18 November 2021
Uber owns no vehicles. Facebook creates no content. And Airbnb owns no real estate. If you’ve been looking to start a business, you may have heard that statement before.
What each of those businesses does is simple. They provide a way for people who have something to easily connect with the people who need it. Cars and riders. Content and readers. Places to stay and travelers.
If you’ve ever thought to yourself, “Wow, that’s a great idea. I wish I had done that,” here’s some good news. You can, and it’s called dropshipping.
Curious to learn how to start dropshipping? We’re going to break it down for you.
So, what is a dropshipping business anyway? It's an online operation where you sell directly to customers without stocking any inventory. You don’t need a physical store and you don’t need a manufacturing facility, shipping center, or warehouse.
When you receive an order from a customer, you contact your supplier. The supplier packages and ships the product to your customer. You collect the money from your customer, pay your supplier, and pocket the rest for yourself.
There’s a good chance you may be having one of two reactions right now.
The truth is, neither of those is entirely true or false. As with many things in life, there’s a gray area between the two that’s a lot more accurate. So let’s take a look at both the benefits and challenges you’ll likely run into when you start a dropshipping business.
As we mentioned above, there’s usually no inventory to buy. That also means you don’t need a warehouse to hold your inventory, and you don’t need a store in which to sell it.
A website, a supplier (or suppliers), and an e-commerce platform (more on this later) can be all you need to start a dropshipping business. Many website hosting and e-commerce platform services are subscription-based, which can mean your financial commitment to them is often only month-to-month or year-to-year.
Being able to get up and running without risking your savings or taking on a large amount of debt has another advantage. You don’t need to generate a ton of sales right off the bat to cover your costs.
That means you can keep the security of your day job, if you want, and move into your dropshipping business full-time when it works best for you.
The cost of your inventory isn’t just the price of each product. The costs of shipping, packaging, and warehousing those items can take a bite out of the profit you might get from selling them.
In addition, there’s the labor and logistics involved with getting a product through the supply chain and into your customer’s hands. With dropshipping, the costs, coordination, and labor are usually handled by your supplier.
Working with suppliers also can make it easier to sell products that may require special storage or shipping, such as perishable food or fragile items.
While the business world has its share of success stories that started small in a garage, you don’t need to sacrifice your sheltered parking space to launch your dropshipping business.
If you have an internet service, you can connect to your customers and coordinate with your suppliers from just about anywhere. Which means your world headquarters could be almost anywhere in the world.
Is that mineral-rich volcanic face moisturizer no longer selling well? Do you see an opportunity to offer a line of organic teas to complement your memory foam yoga mats?
A key benefit to consider when you’re thinking about how to start a dropshipping business is how quickly and easily you can change what you sell. It’s often just a matter of finding the right supplier and featuring your new merchandise on your site.
Being able to quickly find and source different suppliers also can be an advantage when products become scarce (remember toilet paper in 2020?), or they suddenly become popular (hello, sweatpants, also in 2020).
While offloading the manufacturing, product storage, and shipping to suppliers can make your life easier, it does come at a cost: a lower profit margin. That’s not ideal for a business, but it’s a challenge you can overcome by having a higher sales volume.
Supermarkets have traditionally been low-margin operations, but many have been able to prosper by moving a lot of products out the door.
A big consideration for how to start dropshipping is what you’ll be selling. We’ll cover this in more depth later, but it’s a key decision that can make or break your dropshipping business.
Having what a lot of people want is not just a matter of choosing the right products; it’s also about having the right amount available to sell. That often means relying on your suppliers to have what you need when you need it.
Since you can’t stroll through your own warehouse, it can be harder to keep an eye on your inventory. Your suppliers also may be handling orders for other dropshippers, which can affect the number of products they (and you) have available.
One way you can stay on top of your inventory is with technology. There are a number of dropshipping apps and software that can help track inventory, as well as several other business operations we’ll talk about a bit later.
