If you are planning to start a dropshipping business, you are on the right track towards financial freedom.
- The global e-commerce market value for this segment was estimated at $128.6 billion in 2020.
- Experts believe that it will continue to grow until it reaches a projected value of $476.1 billion in 2026.
Simply put, the dropshipping business model has a lot of income potential for the foreseeable future. So even if you decide to jump in just now, there is still much wiggle room—definitely more than enough for you to succeed.
The next step is to figure out how to start dropshipping. While it is one of the easiest operations to launch, you still have to jump through some hoops first.
To make your life easier, we have outlined the entire process, step-by-step and from start to finish.
What Is Dropshipping?
Before we go any further, let us first make sure that we are on the same page.
So what is dropshipping, exactly?
Dropshipping is a type of online business where you can run an online retail store without the hassle of keeping inventory. You don’t have to worry about packaging or shipping products to customers.
This is what sets the dropshipping model apart from other models. In theory, you won’t have to see or hold a single product to sell it.
Of course, this would not be advisable since you won’t be able to evaluate your supplier. It is best to get your hands on sample products, at least initially, to check their quality.
Once you are satisfied, you will be more confident in what you are selling and expect some level of success.
How Does It Work?
Dropshipping has three key players: your customer, your supplier, and you.
In this ecommerce business model, the supplier shoulders much of the burden:
- They create the products to be sold, store them, and ship them on behalf of the retailer, which is you.
- They replace and restock defective items, if any.
- They sell the dropshipping products to the retailer in bulk for a wholesale price.
- They assume the risk if any of the dropshipping products remain unsold.
As a retailer, your role is to present and sell the products as your own under your brand. It involves some or all of these activities:
- You should set up an e-commerce website where potential customers can look for the items they want or need.
- You have to take care of all marketing activities.
- You can shoulder the cost of shipping products or pass them on to the buyer.
- You should identify the product price at which you will make a decent profit and still attract many buyers.
Finally, the customer goes online, visits your website, and browses through your catalog of products.
Once they find something they like, they place their order, which you will then pass on to the supplier. The supplier then fulfills the order and ships the product directly to the buyer.
Ecommerce Dropshipping Business: Things to Consider
Dropshipping is, without a doubt, one of the most viable businesses that you can get into quickly. However, before you pour your resources on it, there are a few things that you have to keep in mind:
As a retailer, dropshipping offers you a way to sell products to customers without the burden of high overhead business expenses. The supplier does most of the heavy lifting, leaving you free to focus on generating traffic to your website and attracting buyers.
However, since you are putting in less money, you will be getting less out of it.
The supplier assumes most of the risk and does most of the work. It is only fair that the lion’s share of the profit goes to them.
So how do you make money from dropshipping?
First, you need to find the sweet spot for your profit margin. If you charge too much, your target consumers will turn to other retailers. If you cut too much into your margin to remain competitive, you might have no business revenue at all.
On average, the dropshipping profit margin falls between 15% and 20%. However, this number varies greatly from one segment to another.
As much as possible, aim for higher than 20%.
Next, you should increase organic traffic to your website, generate high-quality leads, and maximize your conversion rate. This is where search engine optimization (SEO) and your other marketing strategies come in.
Putting your products in front of more potential buyers allows you to make more sales.
Virtually anyone with a laptop, access to the internet, and some money can start a dropshipping business. While this sounds like a good thing, it does have its disadvantages.
On one side, it gives you plenty of opportunities to launch your operation. On the other, you have to compete against thousands or even millions of other people like you.
To complicate things even more, there is a good chance that your reliable supplier would not be working exclusively with you. It means that, at any given time, there will be many other retailers selling the same items as you.
That is why it is very important to achieve the two things that we outlined above:
- Boost your online presence
- Identify the right price for your products
No Control Over Logistics
Not dealing with packaging and shipping is good, but it leaves you with no control over the supply chain. This could be problematic in several ways:
- Implementing a product quality control system is almost impossible, so you can’t guarantee that each item is in top condition.
