Dropshipping has become very popular over the last few years, and if you want to get in on the action, you may be wondering how to start a dropshipping business. You’ve come to the right place! Read on to discover exactly what dropshipping is, the pros and cons, and all you need to know to start your very own dropshipping business.
Definition of Dropshipping
Dropshipping is a retail model in which the seller does not maintain any inventory. Instead, when a customer places an order the dropshipper then purchases the item directly from a manufacturer, wholesaler or other supplier who ships it straight to the customer. Essentially, dropshipping is being a middleman between a manufacturer and end user and never actually handles the product.
What is a Dropshipper
If you run a dropshipping business, you are what’s known as a dropshipper. Your main task is to market your storefront to attract customers. Once they make a purchase, you send the order over to your supplier (more on that below) who will then ship the product directly to the customer. The upside for you is that you don’t have to keep any inventory in stock or deal with the logistics of shipping.
How Does Dropshipping Work
You can think of dropshipping as supply chain management, with 3 players making up the supply chain:
- Manufacturer - the manufacturer creates the product and then sells it in large quantities to wholesalers and retailers.
- Wholesaler - wholesalers purchase items in bulk from manufacturers, mark-up the price and sell to retailers. Wholesalers tend to focus on a particular niche, although there are some that are generalists who may sell a range of products.
- Retailers - retailers can buy either from wholesalers or manufacturers, mark-up the price again and then send to end-users.
If you are a dropshipper, you are, in effect, the retailer in this supply chain, and the process works as follows:
- Order - a customer places an order in your online store and submits payment information.
- Fulfillment - you contact your dropshipping supplier (who is either a manufacturer or a wholesaler) who sends the product out to the customer.
- Payment - the supplier charges you and you, in turn, charge the customer.
Your profit is the difference between what you need to pay the supplier and what you charge the customer. To be a successful dropshipper, you must work out how much you can mark-up the price to earn a nice profit while still being competitive. As with any supply chain, the shorter the chain, the greater the profits because there are fewer parties sharing the total. In practice, this means that if you deal directly with a manufacturer, as opposed to a wholesaler, your profits may be higher. The trade-off is that many manufacturers will have a minimum order requirement, meaning you might have to commit to a larger investment up front.
5 Easy Steps to Start a Dropshipping Business
Now that we’ve answered the question of what is dropshipping, let’s get into more detail of what exactly you need to do to begin. Following is a list of action steps you need to take to get your dropshipping business up and running:
Step One - Research: You may already have an idea of a product you want to sell, but do you have any clue whether there is a market for it? You should start with some initial research and develop a strategy in terms of what you want to sell and who you want to target.
Step Two - Competition: Check out how other dropshippers (or regular retailers) are selling the product and then think how you can do better, either in terms of price or service (but usually price is a big driver of sales!)
Step Three- Supplier: You’ll need to line up a supplier who will drop ship your product when the time comes.
Step Four - Process: Work with your supplier to create a process that you will both follow when a customer places an order. The more detailed and clear this process is, the smoother your dropshipping business will run. This can, and likely will, evolve and change over time.
Step Five - Launch: Here’s where the fun begins! Build and launch your online store and start promoting your product. Watch the orders roll in!
How to Find a Successful Niche (What Types of Products to Sell and Placements to Use)
One of the keys to a successful dropshipping business is choosing the right niche or type of product to sell and where to sell it. It will take a bit of research, but it’s worth the effort to put in the time and make sure you sell a product for which there is significant demand, but not too much competition. Once you’ve selected the product, there are a number of different online platforms like Shopify or Ebay that you can use to create your dropshipping store.
If you don’t yet have any idea in mind, here are some principles to keep in mind when trying to choose the perfect niche for your dropshipping endeavor:
- The more accessories, the better - it’s easy to get caught up in the hype of trying to sell an expensive item, but just because something costs more doesn’t mean you’ll make more of a profit. It’s actually rare that a dropshipper will earn a lot on high-ticket items like computers or TVs. The real money is in the accessories, which you can mark up higher and which tend to be less price-sensitive items.
