If you’ve ever considered launching an online store, you know that inventory can be a pretty big investment.
When you’re already spending hundreds on your biggest needs — including business registration, web hosting, an e-commerce website builder, and a domain — this extra expense can be more than you’re willing to risk. Using a drop shipping business model can help you decrease the risk of pursuing your e-commerce goals.
Drop shipping businesses are rising in popularity for good reason. By erasing the need for you to purchase inventory, this model limits your startup costs and greatly lowers the barriers that make it tough to become an entrepreneur.
In this article, we’ll go in depth on everything you need to know about drop shipping businesses and how to start one.
- What Is a Drop Shipping Business?
- How to Start a Drop Shipping Business in 6 Steps
- Frequently Asked Questions
- Start Your Low-Cost Business
What Is a Drop Shipping Business?
A drop shipping business is a company that sells products to consumers at retail price. Unlike traditional e-commerce business owners, who then continue on to fulfill the order, drop shippers instead forward the order to a third-party supplier, who fulfills the order at a wholesale price.
In this business model, your earnings come from the difference between your set retail price and the wholesale price. Think of it like the split between the two – similar to how retail arbitrage works.
It should be noted, however, that drop shipping suppliers tend to charge slightly higher wholesale prices than traditional wholesalers. This helps alleviate the risk they face for selling and packing items individually, instead of in bulk.
Within a drop shipping business, your primary responsibilities will be sales, marketing, and customer service. Your customer support role may prove to be the biggest challenge, as you’ll often have to manage communications with your buyers while getting answers from your supplier on a timely basis. Luckily, this can be outsourced, similar to how other companies hire gigworkers for customer service roles.
That said, drop shipping businesses come with a few major benefits:
- You never need to invest in inventory or space for your inventory.
- You only need to make purchases on an as-needed basis, when you already have guaranteed earnings.
- You’re not responsible for fulfillment, so there’s no need to worry about packaging or shipment.
- You can cut back on operational costs, in some cases automating a large portion of your business.
How to Start a Drop Shipping Business in 6 Steps
If the idea of starting a drop shipping company piques your interest, then you’ll want to learn exactly what it takes to build your e-commerce store and create a successful business.
Here, we’ll go over a few steps you need to take before you launch your drop shipping business.
1. Develop Your Business Idea
Just because you’re not creating your own products doesn’t mean you don’t need a solid business idea.
The most successful drop shippers identify a niche and sell items within that specific category. This not only helps them build a trustworthy, focused brand, but it also allows them to better target a set of keywords on search engines to get found by buyers.
As you’re developing your business idea, it’s important to do research to make sure what you want to sell is profitable. Consider looking on Amazon to evaluate best-selling products and on Google Trends to see what products people are searching for.
You may also want to research drop shipping and traditional retail businesses that are selling products in your desired category. This will tell you if the market is too saturated or not profitable.
Narrow down a few specific types of products you want to sell, then continue to the next step.
2. Find a Drop Shipping Supplier
Suppliers play a huge role in keeping your customers satisfied — and, therefore, in keeping your ratings high — which means you need to find a supplier you can trust and communicate with efficiently.
Because many suppliers will be located in a different country, with many in China, you’ll also want to make sure they can commit to fast shipments without enormous fees.
Some drop shipping business owners will also request referrals and even product samples to make sure they’re high-quality. It’s your trustworthiness as a seller that’s on the line, so do as much research as you need to to nail down the right supplier.
When it comes to sourcing a supplier, you can read up on drop shipping blogs for recommendations, search online to see where competitors are sourcing from, or look for your desired products on wholesale sites like AliExpress or Alibaba. If you’re willing to invest a bit of money to save time, you can use a platform like SaleHoo to quickly get matched with the best suppliers for your order fulfillment needs.
We recommend choosing no more than three suppliers to make your customer support and order forwarding less of a headache. Then narrow down 5-25 products that you want to list.
3. Create Your E-Commerce Store
There are two major routes you can take when building your online store.
The first is building a website of your own, which will primarily require you to invest in a domain, web hosting, and a website builder that can support an e-commerce platform.
