How to Start a Dropshipping Business in 5 Easy Steps

Starting a dropshipping business is one of the easiest ways to make money online in 2020.

The growth of Amazon, eBay, Etsy, Shopify, and other online marketplaces and platforms means that anyone can start an online store for as little as $20.

But with the barrier to entry being so low, dropshipping has exploded in popularity over the past decade, meaning that many markets are highly competitive.

If you’re thinking of starting a dropshipping business - either as a side hustle or a means to leaving your full-time job - you can save yourself time and set yourself up for success by following the simple steps outlined below.

But first, what is a dropshipping business?

A dropshipping business is where you are able to sell merchandise to your customer without holding any inventory. A customer purchases an item from your store at retail price. You then forward the order to your supplier, which you pay the wholesale price. Once your supplier receives the order, they ship the item directly to the customer under your business name while you earn the profit margin. All you have to do is set up the retail website, find customers, and handle customer support.

There are thousands of people around the world who make five-, six-, and seven-figure incomes from drop shipping and there’s no reason why you can’t do the same.

In this complete guide to drop shipping, we show you how to start a drop shipping business in 5 easy steps:

1. Choosing a profitable dropshipping niche in 2020
2. Finding reliable dropship suppliers
3. Getting a sales tax ID
4. Choosing the right selling platform for your business
5. Implementing a customer acquisition strategy

What Is Dropshipping?

Understanding how the dropshipping business model works is important, as it’s quite different to traditional retail and eCommerce businesses.

Here’s the official definition:

Dropshipping is a supply chain management method in which the retailer does not keep goods in stock but instead transfers the customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer.

How Dropshipping Works

In more simple terms, dropshipping works like this:

1. A customer purchases an item from your store at retail price
2. The order is forwarded to your supplier (you pay wholesale price)
3. The supplier ships the item directly to the customer under your business name

This means that you - the dropshipper - don’t have to buy and store bulk stock, which saves you having to invest a lot of money upfront.

It also eliminates the risk of buying in bulk and not being able to sell all of the products, leaving you out of pocket.

This is why dropshipping is so popular - it requires minimal investment, but reaps similar benefits to traditional retail models.

Dropshipping Statistics: Do the Numbers Add Up?

The hype around dropshipping means some people are sceptical of it as a viable business model and cautious about diving in.

There is limited information about dropshipping specifically, but these statistics should help to provide you with peace of mind (and, hopefully, a sense of excitement).

• 22-33% of online retailers have adopted dropshipping as their primary business model.
• Dropshipping accounted for 34% of products sold on Amazon in 2011. That’s $14.2 billion of drop-shipped products from just one online marketplace.
• The average profit of a manufacturer that dropships is 18.33% higher than a manufacturer that uses traditional retail models.
• Global eCommerce sales amounted to $2.3 trillion USD. Projections show a growth of up to $4.48 trillion USD by 2021.
• 84% of online sellers say that establishing positive relationships with dropship suppliers is the number one roadblock to starting an online business.

Google Trends data also shows a massive increase of interest in dropshipping over the past few years.

What You Need to Start a Dropshipping Business

Other than a positive attitude, a good work ethic, and genuine motivation to commit to your new business venture, there are only a few essentials required to start a dropshipping business.

They are:

• A product to sell
• A supplier of that product
• A platform to sell on
• A sales tax ID

Let’s explore these in more detail.

How to Start a Dropshipping Business in 2020

Step 1: Choosing a Dropshipping Niche

A niche is a segment of a market. For example, bluetooth speakers are a popular niche in the home audio market. You could even say that outdoor, waterproof bluetooth speakers are a sub-niche of the bluetooth speaker niche. You get the idea. The more specific your niche is, the better.

Choosing a niche is the first step to starting a dropshipping business. The rising popularity of dropshipping means it’s becoming harder to find niches that aren’t already saturated. But new products and niches are emerging every week, so the opportunities are almost endless.

A common misconception about dropshipping is that you can be successful and profitable in any niche, but that’s simply not true. If you choose a niche that’s already saturated with sellers or dominated by major brands, you’re going to face an uphill battle with your new business.

Here are a few guidelines to help you choose a dropshipping niche that will make you money online in 2020:

• Start with your interests and passions: Tap into your hobbies and interests. If you enjoy travel or hiking in the outdoors, you’re going to have unique knowledge of the products and trends in those markets that can help you identify a viable niche.
• Scratch your own itch: This is old school entrepreneurial advice. The theory is, if you have a problem in your life then it’s highly likely that others will have the same problem. If you can identify a product that solves that problem, you might have uncovered a great dropshipping niche.
• Research the competition: Is the niche you’re interested in over-saturated? If so, is the competition easy to beat? Better yet, is it worth beating them? You’ll often find that the niche you’re most interested in joining is the one that nearly everyone is already a part of. This doesn’t mean you can’t hop on the bandwagon, just be ready for some competition.
• Ensure the niche is profitable: The objective of business is to make money, right? Therefore, you need to check the profitability of every dropshipping niche and product idea that you come up with. Ideally, you want a profit margin of at least 40% after shipping costs, seller fees and taxes, but you should be aiming for margins of 100% or more.
  
  PRO TIP: You can use this online calculator to determine the profitability of products you are thinking of selling. It deducts Amazon fees from the retail price and estimates how many items are being sold each month, which is an indicator of demand.

Dropshipping Products that Work Well on Amazon and eBay

While it’s possible to dropship everything from toothpicks to the kitchen sink, some products are more suitable for dropshipping than others.