- Look for the hobbyists - people who are dedicated to a particular hobby will spend huge amounts of money to support their passion. Think about something you could sell that directly solves a problem someone with a particular hobby might have. For example, a runner who wants to shave off a few seconds on their best time or a fisherman who is always looking for new hooks and bait.
- Sometimes you can’t buy local - there’s definitely a trend now to support small businesses and buy local, but there are niche products that most local stores don’t stock. If you can sell an item that there is demand for but that is hard for people to find locally, they will flock to your online shop. These types of products might be obscure, so you’ll definitely want to do your research and make sure there’s a viable market.
- Consumables mean repeat business - selling something that gets used up (say, napkins or fishing bait) means your customers will have no choice but to come back and buy more.
- Consider shipping costs - even though you don’t physically ship the products, you will still be impacted by shipping costs. Of course, it’s your choice if you want to absorb the cost of shipping or pass it on to the customer, but if the costs are high it will eat into your profits.
The sky's the limit when it comes to potential items to sell, but luckily for you there are tools you can use to make it easier to determine whether there is a good market for your product. Here’s a rundown of a few of those tools:
- Facebook Audience Insights - this is a free tool offered by Facebook that can help you learn about a certain audience. You simply search for a particular keyword related to the product you plan to sell and you can determine how many people might be interested as well as certain demographic information that will help you in your marketing.
- Google Keyword Planner - you can use Google’s Keyword Planner to see how many people are searching for a certain word or phrase, which in this case would be the name of the type of product you want to sell. If tons of people are searching, you may have hit on a winner (of course you’ll want to keep in mind that you may have a lot of competition if you are selling something too popular).
- Google Trends - this powerful tool gives you more detailed information than you can get from Keyword Planner including if a search term has been growing over time (which is a sign that you can get into the market early as demand is increasing), geographic concentration and seasonality.
As part of your research, you should consider which dropshipping platform to use to create your online store. Here’s a brief description of some of the main options:
Dropshipping on Ebay
Ebay is a very popular platform used for dropshipping. It’s a well-known and well-used website, giving you access to a huge audience. All you need to do is set up a seller account, choose your product and connect with a supplier, and then list your item on the site. When listing the product, make sure you don’t just copy and paste the supplier’s descriptions, but rather add your own flair to start to develop your own brand. Once you make a sale, you just let the supplier know and they will take care of the shipping.
Dropshipping on Amazon
Amazon is another dropshipping option, but they have specific policies that you must be aware of. As a dropshipper, you still must identify yourself as the seller of record of your products and your contact information must be on all packing slips and invoices. As the vendor, you - and not the supplier - would be responsible for processing any returns.
Dropshipping on Shopify
Shopify is an extremely easy platform to use for dropshipping and one of the most popular. You simply create a free account and then follow of the steps that will be clearly laid out for you. There are also a number of Shopify-related apps that can help connect you to suppliers or upgrade your shop in different ways.
Dropshipping on AliExpress
AliExpress is well-known for its wide variety of inexpensive products. Many of the existing merchants on the site are aware that many of their customers are actually resellers and are very familiar with the concept of dropshipping. Using AliExpress for dropshipping means creating your own website and once a sale is made, purchasing the item from AliExpress, putting in your customer’s address for shipping.
Other Dropshipping Companies
The above are some of the most common options that many people use for dropshipping. Of course, they are not the only options and as dropshipping continues to grow in popularity, other companies are likely to crop up. As with any business, it’s important to keep up with the trends and keep an eye out for new platforms that may be of help to you.
What Types of Products to Sell
If you are still drawing a blank on what product you should sell in your dropshipping store, here’s a list of some of the more popular niches that will hopefully spark some ideas for you:
- Health and wellness
- Clothing and accessories
- Office products
- Accessories for cameras or cellphones
- Gaming (i.e. headphones, keyboards, etc.)
- Car accessories
Even within these categories you could probably narrow it down and focus on just one or two products and you should always do the market research first.
Is Dropshipping Safe?
As with any business, dropshipping has its risks and its benefits. You always need to do your own risk-reward calculation before embarking on any business endeavor, and dropshipping is no exception. Done right, it should be a pretty safe bet, but it is important to be aware of the potential pros and cons.
