Dropshipping is a business model in which you sell products without having them in stock. Its greatest benefit is low upfront costs, making it perfect for entrepreneurs who don't have a lot of capital.
Let's take an in-depth look at what dropshipping is and how you can start your own dropshipping business.
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What Is Dropshipping?
Dropshipping is a business model that allows owners to sell products without physical inventory.
Instead, you fulfill the order by purchasing the product from a third party and have it shipped directly to the customer.
Since your business doesn't have any actual inventory, you don't have to worry about having warehouse space, inventory management
, or inventory financing
How Does Dropshipping Work?
With this business model, you partner with a manufacturer or wholesaler to fulfill customer orders.
Whenever a customer purchases an item, you buy it from your supplier. The supplier, in turn, would then send the products directly to your customers.
As a result, you never have to see or handle the products.
This means you don't have to worry about having unsold inventory.
Learn how to negotiate with your suppliers to increase your profit margins.
The Dropshipping Supply Chain
The dropshipping supply chain has 3 crucial links:
- Manufacturer. Manufacturers are the businesses that make the products. They, in turn, sell their merchandise to suppliers and wholesalers. They usually prefer to sell in bulk to offer the best price and quickly move merchandise.
- Supplier/wholesaler. These businesses buy products from manufacturers. Then, they sell it to interested retailers or dropshippers. They usually develop a specific line of products to reach a particular market.
- Retailer. Individuals that supply products directly to consumers. They price products fairly, so shoppers buy their products and can still profit. If you get into dropshipping, you'll be the retailer.
Sometimes, the supplier will be the same as the manufacturer.
How Do Dropshippers Make Money?
To make a profit, dropshippers must price their products to cover their costs and realize a net gain
- find a market area where they excel
- make their dropshipping store fully automated
- offer top-notch customer service
Dropshippers can also improve their profits by:
- establishing a solid presence in the marketplace
- attending e-commerce events to find new products
- marketing their best-selling items to wholesalers
A drop shipper retains customers and add new ones to increase sales.
Pros And Cons
Dropshipping, like any business model, has plenty of advantages and disadvantages.
It doesn't need nearly as much capital as traditional retail business models.
You never have to buy inventory until you make a sale.
As such, it's possible to start your own business without having a lot of startup money.
Easy To Start
Dropshipping businesses are also straightforward to start.
You don't have to invest in storefront properties or warehouses.
You also don't have to worry about managing inventory, packing and shipping products, or handling returns.
Dropshipping businesses typically operate online.
Therefore, you don't have to worry about picking the right location for your store. As long as you have an internet connection, you're good to go.
Out Of Stock
Since you don't own dropship inventory, you must depend on your suppliers
. If a customer places an order and your supplier doesn't have that item in stock, you could run into some issues.
Since anybody can dropship, you'll likely be facing a lot of competition
— especially when it comes to pricing.
Dropshippers often offer products at low prices to attract new customers. This can make it difficult to compete if you cannot match those prices.
When running a dropshipping business, you depend on your suppliers for high-quality service. If they accidentally ship a wrong or broken item, you have to take responsibility
, damaging your reputation.
How To Start A Dropshipping Business
Starting a dropshipping business is relatively easy. All you have to do is follow a few simple steps to get going.
1. Choose A Niche
First, you need to decide what type of business you want to start.
What products are you going to sell?
It's essential to focus on finding something in demand but not oversaturated.
You can sell pretty much anything you want to, including:
- Gardening supplies
- Sporting Goods
Start by evaluating your interests and go from there.
2. Pick A Supplier
It's crucial to find a supplier that carries all the products you want to sell, has a good reputation, and offers competitive prices.
When you start a dropshipping business, your supplier will be your most important business partner.
It's essential to do your due diligence and find the best match for you.
You can also work with several suppliers.
3. Make A Website
Next, you need to build your eCommerce website. This is where your customer will go to browse and buy your products. You can either create your online shop from scratch or choose an already established platform.
Your online storefront needs to be visually attractive.
There are plenty of platforms to choose from, including:
These platforms make it easy to start your own online store.
4. Get A Sales Tax ID
If you're starting a retail business in the U.S., you'll typically need to get a sales tax ID — unless you live in one of the few states that don't have sales tax.
To get one, you'll likely need to establish yourself as a sole proprietor
. It's important to collect the exact amount of sales tax required by your state. Otherwise, the client will hold you responsible for the difference.
