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You’re not alone if you’re trying to figure out how to start a drop shipping business—today, 33% of eCommerce stores use drop shipping as a fulfillment method, and with the eCommerce industry growing at a 17% clip annually, drop shipping is only expected to grow.
You might wonder where to begin if you are interested in starting this type of eCommerce business. We can help.
With this guide, we’ll explain everything you need to know about starting a drop shipping business, including what drop shipping is, how it works, how to source products, and how to find suppliers.
Drop shipping – what is it?
You’ll need to determine if drop shipping is the right type of business model for you before learning how to start one. It is important to understand exactly what drop shipping is and how it works before you make this decision.
Drop shipping is a way of eCommerce order fulfillment that allows you to sell products on your website without being directly responsible for the warehousing or shipping. The products are purchased wholesale from manufacturers or drop shipping suppliers, which handle fulfillment for you.
Drop shipping: what does it entail?
Let’s take a closer look at how drop shipping works.
The drop shipping business model of eCommerce involves three parties: the retailer, the customer, and the supplier or manufacturer.
The drop shipping process, therefore, can be summed up like this:
- Your eCommerce website is visited by a customer who purchases a product.
- The order information is sent to your dropship supplier.
- Suppliers pick, pack, and ship products to customers directly.
Why would you decide to learn how to start a dropshipping business over another type of business?
Since dropshipping makes starting an eCommerce business easy, it has become a popular business model. Adding new products to your catalog is as easy as a few clicks, and shipping is handled from the get-go. You don’t have to pay for inventory or warehousing, and if your products ever lose popularity, you can simply change them out.
Additionally, the startup costs are low. Many dropshippers won’t charge you a fee to work with them, so you only buy what you can sell. In addition, dropshippers provide their vendors with cheaper and more efficient shipping than they would otherwise get. You only need to pay for your eCommerce website and internet connection.
In addition, most dropshipping services allow you to print your own labels, so your customers won’t even know you’re a dropshipper.
Dropshipping probably sounds too good to be true at this point. The dropshipping industry is highly competitive because many people think the same thing. With all this competition, profit margins are low as merchants compete to offer the lowest prices on popular items.
There is a vicious cycle here, as you need to do a lot of business to compensate for your low-profit margins, but you have a lot of competition for every sale. You are also at the mercy of the manufacturers or suppliers you work with since they handle fulfillment and returns, but you have to deal with the customer.
Dropshippers may also find it difficult to build a brand because they sell products from other companies.
Five steps to starting a dropshipping business
If dropshipping is right for you, it’s up to you to decide.
Having said that, if you do decide to learn how to start a dropshipping business, you can make it simpler by breaking it down into smaller, more manageable steps, as follows:
Step 1: Determine the logistics.
As a general rule, the first step to starting a dropshipping business is to go through the necessary paperwork and other steps. Learning how to start a dropshipping business is generally equitable to starting any type of business after this step.
In the process of setting up your business, you’ll want to:
- Register your business name and DBA (if applicable).
- Decide which business structure best suits your needs (sole proprietorship, LLC).
- Obtain an employer identification number (EIN) for tax purposes.
- You may need to acquire business licenses and permits from your federal, state, county, and local governments, depending on where you do business and what you are selling.
Licenses for dropshipping businesses
In addition to the general operating license that may be required for you to start a dropshipping business in your state, there are a few other business licenses to obtain before you can sell online.
- Many states require you to obtain a seller’s permit if you sell products that can be taxed. If you need a seller’s permit and how to obtain one, it will depend on your state. For more information, contact your local business agency or department of commerce.
- A sales tax license is similar to a seller’s permit in that it allows you to charge and collect sales tax. In most states and cities, the specific sales tax requirements and licenses you need to meet will be determined by the state and city in which you live, so again, you should consult local government agencies to make sure you’re following the right guidelines.
- You may be required to obtain a home occupation permit in some areas if you operate a business out of your home. In most cases, this applies to online sellers who ship products from their homes. However, the details vary based on the seller’s location. For this reason, you should consult your local government agency to determine whether or not a license is required for your dropshipping business.
