Dropshipping is a form of ecommerce order fulfillment that allows merchants to sell products on their website that they are not themselves responsible for warehousing or shipping. Instead, merchants purchase products wholesale from manufacturers or dropshipping suppliers, which oversee fulfillment for them.
The process looks something like this:
- A customer buys a product on a merchant’s ecommerce website.
- The merchant sends the order information to their dropship supplier.
- The supplier picks, packs, and ships the product directly to the customer.
Today 33% of ecommerce stores use dropshipping as a fulfillment method, and with the ecommerce industry growing at a 17% clip annually, dropshipping’s popularity is only expected to increase.
In this guide we are going to talk about how to start a dropshipping business. But before we do, we want to discuss the advantages and disadvantages to dropshipping as a business model. Knowing the pros and cons will help you create a business with the greatest chance for success.
Dropshipping has become a popular business model because it makes starting an ecommerce business simple. Shipping is taken care of from the get-go, and adding new products to your catalogue is as simple as a few clicks. Your risk is minimized because you don’t have to pay for inventory or warehousing, and if the products you sell ever lose popularity you can simply change them out.
In addition, the upfront costs are minimal. You only buy what you know you can sell, and many dropshippers won’t charge you a fee to work with them. Plus, dropshippers offer cheaper and more efficient shipping for their vendors than they would otherwise get. All you have to pay for is your ecommerce website and internet connection.
Finally, most dropshipping services will allow you to provide your own labels, so your customers don’t even need to know you’re a dropshipper.
At this point dropshipping probably sounds too good to be true. Unfortunately, a lot of other people thought the same thing, which makes the dropshipping industry highly competitive. Because of all this competition, the profit margins are low as merchants compete to offer the lowest prices on popular items.
This is a vicious cycle, as you need to do a lot of business to compensate for your low profit margins, and yet you have a lot of competition for every sale. You are also at the mercy of the manufacturers or suppliers you work with, as they have control over fulfillment and returns, yet you have to deal with the customer.
It can also be harder to build a brand as a dropshipper, given that you are selling a variety of other businesses’ products.
How to Start a Dropshipping Business in 5 Steps
Step 1: Figure out the Logistics
If you understand the risk and reward of dropshipping and are still interested in proceeding, the first step is to leap a few bureaucratic hurdles. These include:
- Select and register your business name and DBA (if applicable).
- Decide on a business structure that best suits your needs (sole proprietorship, LLC).
- Acquire an employer identification number (EIN) for tax purposes.
- Depending on where you do business and what you are selling, you will need to acquire business licenses and permits from your federal, state, county, and local government.
Once you sort through the red tape of starting a business, you are ready to start the work of creating your dropshipping business.
Step 2: Identify a Market
In dropshipping, you and your competitors all have access to the same products and work with suppliers that offer similar levels of service. Therefore, the great differentiator between your business and your competition will be your marketing efforts. To market successfully, you need to identify a target demographic and sell a product that speaks to them in some way.
Here are some things to keep in mind as you refine your business concept:
- What interests you: It’s easier to sell what you know. Consider your own interests when looking for a product to sell. Chances are if you like it, other people are into it too.
- Identify a niche: When you first start, you want to focus on a smaller subset of people because you can tailor your business to meet their specific needs. An example of a niche would be people who practice tae kwon do, or pescatarians. Ideally, you’ll find a niche and a product that already interests you.
- Keyword research: To help you identify a niche, you should perform keyword research via Google Adwords and Trends to see if there is any search volume around the products you wish to sell. The higher the search volume, the higher the demand for that product.
- See what’s selling online: Another way to find products in demand is by checking “best selling” lists on major ecommerce marketplaces like Amazon and eBay.
- Social media engagement: Check to see what people in your niche are engaging with on major social media platforms, like Reddit, Facebook, and YouTube.
- Competition research: Once you’ve found a niche, research the competition in that space. If high demand is already being met with high supply, you’ll want to steer clear of that market.
- Evaluate profitability: Finally, once you have identified a market and a product, you’re going to want to evaluate the profitability of your concept. With dropshipping margins being so low, you want to ensure you can actually make money in your niche. The dropship supplier directory SaleHoo recommends selling a non-seasonal product that is not dominated by major brands, cheap to ship, and retails for at least $15.
Step 3: Find a Supplier
Once you settle on a niche you want to target with a specific product, it is time to find a supplier that sells that product. This shouldn’t be hard as there are many different dropship suppliers that offer millions of different products.
Your dropship supplier is a key partner in your business. To help you find the right one, we recommend prioritizing the following criteria:
- Experience: You want to make sure your supplier has a proven track record in the dropshipping business and also provides good customer service. Before reaching out, look up their Net Promoter Score and see what’s being said about them on review websites like TrustPilot and Better Business Bureau.
- Fees: With margins being so low, you want a dropshipper that won’t hit you with unreasonable fees. SalesHoo says you shouldn’t pay more than $5 per item for stocking, packaging, and shipping. Some dropshippers will also charge you a small monthly fee for working with them.
- Fast shipping: With dropshipping, the expectation is that the product will arrive within one to two weeks (most dropshippers are located in China). Any longer and you will likely face backlash from your customers.
- Product samples: A major occupational hazard with dropshipping is suppliers that sell products of low quality. Before contracting with any supplier, you should request and receive samples of the products you wish to sell.
- Referrals: A good supplier will provide you with referrals to other businesses they work with upon request. If they refuse, consider it a red flag.
Now that you know what to look for in a supplier, let’s talk about the two types of suppliers you can work with: dropship marketplaces and manufacturers.