As we said, to make a lot, you need to sell a lot. And to sell a lot, you’ll likely need more than one supplier, especially if you’re selling a variety of products (just like the supermarket).
If you’re a believer in not putting all your eggs in one basket, you’ll probably see another advantage in having more than one supplier. If you have multiple sources for some or many of your products, it’s possible to have a backup if a supplier can’t fulfill an order.
At the same time, it can be difficult to keep track of many eggs in many baskets. If a customer orders several products, you could have multiple suppliers involved in sourcing and shipping. That may create multiple shipping charges that you’ll have to absorb or pass on to your customer.
It also can result in different shipping schedules, which may delay the arrival of some of the items. And that’s usually not a great experience for your customer.
Even when you can control shipping costs and delivery schedules, you’re still at the mercy of your supplier. If they make a mistake and the product goes to the wrong address, or if it arrives damaged, the customer will likely blame you. Not a good look for your business.
“A dropshipper walks into a room … and it’s filled with dropshippers.”
What sounds like the opening line of a joke is actually a pretty good observation about the dropshipping business.
Just a few years ago, the global dropshipping market was valued at $102.2 billion. It’s expected to grow 28.8% by 2025. Amazon has 1.5 million active sellers, with 500,000 of them coming on board in 2021.
That not only means you’re likely to be competing for customers — you’re also likely to be competing for suppliers. If you find suppliers charging more for a product and your competitors selling it for less, it could be challenging generating profitable sales.
At this point, if you feel like dropshipping is both easy and hard, simple and complicated, a risky business and a sure thing, it’s not surprising. Spend a little time researching “how to start dropshipping” online, and it’s not hard to see posts and videos about “making a lot of money” and “is it for real?”
How to start dropshipping is similar to how to start just about any small business. There are a lot of things to consider. We know. We’ve written about many of them, and we still haven’t run out of article ideas.
There are some basics that apply to starting almost any business. In fact, we have an article that covers those basics that you might want to start with.
From there, we can start looking at the steps you can take to get your dropshipping business going.
Just about every successful business started with an idea. While that may seem like an obvious statement, having a good idea — a unique or distinctive idea — can make a big difference in the dropshipping world.
While you’re thinking about dropshipping business ideas, think about your local supermarket again. Let’s say you found a great recipe for Khao Man Gai and you want to whip up a batch for dinner tonight. The recipe calls for Thai chili peppers and fermented soy beans.
Unfortunately, your local store doesn’t carry either of those.
In fact, the only place you can find those ingredients is a little shop 10 miles away. So you make the trip, shell out some cash (who knew Thai chili peppers were that expensive?), and go home to create your Southeast Asian masterpiece.
This is a great example of being the only one (or one of the few) who has a product that someone needs or wants. If there are a lot of people who like Thai cuisine, that little shop could be a profitable business.
One way to land on a good idea for a dropshipping business is to ask, “What will my online store offer that others (or relatively few others) offer?” That’s often referred to as a Unique Selling Proposition (USP).
We get it. It’s not always easy to come up with a product that’s both unique or hard to find and is in high demand by a lot of people. In that case, you could consider focusing on the “high demand” part.
To find out where the demand is, go to where a lot of people are shopping. In the online world that’s usually a big ecommerce site such as Amazon or Ebay. Check out the bestseller lists to see what’s hot. You also can pick up on trending products by monitoring your social channels.
OK careful reader, you may be asking “If big shopping platforms are already selling a hot product, how can I compete with them?”
It’s a good question. If you see a lot of competition, that's a sure sign of a big, healthy, profitable market. Profitably selling that same product could be a challenge.
Rather than keying in the specific product, focus on the market.
For example, if yoga mats are in demand, it may be a sign that yoga is a profitable market. Think about what products those customers might also be interested in:. yoga clothing, yoga videos, health and wellness products, hydration systems.
The good news is that whatever dropshipping business ideas you land on, there’s likely a supplier who can provide and ship products for them.