Step 2: Select a market and a niche.
Having completed all of the standard tasks, the next step is to narrow down the specifics of your dropshipping business idea.
As a dropshipper, your competitors and you have access to the same products and work with suppliers who offer similar levels of service. As a result, your marketing efforts will be the greatest differentiator between your business and your competition. To market successfully, you must identify a target demographic and sell a product that speaks to them in some way.
Here are some tips you can follow if you’re looking for the right dropshipping niche for your business.
Finding a niche in dropshipping
- You can sell what you know if you consider what interests you. Think about your own interests when choosing a product to sell. If you like it, chances are others do too.
- Identify a specific market: When you first start, it is a good idea to target a smaller subset of people so you can tailor your business to meet their specific needs. People who practice tae kwon do, for example, or pescatarians, are examples of specific markets. Your goal is to find a product and market that interest you already.
- Conduct keyword research via Jaaxy to see if there is any search volume around the products you wish to sell to help you identify a niche. The higher the search volume, the greater the demand for that product.
- Another way to discover products in demand is to check the “best selling” lists on major eCommerce marketplaces like Amazon. Additionally, you can perform a simple Google search or use keyword tools to see how many people are searching for the product or niche you’re considering.
- Find out what people in your niche are engaging with on major social media platforms, such as Reddit, Facebook, and YouTube.
- Research your competition once you’ve identified a niche market. Consult similar platforms, such as Google, Amazon, eBay, and social media, to see how your competitors in the space are selling their products. A niche that has some competition will indicate there is customer demand and profits to be made, but it shouldn’t be so competitive that you won’t be able to stand out amongst the other sellers offering that product. To better understand keyword research read this lesson “Understanding Keywords.”
- Once you have identified a market and a product, you will want to evaluate the profitability of your concept. When dropshipping margins are so low, you want to make sure you can actually make money in your niche. Dropship supplier directory SaleHoo recommends selling a non-seasonal product that is not dominated by major brands, is cheap to ship, and retails for at least $15.
Finding a niche can be one of the most time-consuming steps in learning how to start a dropshipping business. It is, however, important to take the time to identify the right niche in order to put your business in the best position for success.
Step 3: Locate the right supplier.
The next step is to find a supplier that sells the product you want to target. So, if you’re wondering where to source products for dropshipping, the process shouldn’t be nearly as difficult as locating a niche-as there are a variety of dropship suppliers out there offering millions of products.
Having said this, your dropship supplier is a key partner in your business. We recommend prioritizing the following criteria when choosing a supplier:
- Make sure your supplier has experience in the dropshipping business and also provides good customer service. You can check out their Net Promoter Score and what others are saying about them on review websites like TrustPilot and Better Business Bureau before you contact them.
- Because margins are so low, you want a dropshipper that won’t charge unreasonable fees. Salehoo says you shouldn’t pay more than $5 per item for stocking, packaging, and shipping. You may also be charged a monthly fee by some dropshippers.
- The expectation of dropshipping is that the product will arrive within one to two weeks (most dropshippers are located in China). Any longer and you may face backlash from your customers.
- Samples of products: A major occupational hazard with dropshipping is suppliers selling low-quality products. Request and receive samples of the products you wish to sell before contracting with any supplier.
- On request, a good supplier will provide you with referrals to other businesses they work with. Refusing to do so is a red flag.
Now that you know what to look for in a dropshipping supplier, let’s dive into how to actually find one.
Dropshipping suppliers: where to find them
If you’re looking for dropshipping suppliers, you essentially have two choices: dropship marketplaces and manufacturers.
Dropship marketplaces are the easiest way to get started if you’re new to dropshipping. They’re businesses that work with dropshippers. There are literally millions of different products that they purchase wholesale from manufacturers and importers and resell to vendors at a markup.
