The setup is the foundation of the business, so get that wrong, and the business is off to a shaky start at best and, at worst, will fail within the first year. While it’s possible to set up your business overnight, it doesn’t mean you should. For example, technology providers have made it easy for novices to create their own websites and online store and market them with PPC advertising. However, without knowing how to make a profit with eCommerce businesses, the quick and dirty DIY setup often leads to immediate failure. You’ll be spending money you don’t have on correcting poor-performing assets. Your lack of marketing know-how will result in your business needing to spend more on PPC and social media advertising without guaranteeing sales.
Putting aside the need for education, training, business acumen, and experience, startups fail when they make common errors, including:
- Risking everything on one product or service
- Locking the business into sole supplier contracts
- Lack of funding
- Don’t know how to target market
- Lack of research and industry knowledge
All Eggs In One Basket
Are all your eggs in one basket?
Focusing all your efforts on selling one product may seem more straightforward, but it’s also riskier. What if the product fails? Or a newer product that may also be cheaper comes out before your business has had time to make enough sales to make a profit? Always have a plan B if you don’t have the time to manage to sell more than one product. What you will realize over time is selling one product takes as much effort as selling multiple varieties, as your marketing strategies are essentially the same. Template your marketing campaigns so you can copy them to market all your products.
Electing to have one supplier is probably more a result of business owners’ complacency or laziness than good judgment. When the business is set up in quicksmart with little to no prior trading experience, it relies more on luck. Using just one supplier may work out well in the short term; however, your business may be short-lived without a fallback supplier.
Ensure you research and secure the right wholesale drop shippers on terms that work for you. For example, get the legal agreements approved by your legal advisor and check for restraint of trade clauses that may prohibit using competitor suppliers.
Spreading the risk with more than one wholesale provider also extends to more than one store. Your stores should be different niches to cater to a broader customer base and thus spread the risk should one of your niches no longer attract the market demand.
With your other stores operating well and returning a profit, you can pour resources into finding in-demand products to meet your customers’ needs.
One Marketing Strategy
Another fast way to poor returns is using just one marketing or advertising strategy to attract customers. It’s human nature to stick with what we know. However, you need to break free from this habit in business and use many channels and strategies to attract customers. Keep informed with the latest marketing strategies so your know where your customers are spending their time online.
Marketing starts with customer data capture and growing a database of customers with their preferences. Your marketing messages target their needs once you know what your customers like and want.
Use more than one method to capture customer data and choose channels to reach out to your prospective clientele. For example, try interactive marketing strategies like surveys, quizzes, and games to capture customer data enjoyably so your customers share and like your messages on social media. Once you have caught customer data, you can try target marketing for a higher return on investment. For example, you can send marketing emails to a specific demographic you know is interested in your product.
Also, another successful marketing strategy is running competitions, prize draws, and giveaways on social media to attract and retain customers for your business. Consider using managed marketing services too so you can spend your time on higher-value tasks.
Lack of Funding
All businesses need working capital, and a dropshipping business has overheads and liabilities. A lack of cash flow to pay for services and fees is a sure way to business failure.
Have a contingency plan for funding shortfalls in cash flow. All startups go through peaks and troughs in sales, so learn when they are most likely to happen and fund up before you need the extra resources.
One Knowledge Source
Relying too much on one source of information is risky. The information may be inaccurate and biased depending on its head. If it’s from a current supplier, the data will likely be eschewed in their favor. Therefore use the internet to find other resources like discussion forums, blogs, and whitepapers.
Network online, particularly on social media platforms like LinkedIn. Follow successful entrepreneurs and dropshipping business owners.
There are many reasons for dropshipping business failure. Unrealistic expectations of sales and profit lead to impatience. The owner wants their eCommerce store set up fast, and there is often an over-reliance on one store. Also, a lack of funding, suppliers, and ineffective marketing strategies to attract customers.