Drop Shipping

Why Online Drop Shipping Businesses are High Risk

Read Time: 5 min

In the world of online eCommerce businesses, drop shipping is a big part. Many online retailers have used drop shipping fulfillment methods to add more products to their site with little to no effort. In fact, over 30% of retail shops online have switched to drop shipping as their primary fulfillment method. With very few barriers to entry, these business types pop up on a daily basis. But because of this, securing your way to success is harder to do. There are many risks that business owners and their acquiring banks take on when starting a drop ship business. From order times to common eCommerce issues, drop shipping merchant processing has a hard time staying afloat.

Long Drop Shipping Order Times

When a customer orders an item, they expect it within a few days. Convenience is a huge driver for online eCommerce merchant purchases, so if it becomes less convenient, it won’t last. This is a big issue with drop shipping businesses because they often fulfill from countries far from home. Long lead times are common when the items purchased have to go across the water first.

drop shipping

Unfortunately, customers have a much shorter expectation for shipping times. Overnight and next day shipping has become such a norm that even waiting a week may make them uneasy. This makes your drop shipping business more high risk because it makes it harder to manage expectations. Unless your customers know explicitly that their item will take a few more days than they are accustomed to, you will be dealing with a multitude of unhappy consumers.

Reduce risk in order times

There are ways to help with longer order times:

  1. The first thing you could do is to let the customers track their orders. With certain fulfillment services, they can provide the tracking information that you can pass along to your customers. This way at least they have an up-to-date grasp of where and when their item will be there.
  2. Alternatively, you could have a middle man fulfillment center stationed in the U.S. that will ship the items. This will cut down mailing time drastically but also has its own drawbacks. One of the reasons you are drop shipping items is so that you don’t have to pre-purchase inventory. But in this case, you will need to determine what takes precedent: the convenience of your customer or your business bank account.
  3. An easy way to help reduce the risk of shipping times is just informing your customers how long it will take. This step should be done before the customer purchases. Simply managing expectations will go a long way with your customers.

Less Visibility to Your Consumers

This ties in closely to the shipping and fulfillment, but also has a strong connection to quality control. You are the middleman between your customers and the fulfillment company, which means that you block all direct communication between the first and last steps of the process. While this may be a good thing for you, it means less visibility for your customers.

The risk associated with having less visibility is that your customers may retaliate. Returns, bad reviews, and unhappy customers are not good for your drop shipping business and often are caused by miscommunication. High risk drop ship businesses need to be more conscious of this issue and implement fixes to prevent that.

Let customers log in and see their shipments, allow them a direct line to your customer service line/ email/ chat, and figure out your return policy. Because your consumers won’t be able to physically see the product before they order, be sure that your product sourcing is accurate and the price the customer is paying is fair. Managing expectations is useful for customer visibility, but it is also important to give your customers as much control as you can.

Common Ecommerce Fraud

Ecommerce businesses deal with their own specific sets of risk factors. Online companies are often found to be high risk solely because they are online. The reason for this stems from the amount of fraud that takes place on these platforms. People using stolen information or charging back products that they received are both forms of fraud that are common online. On top of that, there are also…

  • Refund Fraud
  • Merchant Fraud
  • Card Testing
  • Identity Theft
  • Phishing

Protect against fraud

In order to protect your drop shipping business from these high risk factors need to be implemented in a multi-prong approach. These fraudulent tactics are not easy to detect, so making sure that you are PCI compliant and secure is the first step. Then implement address verification and require security codes for all credit card purchases.

Consider also only delivering packages that need to be signed for. For small, inexpensive products, this may not work for your business, but for larger items, it could be a good thing to protect yourself. On top of that, you may be able to screen the suspicious activity of your customers through past purchases.

Credit card online shopping cart

Many of these things can be integrated into your account either through your eCommerce platform or your payment processor handling the transactions.

Online Chargeback Issues

Chargebacks are more of an effect than they are a cause. They happen because of one of the above issues. Long shipping times can lead to chargebacks because the customer may assume that they have been scammed and reach out for a refund from their bank. Less customer visibility can lead to chargebacks because of the lack of communication. And chargebacks are often caused by merchant services fraud. Unfortunately, there is not much that you can do to prevent chargebacks from occurring. Just by nipping problems in the bud can you effectively stop them before they start.

By reaching out to your high risk credit card processing provider, you may be able to apply for early chargeback protection. That way you will be the first to know if a customer is reaching out. The most important part of being conscious of your chargebacks is attempting to keep them low. Many banks and credit card processing companies look at the percentage of chargebacks as a way to gauge the health of a company.

Typically eCommerce businesses are expected to keep their chargeback ratio under 3%. If your company goes over this percentage there is a good chance that your merchant account will be placed on hold. Be aware of this metric at all costs in order to keep processing payments for your drop shipping business.

Drop Shipping Businesses are High Risk

As you can tell, drop shipping businesses are considered high risk. But that doesn’t mean that you should be afraid of starting a business in this industry. Just be more aware and set up your merchant account to mitigate all of these risks.