Lastly, you need to perform research to keep up with your competition and get new customers
You'll be competing with other dropshippers and large retailers, so you need to be able to research to determine your target market, pricing, and more.
By following these easy steps, you can get your dropshipping business up and running in no time.
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How Much Do I Need To Invest To Start Dropshipping?
These are the typical estimated costs to start a dropshipping business.
You can either create your online store or pay someone to do it, which increases your cost.
On average, expect to spend about $30/month
for a web hosting service such as Shopify.
These e-commerce platforms help you find dropshipping products and provide website themes to build your site quickly.
Having a domain name helps you brand your business and build customer trust.
Pricing ranges from $5 to $20 or more per year
A small budget of $500 to $1,000
allows you to market products through content advertising and word of mouth via social media outlets.
To reach customers, you need to invest in search engine, social media, and mobile advertising.
Set a beginning budget of $100
to order products from your suppliers. Then, evaluate the overall process, from placing an order to having it delivered.
How To Cut Costs
A drop shipping business is, by nature, less expensive than other business models. Still, there are some hacks that'll allow you to cut costs.
Get a loan for your drop-shipping Business
- If e-commerce platforms offer free trials, see if they will extend the offer until you start getting sales.
- In the meantime, write content for your pages, create a logo, and take an online drop-shipping course to get ready to launch your business.
- Take advantage of free YouTube videos on how to start a dropshipping business.
- An introductory dropshipping online course starts at $29.00/month, but some are free. Understanding the ins and outs of the industry will allow you to minimize costs.
Best dropshipping products
Here are some of the best dropshipping products that sell very well:
- Clothes and accessories (tracksuits, leggings, jeans, slides, rings, backpacks, hair accessories, makeup)
- Home products (portable blenders, kettles, teas, doormats, pet beds, soap dishes, curtains, blankets, pillows, lams, smart plugs)
- Smartphone accessories (tripods, beauty lights, cases)
- Health and personal care products (face masks, ecologic and specialized toothbrushes, sleep masks, yoga mats, beauty products)
How To Find Suppliers
As we mentioned before, your supplier will likely be your most important business partner. You'll rely on them to fulfill orders, offer reasonable prices, and provide excellent customer service.
But how can you find a good dropshipping supplier?
The two most common and easiest ways to find dropshippers are: use a wholesale directory or search online.
Wholesale directories, like SaleHoo, provide lists of reputable wholesalers. These resources can save you a lot of time in your search for a quality third-party supplier.
Alternatively, you can simply search online for wholesalers or manufacturers in your chosen niche. For example, Alibaba and Aliexpress are common online suppliers used by dropshippers worldwide.
Lastly, you can use apps to source products from third-party suppliers. The Shopify App Store can guide you to apps like these that make suppliers easy to find.
How To Choose The Best Dropshipping Suppliers
Vetting potential suppliers is time-consuming but pays off in the long term. So your goal is to find reliable suppliers to partner with for the long haul.
When choosing suppliers, ask about the product quality and shipping and return policies.
Don't forget to ask about their shipping fees.
The best suppliers have the same high business standards that you do.
Namely, how they handle returns, how quickly they process orders, and how timely they respond to customer inquiries. Make sure to read customer reviews to see how pleased shoppers are with the supplier's service.
The best suppliers are willing to sign a drop shipping agreement detailing the business arrangement and expectations between the seller and the supplier.
The agreement protects all parties involved, especially customers.
Best Dropshipping Suppliers
Here are some of the 10 best supplier dropshipping websites:
Tips For A Successful Dropshipping Business
If you want to become a dropshipping retailer, follow these tips.
Choose Products Carefully
Customers usually shop online to find products they can't find where they live. Do market research to discover which products sell and are easy to ship.
Be Picky About Suppliers
Using the wrong third-party supplier can ruin the reputation of your online store.
If you start getting complaints, it's time to find better suppliers that deliver packages on time and package products safely.
Spend Time Building Your Website
Shopping is fun for customers when sites are user-friendly and provide ample information about the products.
Your website needs to load quickly on all types of devices.
Develop A Reputable Business
Customers trust e-commerce sites that are:
- deliver products quickly and efficiently
- responsive when it comes to customer service
Marketing your products is one of the most important aspects of a dropshipping business to reach more customers. So keep optimizing your SEO keywords to drive traffic.
What Websites Allow Dropshipping?
- Amazon dropshipping. The company allows you to set up an eCommerce store and charges fees ranging from 10% to 15%. Make sure to review Amazon's drop shipping policy before using their platform.
