Why Does Dropshipping Fail?

The business model seemed like a brilliant idea: you set up an online shop, offer a range of products, and external suppliers ship them to your customers. The strategy carried little financial risk, since setting up a warehouse and buying goods to keep in stock were unnecessary.

Prosperity, or even wealth, without risk – a dream come true.

The realities of business life, however, look rather different:

A supposedly risk-free yet extremely profitable business model attracts plenty of imitators. The result: competitive pressure rises and margins shrink. Online retailers barely make any profit at all – and the dream of quick prosperity appears to be over.

Further difficulties are rooted in the business model itself:

In your online shop, you broker your supplier's products and receive a commission for every successful sale. This makes you not an independent retailer, but a sales partner of a far larger company operating in the background.

The producers and suppliers that local online retailers work with are mostly based in China. There, the costs of manufacturing and storing the products are low, which has allowed online retailers to generate high profits in their home market.

For retailers who rely on shipping directly from the manufacturer, however, the operational structures of their partners in distant China are barely visible. In practice, it has turned out that getting in touch with the overseas company when problems arise is often difficult.

The suppliers in China have little interest in disclosing their production processes or entering into a transparent exchange with their partners in Germany. For the large corporations operating in the background, this is a mass-volume business. If some online retailers end the cooperation, that is not an immediate problem for the success of the Asian companies. For these reasons, they have little incentive to commit to keeping their partners satisfied.

This gives rise to further problems:

Online retailers broker products to their customers that do not match the customers' wishes and likewise fail to meet the retailer's quality standards. For customers and retailers alike, it is difficult to organize returns, since these involve a great deal of effort – provided that a location in the distant foreign country can even be found to accept the defective goods.

Because of the distance, fast deliveries are out of the question: customers have to wait at least ten days before they hold the desired product in their hands.

Online retailers who cooperate with suppliers in China face serious challenges in light of the growing demand for sustainable products, when there is no transparency on the suppliers' side.

The consequences that arise from these various problems: dissatisfied customers and frustrated online retailers whose margins collapse.