There are several plugins available from the major players in the industry that make it easy to integrate with your eCommerce website. While we encourage you to do your own research on dropshipping marketplaces, some names to be aware of are:
- Shopify integrates Oberlo for free
- AliExpress offers one of the largest dropship product marketplaces for free
- Integrated directly with BigCommerce and Shopify, Wholesale2B costs $24.99 per month
- Dropship Direct: Free service with over 100,000 products available
- Doba costs $29 per month and integrates directly into Shopify and Volusion
When you investigate any of the suppliers above or do a Google search for other marketplaces, you’ll want to make sure that you keep in mind the criteria we discussed—the right supplier should not only provide the products you need but also be affordable and a reliable dropshipping partner.
Manufacturers and importers
Dropshipping marketplaces give merchants an easy way to launch their business, but the real money is in working with manufacturers and importers. Because you can cut out the middleman (dropship marketplaces) and buy wholesale directly from the source.
However, manufacturers typically have average order volume thresholds that dropship rookies may not be able to meet. Additionally, they don’t usually offer seamless integration with your eCommerce platform, meaning you’ll have to do a lot more work to add and manage inventory. Therefore, we recommend waiting until you have established a foothold in the industry before selling direct source products and working with manufacturers.
When you’re first starting your dropshipping business, working with manufacturers may be too much, so you can check out the following directories to see what they have to offer:
- Maker’s Row
- Import Genius
For international manufacturers:
Finding the right supplier to source your dropshipping products can take time, just as identifying a niche takes time. Nonetheless, since your product supplier will be such an important aspect of your business, you should research your options to find the best one for you.
Step 4: Create your e-commerce website.
Currently, we have identified a market and aligned it with a supplier. Building the website where we will sell our products is the next step in learning how to start a dropshipping business.
There are two ways to do this. You can create an eCommerce store on a major marketplace like Amazon or eBay, or you can build your own website from scratch using an eCommerce platform like Shopify or WooCommerce. Let’s take a look at each option:
The advantage of selling on established marketplaces like Amazon is that they are easy to set up and users find them trustworthy.
If you use an eCommerce marketplace, you will have limited control over your store’s branding, design, and marketing as a merchant. You must also adhere to their terms of service and pay a fee on each sale you make through these platforms.
If you plan to be a dropshipper, we recommend building your own eCommerce website. You can set yourself apart from your competitors with marketing, and eCommerce websites offer you a lot more functionality in that regard.
There are a lot of good eCommerce platform providers out there. In part, the platform you choose for your business will depend on which dropshipping supplier you are using, since some offer direct integration. When you use Oberlo, for example, it makes sense to sell on Shopify.
When choosing a platform, consider what kind of store you want. Platforms like Shopify and BigCommerce offer a lot of functionality for product-focused stores.
Consider using WooCommerce, which integrates with the content management system WordPress, if you want your store to be more content-focused (which will benefit your marketing and SEO efforts).
Step 5: Optimize and market your website.
The last step will be to do everything you can to bring in customers once you have created and launched your dropshipping site.
Whatever platform you choose, you will need to market aggressively and optimize your site for search. Email marketing paid ads, and social media are typically used. Each eCommerce marketing method has its own advantages. You should choose a few that work best for you.
- The majority of eCommerce platforms have a plugin for an email marketing service like MailChimp. Get your customers’ emails and let them know about new products, sales, and content on your site each week.
- You can post ads for your website on Facebook and Google that will appear for relevant terms related to your business. Both allow you to reach a large audience and target your specific niche. You can also pay extra to ensure your ads reach your target audience.
- Posting content related to your business on Facebook, Instagram, Twitter, and other major social media platforms is a cost-effective way to market organically.
- The backbone of all your marketing efforts should be search engine optimization (SEO). The purpose of SEO is to improve your website’s ranking on search engines. You can improve your eCommerce SEO by working with a website builder that prioritizes SEO (like WooCommerce), engaging in keyword research-based content marketing, and building up your backlink profile.
After reading this guide, you should have a good understanding of how to start a dropshipping business.
The best way to differentiate your business from competitors is to create a highly focused concept, partner with the right supplier and eCommerce platform, and invest heavily in your marketing. Don’t think Drop Shipping is the right business for you, check out our “16 Ways to Make Money Online.”