Dropshipping Fundamentals: Five Common Problems and a Few Best Practices for Avoiding and/or Managing Them
Dropshipping is a great way for resource-constrained entrepreneurs to explore and learn eCommerce. And, with the right model, creative, and copy, success is absolutely achievable. But, sustained success – especially at any appreciable level of scale – will only come to those who can avoid and/or properly manage the road blocks that will inevitably be strewn in their way.
In this post, we explore five particularly notable issues:
Merchant services holds, freezes, and terminations
Disabled ad accounts
Customer expectations and (mis)behavior
Merchant Services Account Holds, Processing Freezes, and Terminations
If you follow along with the gurus, it seems like everybody in the dropshipping space is running multiple seven and eight-figure stores only a year or two into their eCommerce journeys. Of course, (almost) all of them are lying; however, one element of dropshipping in particular makes such stories virtually impossible: merchant services. The merchant services providers are the ones who clear customer payments – a service without which stores cannot function. And, here’s the thing: merchant services providers are banks. They are built for consistency and safety – not explosive growth. In fact, when they see explosive growth, they will often hold new funds as they come in (an account hold) and temporarily stop clearing transactions (a processing freeze) – effectively starving sellers of the working capital that they need to procure inventory. It’s actually not uncommon for merchant services providers to hold onto large sums of money for months on end regardless of the implications for the seller (their goal, after all, is to protect themselves from incurring a financial loss due to seller underperformance, fraud, etc.) Reaching seven and eight figures as regular inventory-holding sellers often requires substantial cash reserves to be kept on hand within settlement accounts – and the reduced service standards associated with dropshipping demand even greater security. In a worst-case scenario (which isn’t all that uncommon in dropshipping), merchant services providers terminate accounts without notice (all the while holding onto any frozen funds for months) and add the names of those terminated to the MATCH list – which essentially leads to a five-year ban across all merchant services providers.
Keep growth in check as much as possible – even if this means leaving money on the table. A short spurt of growth that gets you shutdown is not worth it.
If you run into an account hold and/or processing freeze, remain calm and professional in your interactions (aggression will quickly get you terminated). Expect that it will take days or weeks to work through things (and the results may still not be what you want).
Communicate with your representative(s) in such a way as to help them to understand your business as clearly as possible – refrain from anything misleading as it will do nothing but create distrust and increase the likelihood of adverse outcomes.
Contrary to what the gurus suggest, dropshipping really doesn’t scale well – especially when it comes to merchant services. Prepare to take your business in a more traditional direction as soon as you can afford to do so.
Disabled Ad Accounts
For many dropshippers, Facebook is the lifeblood of their operation – often driving 90% or more of a site’s traffic. As anyone with a bit of experience knows, Facebook is extremely finicky. Even if you are doing everything right, it’s not uncommon for ad accounts to unexpectedly be shut down. Much like the banks above, Facebook is also not all that comfortable with explosive growth (due to operational and fraud concerns), so rapid scaling is very likely to set off red flags and bring about a shut down – that is, at least, temporarily. Reasons for shutdowns vary (and are often maddeningly vague): too many post flags, too many poor post-purchase customer reviews, (borderline) copy and/or creative mistakes, website mistakes and/or omissions, IP address changes, etc. If your business depends on Facebook, do your very best to learn and stay within the rules – ignorance-based trial and error will get you banned just as quickly as willful violations of ad policy.
Again, keep growth in check as much as possible. Facebook gets squeamish about hyper-growth just like banks do (as failures to deliver threaten their brand), so it’s best, if possible, to keep growth gradual.
If you get flagged, stay calm and work politely and patiently with Facebook to uncover and correct the problem(s). It may take days or even longer (and their assistance will tend to be vague, at best); however, as with the merchant services providers, you’ll get absolutely nowhere by yelling and trying to force your will on a company that absolutely does not need you or your money.
Make sure that everyone involved in the ad creation and management process understands the rules set by Facebook (which is a little challenging because they aren’t wholly explicit, but are general guidelines which often leave more questions than answers). Do not, under any circumstances, flaunt the rules – you can’t possibly spend enough to get away with it.
Vendor errors are going to happen in dropshipping. Manufacturers are going to ship out damaged and incorrect products. Carriers are going to lose packages. Selling platforms are going to have glitches. Ad platforms are going to erroneously flag and shut down campaigns. Credit card companies are going to flag transactions that should otherwise go through. It’s annoying, but it is business as usual.
Build an error buffer into your margins of at least several percent to accommodate damaged products, lost packages, chargebacks, etc.
Depending on the circumstances, you may be able to push some financial responsibility to the vendors; however, keep in mind that vendors may give in on small things only to cut corners and/or cut you out in the future. Long-term relationships are critical in eCommerce and nickel-and-diming vendors is a great way to undercut your longevity.
Again, when something goes wrong, stay calm and work with your vendors to rectify the situation as efficiently as possible. Losing your temper with them (especially if they are large) will only hurt you.
Customer Expectations and (Mis)Behavior
No matter how hard you try, some customers simply cannot be satisfied – and the nature of dropshipping only exacerbates the problem. Did a package legitimately get lost in transit? Don’t even bother trying to explain – just send a replacement ASAP because the customer doesn’t want to hear about how it’s the carrier’s fault. Did the customer provide the wrong shipping address leading to an RTS? It’s their fault, but don’t expect them to agree – again, just send out a replacement. Unfortunately, in the early stages of business, you generally have to give into even unreasonable customer behavior (by yelling and threatening, they have been conditioned by the market to expect refunds, free merchandise, etc.); however, as a company matures and builds a stronger following, stricter standards on customer behavior can oftentimes be established and upheld.
Again, build a buffer into your margins to accommodate damaged products, lost packages, chargebacks, etc.
Set proper expectations with your customers upfront. Yes, this may negatively impact conversion; however, misleading your customers will cause you to steadily bleed money on the backend while also setting the stage for bigger problems with merchant services providers, Facebook, etc.
Cleary and quickly (within reason) communicate with your customers when they reach out to you. Silence is deafening and tends to exacerbate what would otherwise be manageable customer support scenarios.
Mistakes are going to happen and customers are going to overreact; however, stay calm, do your best to make them happy, and, if all else fails, hold your ground and move onwards – just be sure to actively counter any attempts by unreasonably dissatisfied customers to target you via reviews, ad comments, etc.
Fraud is rampant in the eCommerce space on both sides of the transactional spectrum. Many dropshippers, for instance, have neither the ability nor the intention to deliver on their promises – especially when they are underwater and desperately trying to bring in cash. On the flip side, there are a fair number of evil customers out there who utilize a variety of fraudulent methods to obtain things for free. Keep in mind, if fraud is committed by a consumer, the merchant is generally going to be held responsible. It’s not (very) fair, but it’s the way the system is structured.
Make good on your obligations to your customers – consistently cutting corners is going to catch up with you.
If you are significantly resource-constrained, it’s generally better to be safe than sorry. If an order doesn’t seem quite right, don’t be afraid to cancel it, issue a refund, and move on.
Dropshipping is a great way to get started in eCommerce; however, it tends to exacerbate the problems outlined above. Though capital limitations may be keeping you from adopting a more traditional fulfillment-based model, it is advisable to consider transitioning sooner as opposed to later as very few companies, if any, can sustain success on dropshipping alone.