If yoga is hot, but you don’t know a Downward Facing Dog pose from a Half Lord of the Fishes, and have little interest in finding out just to sell some products, don't worry. Another approach is to focus on something you’re into.
Do you collect sports memorabilia? Perhaps you’re an organic gardener. Or maybe you enjoy building model trains. If you have a passion or a hobby, you can use that as a way to find dropshipping business ideas.
A big advantage of this approach is that you’re already a customer in this market, so have a good understanding of what types of products people might want to buy and where the trends are headed.
Along with being knowledgeable, you’re also passionate about your particular niche. That can help when you’re trying to connect with customers through your marketing, which we’ll cover later on.
Plus, loving what you’re doing can be a crucial ingredient to running a successful business.
If you’re dealing with small profit margins, then you need to sell a lot of products to make money (remember the supermarket?). One way is to sell to many customers. Another is to sell to those customers many times.
When considering a product, think about how often a customer might need it. A vintage HO steam locomotive might be a once-in-a-lifetime purchase for a model railroader, but paper towels are something they’ll need over and over again.
Because dropshipping can be a relatively simple and low-cost way to start a business, it’s easy to get overly excited and start too quickly. The e-commerce company, Shopify, estimates only 10% to 20% of dropshipping businesses succeed.
If you’re looking at how to start dropshipping, you should focus on the “business” part before the “dropshipping” part. A good way to do that is with a business plan.
A business plan can serve as a roadmap. And like a map, it will include important milestones so you can measure how well your business is doing. A business plan can help in other ways as well, such as applying for a business loan or attracting investors.
Here’s some good news. Creating a business plan doesn’t have to be as intimidating as it may sound. We have an easy-to-use template designed specifically for small business owners.
It will help you cover many important areas related to your business without taking up a lot of your time.
This will be one of the items you’ll likely cover when creating your business plan. The business structure you choose can affect important issues, such as taxes, asset protection, and liability.
When deciding on any business structure, It’s a good idea to consult with an attorney or business advisor.
Here’s a brief breakdown of the most common structures for small businesses.
Sole proprietorship — If you want to get started quickly and easily, a sole proprietorship may be the way to go. It’s typically owned and run by one person (although you may have employees), and there is generally less paperwork involved and lower startup fees.
However, there’s no legal distinction between you and the business, which can put your personal assets at risk if the business can’t cover its debts, losses, or liabilities.
Partnership — While a sole proprietorship is often a one-person operation, a partnership is a business that’s owned and sometimes run by two or more people or entities. Each partner gets a share of any profits, but they’re also responsible for any losses.
Limited liability corporation (LLC) — Unlike a sole proprietorship or partnership, an LLC is a separate business entity. That means it can provide more protection for your personal assets. At the same time, an LLC can often be more expensive to set up and operate.
Corporation — A corporation is a close cousin of the LLC. The big difference is that it offers stronger protection from personal liability. Another difference is that corporations often cost more to set up than other structures. You also will have to keep and maintain more extensive records, operational processes, and reports.
An EIN is an employer identification number. It’s free and relatively easy to get from the IRS once you’ve registered your business. This will make tax reporting easier and is helpful if you’re bringing on employees or independent contractors.
You’ll also need it to open a business bank account. Depending on the business structure you choose, a business account may be required. Even if it’s not, it still can be a good idea.
A business bank account allows you to accept credit card payments, which you’ll almost certainly have to do with a dropshipping business. It also can make tax reporting easier and help build a credit history for your business.
There are a number of licenses and permits you may need to sell online. These can often vary by the state you’re operating in, so it’s a good idea to check with your local government agencies and offices.
When you do some research into licenses and permits, you’re likely to run into a wide variety of them. Here are some of the most common types and a brief overview of what they typically cover.
You’ll most likely need a business license. What type (federal, state, local) often depends on where you’re operating your business and what types of products you’re selling.