- Your brand’s reputation will be at the mercy of the supplier.
- You have to deal with customer complaints while hoping that the supplier will come through for you.
- Fee structures could change, leaving with a smaller profit margin.
- You have multiple points of contact as you go back and forth between your customer and your supplier.
While it is clear that dropshipping comes with its own set of challenges, they are all manageable. It just means that you have to put in the work, especially if you are still trying to build your brand.
If you plan to carry various products on your website, you will likely be getting them from different suppliers. The problem with this setup is that if your customers order multiple items, they will be receiving different packages, which is bad for the following reasons:
- It leads to higher shipping costs.
- A lot of packaging will go to waste.
- Your customer might find it annoying to deal with multiple deliveries for one order.
- It could be confusing for your branding.
You can avoid all these things by choosing not only high-quality products but also the right vendors, but more on this later.
What Are the Benefits of Dropshipping?
As you have seen in the previous section, dropshipping is not without its share of growing pains.
Starting this online business is easy since it has a low barrier to entry. However, it would take a lot of patience and hard work for you to succeed.
So what is in it for you?
Here are some of the reasons you should go ahead and take the plunge.
You Do Not Need a Lot of Capital
Most people are afraid to trade in a steady paycheck in favor of being their own bosses because business is a gamble. This is understandable since 90% of startups fail for various reasons.
Others are more willing to take on the risk but have to save up first before they can venture out on their own.
Either way, many people miss out on many profit potentials because of a lack of capital or fear of losing it.
The beauty of dropshipping is that it offers a way around all these barriers. You do not have to spend much to get things going. All you really need are:
- Subscription fees for your domain
- Dropshipping platform
- Suppliers and products
It also allows you to keep your day job and start your own business. As you gain more experience and start raking in more profits, you can gradually ease yourself into it.
The Business Is Easy to Scale
With dropshipping, you have the flexibility to switch from one niche to another. You would not feel the need to stick with your initial choice to recover losses since you won’t be putting too much money into it.
Even better, once you find a dropshipping niche that you are comfortable with, you can easily scale things up. You can just order more products from your supplier as you build a wider base of happy customers and more purchases come in.
All you really have to worry about is maintaining a good relationship with your supplier, which is not that hard to do. After all, they want your business to do well just as much as you.
Many tools are available on the operation side that can automate different parts of your business, including customer service. So anytime you want to ramp things up, you are covered on all fronts.
Low Overhead Costs
As mentioned before, dropshipping eliminates the need for you to store inventory, manage deliveries, or keep track of all products. It means no upfront costs in warehousing or paying someone to organize your stock.
So aside from not needing a large amount for your capital, you do not have to spend a lot of money to keep things running.
Low-Risk Business Model
You have just as much a chance of failing in dropshipping as with any other enterprise. Still, you won’t be investing much of your time, energy, and money to get started in this line of business.
Also, even if your dropshipping business is already up and running, it does not take much to keep things operational.
What do all these mean? Ultimately, you will be taking on less risk. You are putting in less of your resources, so losing them won’t be too problematic.
With dropshipping, you can afford to move on to different products or suppliers. This gives you more flexibility in terms of getting things right. Test different markets or niches until you find one that you like.
Also, with the dropshipping business model, you can easily adapt as technologies evolve and consumer behavior change. Dropshipping is very agile this way. You can easily pivot to another product or supplier depending on market trends. This is especially true as you gain more experience or build your brand.
How to Start Dropshipping in 5 Steps
Now that we have discussed all the pros and cons, it is time to talk about how to start your own dropshipping business.
1. Take Care of All Legal and Tax Preparations
Before you can sell your first product, you need to ensure that you have dotted all the i’s and crossed all t’s. This is especially true when it comes to legal and tax prerequisites.