- Shopify dropshipping store. You can dropship if you want to because this is a store you create from scratch.
- AliExpress dropshipping. This online marketplace allows drop shipping to any location globally. It works similarly to other websites where customers order products while browsing your online store. Suppliers ship products directly to your customers.
- Alibaba dropshipping. You can dropship using Alibaba, but most businesses don't sell or ship items to consumers. Instead, it's more of a business-to-business marketplace where companies look for partners.
- eBay dropshipping. The website allows dropshipping but emphasizes that sellers must fulfill orders using a wholesale supplier and ensure that customers receive packages within the timeframe advertised. Dropshippers aren't allowed to buy items from another retailer that ships directly to the drop shipper's customer.
If you want to learn more about dropshipping, why not try these courses?
- Oberlo 101. This course is for beginners that want to learn the basics of dropshipping. Oberlo provides a Shopify app that connects merchants to suppliers. In addition, the course provides tips and insights from successful dropshipping entrepreneurs.
- Shopify AliExpress. Students learn how to build an e-commerce store, find the best products, and get customers to shop at their stores. The course also focuses on how to reach sales of $100,000+.
- eCom Elites. The course has over 170 instructional videos ranging from 10 minutes to 1 hour. Plus, students get individualized hands-on help to set up a store.
Beware Of Dropshipping Scams
The most common scam you'll run into is fake suppliers.
Meaning people pretend to be suppliers without actually having the products you want to sell.
They'll try to sell you in on a "get rich quick scheme" by pretending that they have these products, collect payment from you, and never ship your products.
This results in you losing money and ruining your reputation as customers never receive their products.
To avoid this, it's important to find reputable retailers.
Search for feedback about the supplier you're talking to, ask for the suppliers' business license, and ask for details on their products.
By identifying phony suppliers, you can avoid falling victim to drop shipping scams.
Dropshipping During A Global Crisis
2020's global health crisis affected millions of businesses. As a result, many store owners decided to update their businesses by moving them online.
After all, e-commerces have proved to be a fantastic alternative to keep existing businesses afloat.
But that might not be true for drop shipping businesses.
Dropshipping suppliers might face restrictions that disrupt their operations.
For example, during the COVID pandemic, suppliers in China had to close. If that wasn't enough, logistic companies and cargo services did the same. All of this translated to delays that, in some cases, lasted several months, which was bad news for business.
You need to make sure that:
- your supplier is open
- their country is shipping
- the country of your customer is receiving international shipments
Start Your Dropshipping Business
Starting your own business is gratifying and challenging. However, it requires a lot of time and energy and forces you to make several tough decisions.
The first major decision you have to make is deciding what type of business you want to start.
This is an essential step as it's hard to go back and change course once you've gotten started. If you're struggling to choose what type of business to open, you can consider drop shipping.
It's essential to learn as much about the business model you choose to avoid wasting your time and money.
At Camino Financial, we pride ourselves on providing expert advice and financing to small business owners like you.
Our motto of "No Business Left Behind" is what inspires us to offer financial products that can help you grow or start your business.
We can give you financing no matter what business model you decide on.
So, why not apply for a startup business loan?
Is dropshipping legal?
Yes, it is, but for online businesses to be competitive and considered legitimate enterprises, they should:
- get a business license
- adhere to sales tax and income tax requirements
- develop legal agreements to protect the consumer
Is dropshipping worth it?
Dropshippers have lower overhead costs and can make money, but it involves an investment of time, money, and hard work.
Success doesn't happen overnight because a drop shipper must market its products and build a repeat customer base.
What's the difference between dropshipping and retail arbitrage?
Dropshippers sell directly to customers but the wholesale suppliers are the ones that ship the products.
Retail arbitrage entails purchasing products from other retailers at a discount and selling them at a higher price.
Is dropshipping profitable?
It can be if the drop shipper:
Dropshippers have lower business costs and can generally profit quicker than other businesses with more overhead expenses.
- works with reputable suppliers
- sells products customers want
- offers products that are easy to ship, and priced competitively
Do dropshippers ship internationally?
Some dropshippers offer worldwide shipping, but they must meet each country's regulations.
International dropshippers incur more costs to cover:
- customs fees and insurance
- software tracking systems
- increased shipping rates
Do I need to register a business entity to dropship?
There's no reason to set up a business entity beyond a sole proprietorship until you start building sales.
As your business expands, you should meet with an accountant and lawyer to discuss which business entity offers the most financial benefits and liability protection.