You’ll also have to manually design your e-commerce store, which is an opportunity to brand yourself. Many business owners who choose this route recommend creating a Shopify store to easily source and list new products.
The other route you can take is creating a store on an existing online marketplace, like Amazon, Facebook Marketplace, Craigslist, or eBay. This allows you to quickly start your business and get guaranteed traffic on your product listings from potential customers.
Online marketplaces are ideal for getting sales from organic searches. However, you will have to deal with the platform’s fees with every sale, on top of wholesale drop shipping product fees.
Creating your own website can be a bit more expensive initially, but if you’re in it for the long run, it will help you earn a higher profit margin and give you the flexibility to develop your own brand. Ultimately, your final decision should depend on what your goals are for your company.
Do some additional market research to decide what you need to charge for each product as you begin to list them, keeping in mind how much your suppliers are charging for shipping and other fees.
You should also consider the fact that customers will need to be charged a sales tax, which can be as much as 9% depending on your state, on top of the product and shipping costs.
4. Set a Refund and Return Policy
Missing packages, defective products, incorrect items, or simply unhappy customers can all occur when you’re running a retail business. Having set policies for how you’ll respond will help you reduce miscommunication and even fraud as a store owner. Being upfront about your policies will also ensure your customers don’t feel cheated.
Many drop shipping suppliers and online marketplaces already have return policies of their own, so it’s important to consider how your policies will all fit together as you decide how to handle customer orders.
5. Register Your Business
Before you can operate your business, you need to decide what type of business entity you want to operate as.
Most drop shipping business owners choose to create limited liability companies (LLCs) because this business structure reduces your personal liability, offers great tax benefits, and is scalable.
To create an LLC, you’re required to file a document called the Articles of Organization with your secretary of state’s office.
In addition, drop shippers in the United States typically need to get a sales tax ID, sometimes called a seller’s permit or reseller’s license, registered in your state. You can search online for “sales tax ID” with your state name to figure out which state department you need to register with.
6. Create a Marketing Plan
The final step to building your drop shipping business is developing your marketing objectives, which you will use to form your marketing plan.
Think about who your ideal customers are and how you can best reach them. Some popular marketing strategies for drop shipping businesses include:
- Social media marketing:Facebook ads and Instagram ads are often used to promote consumer products.
- Search engine optimization (SEO): This involves using keywords on your site or product listings to get found.
- Influencer marketing: You can work with social media influencers, bloggers, and industry leaders to promote your products.
Frequently Asked Questions
Drop shipping business models are a great option for aspiring entrepreneurs who want to minimize the risks of starting a business. Here are some frequently asked questions about how drop shipping works:
1. How much higher should my retail price be than the wholesale price?
Most traditional retailers opt for a 50% markup. If a supplier charges $10 for an item, it’s standard for retailers to charge buyers $15. However, many drop shipping business owners aim for at least a 40% profit after all fees are considered, and many recommend aiming for a 100% markup when competitor prices allow.
2. How much can I make with a drop shipping business?
Just as with any other business, your income will depend on how much time you’re putting into your business, what you’re selling, and how effective your marketing tactics are. Full-time drop shippers certainly have the potential to make well above $60,000 per year, but others may make considerably less.
Still, drop shipping is a low-risk e-commerce business model due to the fact that you won’t have to put in a huge investment. You can even run a drop shipping company as a part-time job if desired.
3. Why aren’t any major brands drop shipping companies?
Since you’re not selling your own products, it can be difficult to build brand loyalty with your drop shipping company. In addition, since your entire line of products are being sold by various online retailers, many consumers will research on Google to find the lowest price, rather than specifically seek out your drop shipping store.
Start Your Low-Cost Business
Keeping your costs low can help you keep profits high. Running a drop shipping business naturally allows you to minimize costs straight from the start. In the long run, this business model will also ensure you never have to worry about inventory or shipping, so you can focus on selling.
No matter what type of business you’re running, you need to know how your business is doing to make sure the expenses aren’t eating away at your paycheck.