Photo credit: Oberlo
For those new to dropshipping, the easiest way to get started is with dropship marketplaces. These are businesses that exist to work with ecommerce dropshippers. Most sell millions of different products that they purchase wholesale from manufacturers and importers and sell to vendors at a markup.
The major players in the industry offer special plugins to make integrating with your ecommerce website a cinch. While we encourage you to do your own research on dropshipping marketplaces, some names to be aware of include:
- Oberlo: Free service that integrates with Shopify
- AliExpress: Free service that offers one of the largest dropship product marketplaces
- Wholesale2B: Costs $24.99 per month and integrates directly with BigCommerce and Shopify
- Dropship Direct: Free service with over 100,000 available products
- Doba: Costs $29 per month and integrates directly with Shopify and Volusion
Manufacturers and Importers
While dropship marketplaces offer merchants an easy way to launch their business, working with manufacturers and importers is where you will really make your money. That’s because you can cut out the middle man (the dropship marketplaces) and buy wholesale directly from the source.
However, manufacturers typically have average order volume thresholds that dropship rookies might not be able to meet. They also don’t offer seamless integration with your ecommerce platform, which means a lot more work for you in terms of adding and managing inventory. Therefore, we recommend waiting until you have a foothold in the industry before working directly with manufacturers.
When that day comes, however, you can conduct your search using the following online directories:
For domestic manufacturers:
For international manufacturers:
Step 4: Build Your Website
We’ve identified a market and we’ve aligned with a supplier. Now it’s time to build the actual website where we will sell our products. There are two ways to go about this. You can either create a store on a major ecommerce marketplace like Amazon or eBay, or build your website from scratch using an ecommerce platform provider like Shopify or WooCommerce. Let’s explore each option:
The benefit of selling on well-established marketplaces like Amazon is that they are easy to set up and users find them to be trustworthy. However, using an ecommerce marketplace seriously limits your independence as a merchant, as you will have limited control over the branding, design, and marketing of your store. In addition, these platforms will charge you a fee on every sale you make, and you must adhere to their terms of service.
If you’re going to be a dropshipper, we recommend building your own ecommerce website. As we said earlier, your marketing is what will set you apart from your competitors, and ecommerce websites offer you a lot more functionality in that regard.
There are many good ecommerce platform providers out there. Choosing which platform to use for your business will partially depend on who your dropshipping supplier is, as some offer direct integrations. If you use Oberlo, for example, it makes a lot of sense to create a Shopify store.
In general, consider what kind of store you want when deciding on your platform. More product-focused stores will benefit from being on platforms like Shopify or BigCommerce, because they offer a lot of product functionality. If you want your store to be more content-focused (which could be a boon to your marketing and SEO efforts), consider using WooCommerce, which integrates with the content management system WordPress.
Step 5: Market Your Site
Regardless of which platform you choose, you are going to need to market aggressively. This is typically done through a combination of email marketing, paid ads, and social media. Each approach has its own merits. We recommend settling on a few that work best for you.
- Email marketing: Most ecommerce platforms have a plugin for an email marketing tool like MailChimp. Collect your customers’ emails and reach out to them each week highlighting new products, sales, and content on your site.
- Facebook and Google ads: You can post ads for your website that will appear for terms related to your business on Facebook and Google. Both give you the ability to tap into a huge audience and target your specific niche. You can also pay extra to ensure your ads reach your target market.
- Social media: Posting content related to your business on Facebook, Instagram, Twitter, and other major social media platforms is a cost-effective way to organically market your business. Read our guide on small business social media marketing strategies.
- Search engine optimization (SEO): SEO should be the backbone of all your marketing efforts. It is a set of strategies that improve your website’s ranking on search engines. Steps you can take to improve your SEO include working with a website builder that prioritizes SEO (WooCommerce), engaging in keyword research-based content marketing, and building up the number of backlinks to your website.
How to Get Financing for a Dropshipping Business
Although the cost of starting a dropshipping business is fairly minimal, it is not nonexistent. At a minimum you will be paying for your ecommerce website, inventory, and some shipping and marketing costs.
There are a few different avenues you can take to finance a dropshipping business. They are as follows:
- Business line of credit: You can think of a business line of credit as a mixture of a loan and a credit card, allowing you to draw against a pre-approved amount of financing, and only pay interest on what you borrow. This makes sense for dropshippers who only need to pay for expenses as they arise, like marketing campaigns.
- Inventory financing: If you can’t afford the wholesale prices offered by dropshipping suppliers, inventory financing may make sense for you. With inventory financing, a lender provides the funds for a large portion of inventory, and the products purchased with those funds serve as collateral for the financing itself. As long as you make your scheduled payments on time and in full, the inventory is yours to do with as you see fit. Be careful though; if you fail to make a payment, your lender could repossess your inventory as repayment for the debt.
- Business credit card: If you’re having a hard time securing a loan, try using a business credit card. If you can qualify for a 0% intro APR business credit card, you can spend for a predetermined period without paying interest. Once your introductory period ends, your APR will set in at a rate that will vary with the market Prime Rate, so be sure to see the issuer’s terms and conditions for the latest APR information.
- Ecommerce grant: Grants are free money. However, to acquire a grant, you typically have to fill out a lengthy application and wait a significant period of time. If you’re looking for grant opportunities, two places we recommend checking are the U.S. Department of Commerce, and the U.S. Small Business Innovation Research program.
Note that if you are seeking a loan, online lenders are going to be your best bet. Dropshipping is a highly competitive industry, and banks tend to be risk-averse. Online lenders also offer faster funding, and more flexibility.
The Bottom Line
The information we have provided should be enough to get you off the starting line and into the race. Just remember that competition is fierce. The best way to break away from the pack is to create a highly focused concept, partner with a good supplier and ecommerce platform, and market like crazy. Good luck!