Pros and Benefits of Dropshipping
There are many potential benefits to starting a dropshipping business. The biggest one is the complete mitigation of inventory risk - you don’t have to invest any capital up front and you aren’t holding any stock, so you haven’t lost anything should no one buy from you. Here’s a quick look at some of the other key benefits:
- Simple to start - all you need is a simple website or online platform that gives people a way to make a purchase from you. This can be as easy as creating the most basic website and using a tool like Pay.com to accept online payments.
- Little to no overhead costs - your biggest expense is likely to be your web-hosting fee. As you grow, you may incur a few operating expenses, but it will never be anything too expensive since you don’t need a warehouse or a way to hold and manage inventory.
- Flexibility - whether on your living room couch or on a remote island, you can run your dropshipping business from anywhere as long as you have a way to communicate with your customers and suppliers.
- Product Selection - you can change up what you offer in your store as often as you like. You can add accessories and new products as you see demand for them and remove ones that aren’t selling. Because you aren’t obligated to purchase any inventory, you can easily test and see what sells best.
- Easy to Scale - when you start to see huge growth, you can add new suppliers to ease their burden. You’ll have an increase in paperwork and customer support, but that’s certainly not a bad thing when it also brings more sales and profits!
- No shipping hassles - your supplier does all the hard work of managing the shipping logistics - all of that is completely off your plate!
Cons of Drop Shipping
When it comes to dropshipping, although there are tons of benefits, there are also some downsides to keep in mind. Here’s a glimpse at some of the cons:
- Complex shipping pricing - while you don’t have to deal with the logistics of shipping, you do have to make pricing decisions. This can get complicated if you are dealing with more than one supplier who have different billing systems and pricing structures. You need to make sure you are offering your customers the best price without letting shipping costs squash your profits.
- Branding is not your own - while you can brand your website and online store, you won’t necessarily have much control over the packaging that your suppliers use when they send out the products. This does depend on the supplier, so if it’s important to you, you can seek out suppliers who will use your branding.
- Customer support is on you - no one likes dealing with an unhappy customer, especially when the problem is not even your fault. At the end of the day, the customer purchased from you, so even if you had a third party do the shipping, the buck still stops with you when there’s a problem.
- Low profit margins - because dropshipping is growing ever more popular, there is a lot of competition, especially in some niches. This means you may need to keep prices very low in order to get your foot in the door. Good news is, as you gain a reputation you should be able to increase your prices.
- Supplier challenges - business relationships are built on trust, and all you can do is your best to make sure you are working with reputable and honest suppliers. But, relationships can go sour for a number of reasons and there’s always the risk (hopefully small) of a supplier turning out to not be what you thought.
- Inventory - not maintaining your own inventory is a huge benefit to dropshipping, but what happens if your supplier runs out just when you get a nice big order? This is why it’s important to have relationships with more than one supplier.
Types of Dropshipping Business Models
You can run your dropshipping business in any way that works best for you, based on your market research, the type of product you are selling, and how simple or complex you want it to be. There are four main models to consider:
Model #1 - Product Reselling
Product reselling is the classic dropshipping model. As we’ve been describing throughout this article, this type of dropshipping means developing a relationship with a supplier who ships the product straight to the consumer once that person has purchased it from your store.
Model #2 - Online Presence
In some cases, there are retail brick and mortar stores that do not have any online presence. This could be a good opportunity for dropshipping. You, as the dropshipper, could partner with the store and create a website or ecommerce store. If a customer places an order online, you would then contact the retail location who would handle the shipping.
This model is slightly more complex than the classic product reselling because you must develop a relationship with the store. And, working with a retail store is not the same as a wholesaler - there are more likely to be inventory issues, for example, and the store owners may not be as familiar with the concept of dropshipping as a wholesaler might be.
Model #3 - Product Creation
Another dropshipping model involves bundling together a number of separate items and selling them as one via dropshipping. This is a good model if you are interested in selling gift baskets, for example such as for a new baby or a housewarming gift. The main issue to keep in mind is that if you dropship items in the gift basket that come from different suppliers, they could arrive to the customer in separate shipments. Should you choose to open a product creation dropshipping business, you should strongly consider working with one supplier who can provide all of the items and would be willing to package them all together before shipping.