You should form a legal entity first by doing the following:
- Register the business with the state
- File for an Employer Identification Number or EIN (for partnerships, LLCs, and corporations)
- Set up a business bank account
- Manage taxes
Applying for an EIN
In certain cases, some of these items are not legally required. For instance, if you plan to run the business on your own, you would be starting a sole proprietorship.
This type of business doesn’t need an EIN to operate. You can just pay a personal tax based on your profits instead of separate business taxes.
However, there are many reasons to get an EIN anyway:
- When filling out forms for business permits and licenses, you will be asked for an EIN
- You need an EIN to set up a business bank account
- If your business grows and you need to hire a staff, you would need an EIN
- Many dropshipping suppliers look for an EIN before fulfilling orders
- Having an EIN helps protect you against tax theft and identity theft
With everything at stake, it is better to get it out of the way and apply for an EIN. You can do it online and finish the whole process within 15 minutes.
That said, before you visit the IRS website, make sure that you have prepared the following:
- A unique business name, preferably one with an available domain
- Your social security number or Truncated Taxpayer Identification Number or TTIN
- Some basic information, like name and address
Selecting a Business Name
Among all these steps, coming up with a business name might be the trickiest. However, you could not afford to take it lightly.
After all, it will be the cornerstone of your future brand, something that could impact the purchasing decision of your target consumers.
As mentioned before, try to choose one with an available domain name. This will give your business instant credibility and level the playing field a bit for you as you go against more established competitors.
A business name generator available in some ecommerce platforms can help if you’re having trouble coming up with one.
Aside from picking a name with an available domain, try to optimize it for search engines by incorporating an SEO keyword.
Note that 89% of consumers use Google, Bing, or other platforms to look for the products or services they need. So even if optimizing this early is not required, it could help boost your online presence significantly and make your brand easier for consumers to find online.
Applying for a Business License or Permit
Once you have your EIN and business name, you can apply for a business permit or license. Some areas would require you to have one while others won’t. Consult with local offices like the county’s Office of the Clerk, the city hall, or the courthouse.
While this part of the process is not as exciting as you might think, you need to get them out of the way to avoid potential problems in the future. Doing this early will give you peace of mind, allowing you to focus on turning your dropshipping business into your very own money-making machine.
2. Choose a Product
Now starts the fun part: looking for a product to sell. This is a very important step as it will determine what market or dropshipping niche you will operate in. It will have a lot of impact on your success moving forward.
The question is, how do you choose?
Shopify alone dropshipped almost 1.9 million products in 2021, which is just in the Americas.
By itself, this number will give you some idea of what you are up against but don’t worry. We have outlined some of the critical steps you can take to find the right product for you.
Look for Products You Are Passionate About
When deciding which products to carry on your website, it is normal to choose something you are passionate about. For instance, you could sell sports equipment, apparel, or merchandise if you love sports.
This is a very good starting point for several reasons:
- You have a good idea of what your target audience wants, which can help with your efforts on marketing.
- You have some inside knowledge on which products are desirable and which ones are not.
- You will be more motivated to work since you are excited about what you are selling.
While these advantages may not seem much, they would still give you a leg up on your competition selling product similar to yours. This is very important since you will be vying for the attention of the same potential buyers that many other sellers are pursuing.
In other words, you have to make the most of even the slightest edge to maximize your chances of succeeding.
Choosing a product you are passionate about is only one side of the equation. You should also consider the business side of the process, which means you need to think about profit.
So how do you do this?
A reliable way to identify fast-moving products is by looking at current trends, which brings us to the next section:
- Use Online Tools
Online marketplaces are filled with millions of products. Just thinking about choosing one or even a few out of this many options can be overwhelming.
Fortunately, there are online tools that can help narrow down your options.
One is Google Trends, which you can use to find out which product niches are gaining popularity and which are on a downward trend.
So how does it work?
We all know that today’s consumers mostly turn to Google before making a purchasing decision. It means that Google has access to tons of information that will give you valuable insight into the behavior of your target audience.
