5 Reality Checks Before Starting A Dropshipping Business

I started my e-commerce journey right after I graduated from the university almost 14 years ago. At that time, I didn’t have much money, except a few hundred dollars from being a tutor, like most fresh graduates.  

I chanced upon a seminar talking about how to build my online store without actually holding physical stocks. All I had to do was drive traffic to the store and the revenue would come in.  

Sounds pretty straightforward, right?  

Unfortunately, my e-commerce journey hasn’t been a bed of roses and after 5 years, I decided to hang my dropshipper boots and move on to my next career venture.  

Fast forward to today’s pandemic world, I was stuck at home and thinking about my career direction. I saw that the world turned to the Internet to seek all kinds of solace, from online shopping, online learning, watching entertainment, and even to online trading.   

This made me reminiscence about my dropshipping days. I started to wonder if I should give dropshipping another shot (how to spot a great business opportunity?). And as if the Internet gods were listening to my thoughts, numerous ads on dropshipping programs and stories started to appear on my Facebook and YouTube feeds.  

I couldn’t resist the urge and clicked on them to find out more about the landscape of dropshipping today. It was when I embarked on a second time into the world of dropshipping through these dropshipping gurus and their programs over the next 3 months.  

What is dropshipping?  

Dropshipping is an order-fulfillment business model, where one sells a product without holding any physical stock. In most cases, the dropshipper is the middle man between the customer and the manufacturer-supplier. 

Say you are the dropshipper today. 

When a customer purchases your website, the manufacturer-supplier will pack and ship the order to your customer. You pay the supplier, and the rest is yours to keep. Sounds simple? 

Not really. 

They say, “the devil lies in the details”. 

And it’s in these details many beginners may miss, overcasting the glitz and glamor of many success stories of dropshippers that I have learned much more.  

Today, I am eager to share my 5 reality checks you have to know before parting your time, money, and energy into starting one.  

1. Expect a low-profit margin

Dropshipping has a low-cost barrier to entry compared to other types of businesses, which may have you expecting a high-profit margin. However, in reality, most dropshippers make an average of 10–30% of their selling price, depending on seasons of the year, types of products, and how competitive the market is.  

To give you a perspective, most brand wholesalers make an average of 50%, and direct manufacturers/suppliers can make up to 65% profit. 

Consider one of the most popular dropshipping items during these two years – the Nebula Galaxy Night Lamp that I attempted to sell.  

A quick search on AliExpress, which was one of the most popular places to source products for and I used it as well, revealed that the average cost price of this Night Lamp was estimated at $40 for shipping to Singapore with an average delivery time of 20 days. 

Now to price the Night Lamp competitively, I researched for selling prices from major competitors such as Amazon and other top sellers that came up on Google search results to help me determine a reasonable selling price and if the profit margin was worth the effort.  

It appeared that the average selling price for the Night Lamp was between $50 to 70. Let’s say I decided to sell it at the mid-price of $65, which gives me about $25 profit (a 38% profit margin).  

However, that’s not the final profit I received, as I would have to factor in payment processing fees (4%) and advertising costs (which takes the huge bulk of the profit). 

This brought my profit down to about $13 per Lamp sold. (20%) Still not so bad, I thought.  

I had realistic expectations about my revenue goal of making an extra $500 per month. This meant I would have to hit a sales target of 38 Night Lamps each month without having any refunds. I wasn’t sure if that’s even possible, given the high competition rate.  

2. Expect fierce competition from all over the world

The online world of e-Commerce is highly competitive. Compared to 14 years ago, there are now younger and hungrier entrepreneurs eager to make their first dollar from all over the world. All they need is a good computer and stable internet access.  

As mentioned above, the cost barrier to entry for dropshipping is very low. I started two dropshipping stores for less than $300 each, to cover hosting, domain, website theme, and apps.  

Just imagine the number of dropshippers for a particular product there are in a single month! Not to mention the big players such as Lazada, Shopee, and Qoo10.  

3. Expect costs from marketing to accumulate 

Compared to 14 years ago, where online stores focused mostly on SEO marketing to boost their ranks, the digital marketing landscape for e-commerce has changed tremendously.  

I have learned through trial and error that for any e-commerce business to succeed, they would need a combination of Meta (Facebook) advertising and social media influencer marketing.  

With Facebook advertising, I had to spend about $500-1000 on running ads alone to determine if a product was worth selling. I ran a few campaigns and analyzed the relevant ad metrics. I have to emphasize that at this point, I am usually not making any profit, but to ascertain the likelihood of my product selling well or not. I also have not factored in the costs of designing creative ads and copywriting that are required to turn viewers into buyers. 

With influencer marketing, I had to search for influencers on Instagram or TikTok with various followers’ sizes, depending on my budget. Usually, the higher the followers or engagement they have, the more expensive the influencers charge.  

The rates these influencers command highly fluctuate, but I was given quotes between $1000-5000 for just a shout-out or video review, with an average follower size of 20k. In addition, they would ask for an influencer discount code for their followers to shop. They would usually request a 15-30% discount to entice their followers, and they may also ask for commissions of their referral sales.  

Honestly, I wasn’t ready for that kind of budget, so I did not embark on influencer marketing.  

4. Expect no-control over your Facebook Business and Ad accounts 

One of the events that can hamper your dropshipping growth is the banning of your Facebook Business or Ad account. And that was what happened to me just 2.5 weeks into running my ad campaigns. 

There were no reasons cited by Facebook, other than the standard “You have violated one of our terms or policies.”. 

Despite requesting for review to lift the ban on my ad account, the Facebook Business team firmly decided that they weren’t lifting the ban, further banning my entire Business account permanently. I never knew the specific reasons. I was following their rules to the tee.  

It was later that I found out that many dropshippers in the community had faced these situations, even when more than $10k had been spent on Facebook advertising. No one knew the actual reasons, except that it’s a combination of the AI algorithm and perhaps some random glitch in the humans. 

The significance of the ban is when your Facebook Business or Ad account gets banned, you cannot run ads again unless you have a second Business account or you used an account of your friend or family member. It may sound like a trivial matter, however, but I cannot wonder the likelihood of my second or third accounts being banned again. 

Besides, I learned the value of Facebook pixels and the data it brings for my future retargeting ads, which is touted as the best way to get sales. Hence, if I have to start running ads on a new account, this means I have to be ready to spend even more ad dollars to retrain the pixels. 

5. Expect no-control over product quality and supply chain 

Dropshippers, like myself, often have no control over the product quality unless I have $100k in capital to private-label or custom-design my product to my taste. 

I have encountered some dropshippers going as far as buying just one quantity to test the product. They had shared that it was not a guarantee that the future products sold and packed by the supplier were of the same quality, from some of the customer’s feedback shared.   

Furthermore, I cannot control much of the supply chain, from manufacturing to inventory to packing and freight shipping. And customers usually want their items fast! 

In a global pandemic such as now, the shipping and delivery times have been badly affected worldwide due to frequent lockdowns. This had drastically increased the waiting time of eager buyers, who now may suffer from buyer remorse and ask for refunds. Most often than not, I would give in to try to maintain a customer satisfaction rating. I can prevent this if I had a clear and strict refund and shipping policies. 

Even in the rosy world of no-pandemic days, shipping times are usually not within the grasps of most sellers unless they own their private label airplane as Amazon does. 

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