Model #4 - Print on Demand
The final dropshipping method that we will describe is print on demand. If you want to provide personalized items, this is the dropshipping model for you. Customers would choose the product and how they want it personalized (based on options you provide) and then your supplier prints and ships.
How to Find Drop Shipping Suppliers
The success of your dropshipping business rests heavily on the supplier you choose. An unreliable supplier can ruin your reputation and cause you to lose customers. So, you will want to thoroughly investigate and carefully screen the suppliers that you choose.
Some of the questions you will want to ask as part of your vetting process include:
- How much do you charge per item? If the price is too high to allow you to add a mark-up that will give you a decent profit, you might want to look elsewhere.
- Are there any hidden charges? Make sure you uncover any and all possible charges, including handling fees or other charges.
- How do you ship the products? As long as the supplier uses reputable companies and can provide tracking numbers, you probably don’t need to be too concerned.
- What is the billing process? Depending on your own cash flow, you may prefer a monthly bill vs. paying per order.
- What is the process for returns? Be sure that customers can easily return an item if they wish.
You can also get into more detail and ask about length of time for shipping, customer support processes, insurance, and fraud protection. You should also always ask for references and look at reviews online.
Dropshipping Risks to Consider
In addition to the potential challenges inherent in starting a dropshipping business, there are also a couple of significant risks that you should consider, specifically as related to fraudulent payments and illegitimate suppliers.
- Fraudulent payments - cybercrimes are on the rise, so it’s very important to ensure that you have a safe payment structure. This is both to protect your customers from having their private information compromised and to protect yourself from being a victim of fraud. A system like Pay.com’s will keep all of your bases covered (and is also super easy and convenient to use).
- Illegitimate suppliers - as described above, choosing your supplier(s) is arguably the most important decision you need to make in your dropshipping business. Checking references, getting recommendations from other trusted sources, and reading reviews online can all help you identify any red flags before signing on with a supplier. If you end up with a dishonest supplier, you run the risk of your customers either never receiving a product or receiving something other than what was advertised. Your dropshipping business will be based on your reputation as well as the quality of the products, so it’s worth any extra effort to make sure you get this right.
Is dropshipping illegal?
Dropshipping is a completely legal business model. Just like any other retailer, you are selling products that someone else manufactured. Just because you are not holding the inventory, but are relying on someone else to fulfill the order does not make it illegal (or even sketchy in any way). Of course, you need to make sure that you cover all bases involved in setting up a legal business wherever you are located and you should check with a lawyer to be sure.
How much capital should I first invest?
The amount of capital to invest in your dropshipping business up front should be minimal. The main items you can’t live without include an online store (appx. $30 per month) and a domain name (appx. $5-20 per year). You’ll also need to invest in advertising in order to draw people to your store. This will depend on your budget - you can start with $500 in Facebook ads for example and then go from there.
How profitable is dropshipping?
Like any business, dropshipping can be extremely profitable or not at all...or anything in between. It depends on the product you choose, the market forces, and your supplier. Because you do not hold any inventory, if selling one product is not as profitable as you would like, you can easily switch to another.
How much do dropshippers make a month?
The numbers vary, but you’re likely to earn up to $10k a month within the first couple of months and that number will only increase as you become more experienced and are able to better target your marketing and/or improve your negotiation with suppliers.
Do I need to pay taxes on a dropshipping business?
You will have to pay taxes according to the laws in the location where you live and/or where your business is registered. You should consult with an accountant to make sure you follow all relevant laws.
Do I need to register an actual business?
Yes, you will need to register your dropshipping initiative as a business. You may not need to do this immediately, but don’t wait too long because most payment providers will require proof of registration in order to set you up.
Who pays the shipping costs?
The supplier will charge you for shipping. It’s your choice to absorb that cost yourself or pass it on to your customers. As with any other online store, sometimes shipping is “free” and included in the price of the product and other times there is a separate shipping cost. You can try different methods and determine which works best for your customers and your profits.