Federal business licenses — If you sell products that are heavily regulated, such as animal products, alcoholic beverages, and explosives, you’ll need a federal business license.
State business licenses — License requirements vary among states based on your type of business and what you sell. We break down some of the business license requirements for each state here, but you also should check with your local business agency or department of commerce.
If you sell products that are subject to sales tax (and many are), most states require you to obtain a seller’s permit. The permit allows you to collect sales tax and forward it to your state government.
Some seller’s permits also allow you to buy products from suppliers without requiring sales tax. Each state has its own rules around sellers’ permits and taxes, so that’s another one to make sure to check out in your area.
If you operate in multiple states or jurisdictions, you also may need seller’s permits for those locations. Also, if your business is in one state and your inventory is located in another state, you may need licenses and permits for both states.
You may be required to have a permit if you’re running a business out of your home. This can apply to a dropshipping business, especially If you’re shipping products from your home. Again, the rules can vary by location, so it’s best to check with your local government agency and state.
If you're operating as a sole proprietorship or a general partnership you’ll most likely use your legal name (and your partners’s, if there are any) as the business name.
If you want to operate under a different name, you’ll likely need a DBA license so that you can legally open bank accounts and conduct other business activities using that name.
Once you have your business covered in terms of licenses and permits, it’s time to think about how to financially protect it from risk.
You may be thinking, “I don’t have a storefront. I don’t manufacture anything. I don’t even have inventory. How much risk is there if I’m just connecting buyers with suppliers?”
Here are a few examples of common risks that online business owners may face:
Having little quality control. Since someone is likely making and shipping the products you sell directly to your customer, it can be hard to spot defective items ahead of time.
If a product causes damage or injury, you could be sued. For instance, if an electrical item you sold had faulty wiring and caught on fire, you could be liable if there was damage to the customer’s home.
It’s also possible you could be on the hook if another product, such as skin cream, caused a customer’s allergic reaction.
Limited protection with homeowners insurance. While you may be running a dropshipping empire from a suburban ranch house, your homeowners insurance likely won’t cover any business-related accidents that occur in your home.
Advertising injury. Marketing is often a crucial part to a successful dropshipping business. Your website, social networks, and other marketing channels can expose your business to risks you may not have thought of. Those risks can include claims of stolen ideas, invasion of privacy, libel, slander, and copyright infringement.
For example, you might claim a competitor’s product is made with an inferior ingredient. You later find out that it’s not true and your unhappy competitor claims they lost sales and sues you for libel.
Even a seemingly harmless action could result in a legal claim. For instance, you use a customer’s glowing review of your product without their permission. They then sue you for violating their privacy.
Having e-commerce insurance that includes general liability (GL) coverage can help protect you from the financial impact of dropshipping business risks. For example:
OK, now you might be thinking, “That’s a lot more information about risk and insurance than I expected.”
We totally get that. That’s why we go out of our way to not only help small business owners find e-commerce insurance, we help them understand what they’re buying.
Spend 10 minutes online and we can find coverage options for you from some of the nation’s leading insurers.
We can do the same thing on the phone as well. Our licensed insurance agents are available Monday through Friday, 8 a.m. to 8 p.m. ET. Just call 844-654-7272.
Whichever way you choose, we can often find general liability policies for e-commerce sellers for as low as $22.50/month.
Get an affordable & customized policy in just minutes. So you can get back to what matters: Your business.Start Here >
Risks to your business are one thing — threats to your business are another. Cyberattacks are on the rise. In fact, it has been reported that a hacker strikes on average every 39 seconds.
While firewalls and anti-virus software are good, they’re not perfect. Even if just one cyberattack is successful, the financial damage could be tens of thousands of dollars.
That’s why we recommend adding cyber insurance to your business coverage, if available. And just like general liability, we make it fast, easy, and affordable to get protected.
You can start right now and get a quote in under 60 seconds.
It’s time to turn your dropshipping business ideas into a dropshipping business.