You can access this information in Trends by plugging in the keywords that people commonly use in your chosen niche. From there, you can look at the search volumes and see which searches are in demand.
Aside from Google Trends, there are other ways to find out which products are popular:
- Use Ubersuggest’s Keyword Tool
- Visit popular e-commerce websites and look for product category trends
- Do a competitor analysis
Knowing Your Competition
Analyzing the competition is key for every business owner. It is doubly important for you since you are still trying to gain a foothold in the market.
Before you can start building your brand, you have to deal with a few important questions:
- How will you compete against more experienced retailers?
- How can you stand out from your competition?
- How can you gain the attention of your target audience?
To find the answers, you need to know what products your competitors are selling and how they are selling them.
Again, Google will be very helpful in this process. You could search for online reviews and find out what customers are saying about the competitor product or even the stores.
From there, you can figure out where other sellers fall short or what they are not offering and fill the gap yourself.
You could also try looking on social media and using Ahrefs or SEMRush if you plan to sell in different locations across the world.
3. Look for a Potential Supplier
Remember that product suppliers do most of the heavy lifting in the dropshipping business model. So even if you do everything else right, if your supply chain is unreliable, you are setting yourself up to fail.
However, while finding the perfect dropshipping supplier can help you achieve your business goals, it is easier said than done. There are thousands of product suppliers and millions of products to choose from, and if you do not know where or how to look, you might get stumped.
The good thing is that there are ways to whittle down your options in the same way that you were able to zoom in on the right product.
Three Types of Third-Party Suppliers
The first step is to decide which of the three main types of suppliers to choose:
- Dropshipping suppliers
- Dropshipping wholesalers
- Dropshipping distributors
So far, we have been mostly discussing the first type: dropshipping suppliers. They let you post product photos on your website, and whenever you receive an order, they will ship the items straight to the customers.
Wholesale suppliers sell products in bulk for a very reasonable price. You can then sell them on your online store as you see fit. Note that this type of supplier usually gets to keep all your customer information, including credit card details.
The third type of supplier is the dropshipping distributor. They will not keep any of your customer’s information, which makes them the best choice if you want to maximize consumer privacy and security.
Where to Look for a Reputable Dropshipping Supplier
Now that you have an initial idea about dropshipping suppliers, it’s time to look for the best candidates. So how do you do this?
A good way to start is by looking at online directories like Wholesale Central. It offers powerful sourcing tools to help you find thousands of suppliers, distributors, manufacturers, and more.
Even better, all the names listed in their directories are prescreened, so you do not have to do much legwork when it comes to vetting them.
You could also try visiting platforms like Oberlo and BigCommerce. Sites like these let you search for products and suppliers. They even throw in product reviews, customers reviews, ratings, and more—everything you need to make the right decision.
Making the Decision
Once you have a potential supplier shortlist, you can narrow it down even more by contacting them and asking important questions:
- What are their shipping times?
- What are their minimum order quantities?
- What are their wholesale prices?
You can rank them based on their answers and have a clearer idea of how to move forward.
Next, try to order product samples to test their supply chain and see if their performance matches how they presented themselves during your previous conversations.
From there, you can decide based on product quality, packaging, potential profit margin, and other criteria.
4. Build Your Dropshipping Business Store
Now that you have quality products to sell and a supplier to get them from, you should start focusing on your e-commerce site. You need to design a layout, connect a domain, and set up a payment method.
Several platforms can help you do this quickly. Some of the most recognizable options are Shopify and WooCommerce.
These sites have built-in templates that small business owners like you can use to create a great brand. They even include secure portals that offer customers quick and safe payment methods.
Here’s a list of what you can do with the right e-commerce platform:
- Create your own brand quickly
- Come up with a unique value proposition
- Provide a secure payment portal for customers
- Have access to updated design elements and themes based on the latest trends
- Have access to a wide range of tools for marketing, analytics, and more
As you start making money, you can switch to a better design to attract more customers and grow your business. Some themes are free, but just the same, they can get the job done for you. They will help you launch your dropshipping business even if you have a very tight budget.
