Drop Shipping

5 Best Tips to Reduce Risk for Drop Shipping Merchants

Read Time: 6 min

Drop shipping is one of the fastest-growing online income opportunities for people looking to start a business. But for this high risk space, it is important that these businesses know the right steps to take in order to reduce risk. Many drop shippers end up in trouble due to merchant services fraud, a high chargeback rate, and long lead times for order fulfillment. Also, many drop shippers don’t have the proper online credit card processing or don’t know which drop shipping payment processor is best for them. Below, we list 5 of the best tips drop shipping merchants should follow in order to safely reduce the risk in their business.

1) Focus on a Niche


Sadly, many drop shippers don’t last long in the business. That’s because these drop shipping companies try to sell everything to everyone as though they are a mini Amazon. The problem is, if your business has no brand recognition, it is hard to attract a wide audience. Instead, a new drop shipper should work on a niche and sell specialized products to a small, but passionate, audience. For instance, selling items for pet owners with small dogs is niche enough to stand out even though there are millions of people with small dogs. By focusing on a niche, a new drop shipper will be able to quickly attract an audience and gain fast sales.

Doing this helps reduce the risk of your business because it allows you to create a clear business plan. This is good for the business owner, the banks, suppliers, and investors in your company. Keep it simple in the beginning and work on expanding your offerings as you grow.

2) Model Competitors

The best way a drop shipper can reduce risk is by looking at their competition. Now, that doesn’t mean a drop shipper should directly copy the store of a competitor but instead see what they do well and what you could do better. Looking at the components of a competitor’s store and using that for the building blocks for their own store is important for drop shipping businesses. For instance, how many items are offered on the front page? What incentive does the model use in order to collect emails? Does the competitor offer free shipping? Here are some features of a successful drop shipping store that new businesses should model after:

  • What are their best selling products?
  • How fast is their shipping time?
  • Do they have an 800 number?
  • Is their terminal online easy to use?
  • How well written are their product descriptions?
  • How many items are they selling?

After modeling the store, the drop shipper should go about designing their own.

3) Work With the Right Supplier

When the first orders start coming in, a new drop shipper will become excited that their hard work is finally paying off. However, much of this hard work can become undone if they haven’t sourced their product well enough or are working with the wrong supplier. The problem is, many drop shipping suppliers are located overseas with shipping times that can range from 5 days to 4 weeks. In a world where most people can get their Amazon packages in 2 days with Prime Shipping, waiting multiple weeks for an online order is a challenge. Therefore, new drop shippers need to make sure that they work with a supplier that has a track record of fast shipping times.

One of the best places to find the right suppliers is Aliexpress. This Chineses based drop shipping platform is the number one most popular place where drop shippers can find suppliers. What makes Aliexpress so great is that they have the largest directory of Chinese product manufacturers and wholesalers. Also, the site has a robust rating system. Ideally, a new drop shipper will want to work with a supplier that has lots of orders and a long track record on the site. If the supplier is able to offer 5-day shipping, then this is a plus.

Storage close to home

If a drop shipper really wants to stand out from the crowd, they can order their inventory in bulk and have it shipped to the United States and stored in a third party warehouse. After an order is made, the third party warehouse can quickly ship the item and ensure that the customer receives the order in just a couple of days. Bear in mind that this requires lots of upfront funding. However, if a drop shipper is serious about growing their business, then a third party U.S. based warehouse is a smart option.

This is a huge way to reduce risk on a drop shipping site because lead times are one of the main reasons these businesses get into trouble. Finding a way to circumvent this issue will make sure that your business has the strength to succeed.

4) Have Great Customer Service

It is important that a drop shipper offers excellent customer service. That means having contact information that is easily discoverable on the site. A drop shipper should be able to answer all email inquiries within 24 hours. Most large drop shippers use virtual assistants to answer emails. If a drop shipper is serious about customer service, they will also have an 800 number or chat service on their site to handle any customer service questions.

Reducing risk in this aspect will make the entrepreneur and the business a way to mitigate issues before they happen. Being able to help an unhappy customer before they resort to a chargeback may mean the difference between a business staying up or being shut down. 

5) Secure Credit Card Processing

credit card online payment

One of the most overlooked, yet important, tips is to find the right online payment processor for drop shipping. This is a company that will allow you to accept transactions through a virtual terminal in order to sell products. Merchant processing for drop shipping can be a challenge because it is considered a high risk business. That means many tier-one companies such as Paypal, Stripe, and Square do not accept drop shipping merchants. These traditional processors do not have the capability or support in order to take on a drop ship business. Therefore, it is important that a new drop shipper works with an online payment processor that has a long track record of working with drop shipping stores.

Before you decide on an online payment processor, there are a few questions you need to ask.

  1. First, you should ask how long the company has been in existence. You will want to avoid any payment processor that has been in business for less than 24 months.
  2. Second, a drop shipper should ask how much money an online payment processor will withhold and for how long. Just about all online payment processors will retain a ‘reserve.’ This reserve is a percentage of transactions that are kept in case there are chargebacks or fraud. Banks will use this reserve to cover any losses from the chargebacks incurred.
  3. Third, a drop shipper should find an online payment processor that can offer fast, easy payments. Your customers need to have a very easy experience when checking out so that they will have a better chance of coming back. An integrated payment gateway will allow this to be an easy experience for everyone.

Summing Things Up

Drop shipping is one of the most exciting online money-making opportunities. However, this drop ship business needs to come up with ways to reduce risk. By taking the right steps, a new drop shipper will be able to find the right niche, build a proper store and get the sales they need to grow their business. Finally, a successful drop shipper should select the right online payment processor that will allow them to easily collect all types of customer payments easily and securely. Follow the 5 drop shipping tips above to get your business off on the right foot.