Now that you’ve done the upfront planning work, you need three more things to set yourself up for dropshipping success:
Two options for sourcing and shipping your products are dropshipping marketplaces or direct-source suppliers.
If you’re looking for a plug-and-play solution to help get your business started faster, this could be a good option. These include companies such as Oberlo, AliExpress, and Doba, among others.
While the concept of dropshipping is relatively simple, the process can be involved. Using a marketplace can simplify and automate a lot of it. Here are just a few examples:
All of this convenience comes with a price, but profit margins with dropshipping marketplaces still can be about 15%-20%.
If you’re new to dropshipping or starting it as a side hustle, having a marketplace platform can make it easier to get up and running and get some experience under your belt.
Just keep in mind that other dropshippers have access to the same products as you do, so you may have to price your products more competitively.
If you’ve been working with a marketplace supplier for a while, you may want to consider building direct relationships with suppliers.
Along with potentially larger profit margins (the marketplace is not taking its cut from your sales), working directly with suppliers can give you the opportunity to brand more of what you sell.
This concept is known as “white label.” Your supplier still makes or sources the product, but they ship it to your customer with packaging that can include your logo and company branding.
You’re likely competing with many other dropshippers, so whatever you can do to stand out can be an advantage.
While it is possible to start your business working directly with suppliers, many have high volume requirements, which can be hard to meet for new owners. In addition, you’ll need to devote more time updating your website, forwarding orders, and other back-office tasks.
Whether you’re selling flannel shirts, rice cookers, or laser acupuncture pens, you need a place to sell them. That means an e-commerce website that’s easy to access, easy to use, and can attract a lot of customers.
As with suppliers, there are options when it comes to “building” your online store. You can work with an e-commerce marketplace or an e-commerce platform. While both can work for your dropshipping store, here's a brief breakdown of each to help you decide which might be better for your business.
If you’ve ever bought something from Amazon or Ebay, you’ve been to an e-commerce marketplace. These sites feature different products from different sellers all in one place. It’s sort of like the online version of a shopping mall.
Much like the mall, an e-commerce marketplace does a lot of the heavy lifting in terms of attracting customers. They also take care of processing transactions and many technical aspects of running your store. In return, they usually charge a fee on each sale you make.
That leaves just the sourcing and shipping to you and your supplier. Some sites, such as Amazon, can even take more off your plate by warehousing and shipping products for you.
Using a marketplace site also can make it easier to set up your website, but you’ll likely have to sacrifice some control over your branding for the convenience, and you’ll also have to adhere to their terms of service.
If you’re looking for more control and hands-on involvement in your online store, consider working with an e-commerce platform. There are a number of them to choose from, including names you may have heard of such as Shopify or BigCommerce.
You may want to consider your supplier when you look for an e-commerce platform. Some offer direct integrations (Oberlo and Shopify, for instance), which can make setting up and running your business easier and smoother.
While using a platform may not be as quick and easy as using a marketplace, it’s not so complicated that you’ll need a background in coding or programming. Many offer tutorials, articles, user forums, and other customer support that can answer questions and get you over any bumps in the road.
The overall structure of your site will likely be influenced by your type of business. You may find some e-commerce platforms better for product-focused business, while others cater more toward content-based businesses.
Product-focused site — Think of these more like your supermarket. Customers want to be able to see product images, descriptions, and specs. Like a good brick-and-mortar store, products are logically grouped together, and it’s easy to navigate through categories.
These sites can work well for products that can appeal to a wide range of customers, such as shoes, phone accessories, or pet supplies.
Content-focused site — If your business is geared toward a particular niche, say health and beauty, or a hobby like model railroading, you may want to create a content-focused site.
This type of online business usually has a more narrow but also more engaged audience. They’re not only looking for products and services, they also may be interested in content that offers advice, help, and insights.
Customers who come to your store for products may find added value in the content you offer. At the same time, visitors who come to your site for information also may buy products from you.