E-commerce platforms are designed to help you jumpstart your online business quickly and effortlessly. Still, there is an even easier route: e-commerce marketplaces such as Amazon and eBay.
These sites have millions of visitors, offering a wide base of potential customers that you can tap into.
The problem is that their product listings consist of simple grids. Even worse, you can’t implement your own marketing strategies. It is very easy for your products to disappear into the background, especially if they are not very unique.
So while an ecommerce marketplace offers an even easier way for you to get your products out there, you won’t stand out, making it difficult to attract buyers.
5. Market Your Dropshipping Business
With your e-commerce site in place, you are now closer to the finish line. However, your job is far from done.
You still need to get the word out about your online store, product listings, and brand. It is time to promote your dropshipping business.
This part of the process is an afterthought for some people, which is a common mistake entrepreneurs make. In fact, marketing is one of the most crucial components of any business plan.
This is especially true in the dropshipping segment, wherein you have to compete against thousands of other sellers who offer the same products as you.
How are you going to stand out? How will you convince potential buyers to choose you over many others?
With the right marketing tactics, you can answer these and other similar questions consistently and convincingly.
If you do not have any experience and you do not know where to start, we’ve got you covered. Here’s a quick look at some of the best ways to promote your dropshipping business:
- Facebook advertising
- Advertising on Google
- Retargeting ads
- Email marketing
- Content marketing
- Posting on a social media platform
- Search engine optimization
One of the most common misconceptions about marketing is that you need a lot of money to do it right. While it is true in many cases, there are ways to get the results you want while keeping costs down.
For instance, do not give in to the temptation of splurging on your very first Facebook ad. You are still practically experimenting at this stage, so try to limit your budget.
Doing this will even allow you to launch separate ads for different products, making it easier to identify which items sell faster.
Retargeting ads are another way to squeeze every drop out of each marketing dollar. Suppose organic traffic to your website increases, but the conversion remains stagnant. In that case, you can use this marketing strategy to complete more sales.
Finally, do not forget to optimize your website for search engines. Sprinkle the right keywords on your landing pages, product descriptions, and other parts of your website. Doing so will increase your search rankings and put your product selection in front of more potential customers.
A Viable Source of Revenue
Dropshipping is one of the easiest, fastest, and cheapest ways to start a business from scratch. However, as you can see, it still takes a lot of hard work, patience, and planning, especially if you want to do it right.
Nonetheless, there is no doubt that it offers a viable source of income.
We have outlined the whole process in detail. If you want to give it a shot, you can have your dropshipping business up and running in a few hours and sell your way to financial freedom in no time.
1. Is dropshipping profitable?
The short answer is yes, it is a profitable business model. A successful dropshipping business or successful dropshippers typically have a profit margin of 20% to 30% for every sale.
These numbers translate to an average full-time income of $100,000 per year. It is possible to make more if you manage to pick fast-moving high-margin products.
2. Is it possible to start a dropshipping business with no money?
While dropshipping has a low barrier to entry, it requires limited capital. You will need money to pay for the business license, build your dropshipping website, choose a supplier, and cover marketing costs.
3. Do dropshippers need to pay taxes?
All sellers, at least in the US, must pay a sales tax if the state where they ship the products has a sales tax nexus. This rule applies to both retailers and dropshippers.
4. Do I need to have the experience to start dropshipping?
Dropshipping is open not only to professionals but first-time dropshipping entrepreneurs as well. There is a learning curve if you do not have previous experience, but it is perfectly possible to be successful just the same.
5. Do I need a business license for dropshipping?
In theory, you do not need a business license to start dropshipping. However, it is not a good idea to skip this part of the process.
Your license will help protect you from personal liability and make your brand more trustworthy. It will also be useful in writing off some taxes.