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If you’re trying to figure out how to start a dropshipping business, you’re not alone—today, 33% of ecommerce stores use dropshipping as a fulfillment method, and with the ecommerce industry growing at a 17% clip annually, the popularity of dropshipping is only expected to increase.

So, if you’re interested in this type of ecommerce business, you might be wondering where to start. Luckily, we’re here to help.

In this guide, we’re going to break down everything you need to know in order to start a dropshipping business—including what dropshipping is, how it works, how to source products, how to find suppliers, and more.

What is dropshipping?

Before you can learn how to start a dropshipping business, you’ll want to ensure that this is the right type of business model for you. In order to make this determination, it’s important to understand exactly what dropshipping is and how it works.

In short, dropshipping is a form of ecommerce order fulfillment that allows you to sell products on your website that you are not directly responsible for warehousing or shipping. Instead, you purchase products wholesale from manufacturers or dropshipping suppliers, which oversee fulfillment for you.

How does dropshipping work?

With this basic definition in mind, let’s break down how dropshipping works in a little more detail.

Overall, there are three parties involved in the dropshipping business model of ecommerce—you, the retailer, the customer, and the supplier or manufacturer.

The dropshipping process, therefore, can be summed up like this:

  • A customer buys a product on your ecommerce website.

  • You send the order information to your dropship supplier.

  • The supplier picks, packs, and ships the product directly to the customer.

Dropshipping pros

So, why would you opt to figure out how to start a dropshipping business over a different type of business?

Overall, 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 catalog 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 startup 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.

Dropshipping cons

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 can be 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

Ultimately, it’s up to you to determine whether or not dropshipping is the right type of business for you to start.

This being said, however, if you do decide to invest in learning how to start a dropshipping business, you can make the process easier by breaking it down into smaller, more manageable steps, as we’ve done below:

Step 1: Figure out the logistics.

Overall, the first step to starting a dropshipping business is actually getting through the paperwork and other necessary steps to start a business. With this step, learning how to start a dropshipping business is generally equitable to starting any type of business.

This being said, when you’re setting up your business, you’ll want to:

  • 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 may need to acquire business licenses and permits from your federal, state, county, and local government.

Dropshipping business licenses

In addition to the general operating license that may be required for you to start a dropshipping business in your particular state, there are a handful of other business licenses that are necessary for selling online.

  • Seller’s permit: Many states require you to obtain a seller’s permit if you’re selling products that can be taxed. As is the case with most types of business licenses, whether or not you need a seller’s permit and how you get one will vary based on your state, so you’ll want to consult your local business agency or department of commerce for more information.

  • Sales tax license: Similar to a seller’s permit, a sales tax license is required for you to charge and collect sales tax. The state and city you live in will dictate the specific type of sales tax requirements and licenses you need to meet, so again, you’ll want to consult local government agencies to ensure that you’re meeting the proper guidelines.

  • Home occupation permit: Finally, in some locations, you’re required to obtain a home occupation permit for running a business out of your home. Often, this applies to online sellers who are shipping products from their homes, however, the details vary based on location. Therefore, you’ll want to consult your local government agency to determine whether or not this type of license is required for your dropshipping business.

Step 2: Identify a market and choose a niche.

Once all of the standard tasks are complete, the next step to learning how to start a dropshipping business will be narrowing down the specifics of your dropshipping business idea.

After all, 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.

Along these lines, if you’re looking for the right dropshipping niche for your business, you can follow the tips below.

How to find a niche in dropshipping

  • Think about 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 specific market: 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 specific market would be people who practice tae kwon do, or pescatarians. Ideally, you’ll find a market 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. You can also perform a simple Google search or utilize keyword tools to see how many people are searching for the product or niche you’re considering.

  • 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 think you’ve found a niche market, research the competition in that space. You’ll want to consult some of the same platforms—Google, Amazon, eBay, social media, among other channels—to see how competitors in the space are selling your product. Ideally, you’ll be able to find a niche that has some competition—which indicates that there is buyer demand and profits to be made—but not too competitive, in which you won’t be able to stand out amongst the other sellers offering that product.

  • 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.

Overall, when it comes to learning how to start a dropshipping business, finding a niche can be one of the most time-consuming steps. This being said, however, it’s important to take the time necessary to identify the right niche to put your business in the best place for success.

Step 3: Find the right 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. To this end, if you’re wondering where to source products for dropshipping, the process shouldn’t be nearly as difficult as identifying a niche—as there are a variety of dropship suppliers out there that offer millions of products.

This being said, your dropship supplier is a key partner in your business. In order to find the right supplier, 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. Again, 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.

So, now that you know what to look for to find the right dropshipping supplier, let’s break down how to actually find that supplier.

How to find suppliers for dropshipping

When you’re trying to find a supplier for dropshipping, you essentially have two options: dropship marketplaces and manufacturers.

Dropshipping marketplaces

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. Although 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

As you look into any of the suppliers above, or do your own Google search for other marketplaces, you’ll want to ensure that you keep in mind the criteria we discussed—the right supplier should not only offer the products that you need, but also be affordable and a reliable partner in your dropshipping business.

Manufacturers and importers

Although 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.

This being said, however, manufacturers typically have average order volume thresholds that dropship rookies might not be able to meet. They also don’t usually 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 selling direct source products and working with manufacturers.

Once again, although working with manufacturers may be too much when you’re just starting your dropshipping business, you can use the following online directories to see what they have to offer:

For domestic manufacturers:

  • Maker’s Row

  • Import Genius

For international manufacturers:

Similar to identifying a niche, finding the right supplier to source your dropshipping products can take time. As we’ve mentioned, however, because your product supplier will be such a crucial component of your business, it’s important to search through the options to find the best one to support your business.

Step 4: Build your ecommerce website.

At this point, we’ve identified a market and we’ve aligned with a supplier. Now, the next step to learn how to start a dropshipping business is building 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:

Ecommerce marketplaces

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.

Ecommerce platforms

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 sell on Shopify.

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: Optimize and market your site.

Once you’ve actually created and launched your dropshipping site, the last step will be to do everything you can to bring in customers.

Therefore, regardless of which platform you choose, you are going to need to market aggressively and optimize your site for search. This is typically done through a combination of email marketing, paid ads, and social media. Each ecommerce marketing 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.

  • 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 ecommerce SEO include working with a website builder that prioritizes SEO (like 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’s not nonexistent. At a minimum, you’ll 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.

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

Now that we’ve reached the end of our guide, you should have a good sense of how to start a dropshipping business.

It’s important to remember, therefore, although the competition can be tough, the best way to distinguish your business from competitors to create a highly focused concept, partner with the right supplier and ecommerce platform, and invest heavily in your marketing efforts.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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