As we’ve mentioned several times, you’re likely to have a lot of company in the dropshipping world. For example, if you want more customers to buy home decor products from your store, you should think about ways to stand out from all the other sites selling home decor products.
A fast and easy way to put your website together is by using a website builder template They provide a layout and allow you to add images, videos, and text.
While this will get your site up and running relatively quickly, there also is a good chance that your site could look very much like other sites.
If you’re at the supermarket buying canned peaches and every brand uses the same packaging, lists the same ingredients, and describes their peaches the same way, which one would you choose?
Probably the one with the lowest price.
If you try to compete only on price, you’ll likely see lower and lower profit margins with your dropshipping store. If a competitor can operate with lower margins than you can, you could soon be out of business.
It can make a lot of sense for new dropshippers to start with a “theme” from a website builder. They're easy to use and some are even free. But there are some simple ways to enhance a theme to help your site stand out from others.
Write your own product descriptions. While many suppliers provide descriptions for their products, they often focus on features, not benefits. Consider explaining what a feature can do for a customer.
Rather than just saying a pair of socks are “100% cotton,” you may want to add “so they’ll feel comfortable all day long.” The feature is “100% cotton”; the benefit is the comfortable feel.
Add your logo. You can think of a logo as a brand fingerprint for your store. It’s an easy way to start differentiating your business from all the other ones.
And you don’t have to be an artist to create one, either.
There are online resources, like Fiverr and Canva, that can help you build a logo for your store without spending a lot of cash.
Create your own product images. This can be more difficult and expensive, especially for new business owners. However, there are some applications that can hhelp you alter or add a background to a supplier’s image to make it look different.
Another option to keep in mind is to ask your customers to take photos of your products, especially ones where they’re using them. Just make sure you get their permission before adding them to your site.
OK, you’ve built your dropshipping store. Now let’s get customers to flock there. This can be a critical part of launching your business.
There are a number of ways to boost traffic to your store. As a new business owner, it may be helpful to focus on some of the basic ones first.
Social media: Much like you’d use your social channels to share other news in your life, you also can use them to promote your online business. This is often called organic marketing.
Facebook and Google ads: In addition to posts on your social channels, both of these platforms let you buy and place ads for your business. Unlike traditional advertising, you can target your ad around specific keywords and audiences.
We’ve got a handy article to help you get started with Google ads here. We’ve got another one to help with Facebook advertising here.
Search engine optimization: When someone searches for a product that you sell, you want your website to show up near the top of the search results. There are a number of steps you can take to boost your ranking, and many website builders and e-commerce platforms offer tools to help, as we do with this article.
You’ve got email: Email can be an effective way to let customers, or potential customers, know about new products, special offers, or help content on your site.
A good e-commerce platform will have a plugging for email marketing tools and should allow your customers to opt in to receiving emails from you.
As a big supporter of small businesses, we offer a broad range of marketing information in our online resources center, Simply U.
Here are a few articles about marketing your business online that can help get you started:
How to Win New Business with Digital Marketing
8 Budget-Friendly Small Business Marketing Tips
Small Businesses: Your Cheat Sheet to Organic Digital Brand Marketing
OK, you’ve read the article. That’s a good sign. It shows you’ll take the time to become informed and educated on how to start a dropshipping business before jumping into what can easily look like a very attractive pool.
Dropshipping can be highly competitive. But a little competition can often be what some people need to tap into their creativity. With so many dropshippers offering so many of the same products, your creativity and ability to add value to your online store can play a big role in your success.
If you’ve been looking for a chance to flex your imagination and bring your vision to a small business, dropshipping could fill that order nicely.
* Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on August 2021 data of 43% of our total policies sold.
As a 9-year-old at summer camp, I hated it — especially after being pulled screaming from the pool during the swimming competition. While this left me without an aquatic achievement patch, it also inspired the letter to my parents that got me an early release from Camp Willard. That showed me the power of writing. I’ve done my best to use it only for good ever since, such as writing helpful articles for small business owners.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
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