The perfect dropshipping product is generally:

• Not dominated by major brands: What’s the first company that comes to mind when you think of the word ‘smartphone’? Apple, probably. Or Samsung? These major brands have the smartphone market on lockdown and it’s going to be tough for any business to compete for a slice of that pie. A good dropshipping product isn’t dominated by a major brand so that you can have a greater chance of capturing a chunk of the market.
• Small and lightweight: The general rule is that a good dropshipping product should be able to fit inside a shoebox and weigh less than 2kg (4.4lb), the weight limit for ePacket. This is to save you paying extra for shipping.
• Non-seasonal: Ideally, when you’re starting out you want to avoid products that are only in demand for one season a year. For example, selling something you’d only use at the beach during summer, or Christmas decorations really limits your selling power during the off-season. Choose dropshipping products that are in demand all year round.
• Retails for between $15 and $200: This price range is known as the eCommerce “sweet spot”. Anything cheaper than $15 and you’re not going to be making much of a profit margin and anything over $200 is going to be difficult to sell en masse. While there are plenty of exceptions to this rule, following it will make your dropshipping journey easier to begin with.

Brainstorm Business Ideas

Now that you know the criteria for a good dropshipping niche, you can start narrowing down product ideas for your eCommerce business.

You should aim to brainstorm at least 10-20 product ideas and then use the guidelines above to either qualify or eliminate them from your list.

Once you’re done with that process, you might only have a few product ideas that are considered viable. If you have none, then you’ll need to start the process again.

If you have at least one solid product idea at this stage, you’re ready to progress to the next level.

Use SaleHoo Labs for Market Research

SaleHoo Labs is a powerful market research tool for dropshippers and eCommerce store owners. It provides you with valuable information on tens of thousands of products across 25 categories, such as:

• How much competition there is for each product, based on how many people are selling it on Amazon and eBay
• The average retail price each product is selling for online
• The sell-rate of each product
• A list of trusted suppliers of the product that you can contact immediately

It can help to give you product ideas and save you hours of time that it takes to conduct market research manually.

How to Outsmart and Outsell the Competition

If you want to set yourself apart from the thousands of others who are thinking of starting a dropshipping business in 2020, you need to have a few tricks up your sleeve.

You need to find a way to be better and smarter than your competition so that you operate more efficiently and make more sales than they do.

How do you do this? The same way that champion sports teams, like the Philadelphia Eagles or the Golden State Warriors, prepare each week - by studying the competition.

• Identify the competition: Start by finding the top sellers in your niche on Amazon and eBay. Also take note of how many sellers are in the niche.
• Analyse their product listings: How do they set up their product listings? What are their photos like? What kind of sales copy do they use? Find ways to make yours better. You might identify unique selling points you can use or other improvements that will make your product listings more attractive for prospective customers.
• Read customer reviews: Take some time to scroll through the customer reviews for a few of the top sellers in your niche. Take note of what customers liked and what they complained about so you can refine your approach to customer service.

When you’re starting a dropshipping business you should absorb as much information as possible from as many sources as possible. Product listings and reviews of top sellers in your niche are perfect places to look for ideas to improve on what your competition is doing.

Summary

The first step to starting a dropshipping business is about choosing a niche. To re-cap:

• Choose a product/niche that’s easy to dropship
• Make sure there’s sufficient demand for your product/s
• Research your competition to give yourself an advantage

Bonus:

For more information on deciding what to sell online, check out this guide

For product ideas that will make you money online, check out this post

Step 2: Finding a Dropship Supplier

For many aspiring eCommerce entrepreneurs, finding a reliable supplier is the hardest part of starting a dropshipping business.

You rely on suppliers to keep your product in stock, to uphold product quality, and to ensure orders are shipped to your customers in a timely manner. As a dropshipper, your supplier is your most important business partner.

What to Look for in a Dropship Supplier

A good dropship supplier should:

• Actually be a dropshipper: Not all product suppliers offer dropshipping as a service. Some are simply wholesalers or manufacturers. Before you make contact, make sure the supplier is a dropshipper.
• Have experience (+ helpful staff): You want a supplier that has years of experience with dropshipping. Suppliers take on a lot of responsibility with dropshipping so you want to be sure that you can count on them at all times. A good sign is if the sales rep you’re in contact with seems helpful and well-informed. If you suspect they’re not experienced, go elsewhere.
• Not charge huge order fees: It’s quite normal for dropship suppliers to charge a small fee for their services. After all, they’re holding onto stock and organizing packaging and shipping for you. These fees should only a few dollars ($2 to $5 usually). If a supplier charges you more than that, you should let them go.
• Provide fast shipping: Most dropship suppliers are located in China so you can’t expect overnight shipping. However, you do want to make sure your customers will get their items as fast as possible. Check their shipping times to the countries you service. One-two weeks is acceptable for dropshipping. Any longer than that could result in negative customer feedback.
• Have quality products (+ product photos): You should always request product samples to test quality prior to committing to a supplier. The supplier should ideally have high quality images that you can use in your product listings.
• Provide referrals on request: A good supplier should willingly connect you with businesses that can verify their service. Ideally, you want word-of-mouth referrals, but failing that you might be able to make your mind up based on customer reviews online (although be aware that online reviews can be manipulated).

Where to Find Reliable Suppliers

There are essentially two ways to find good dropship suppliers. You can either search online manually or use a wholesale directory like SaleHoo.

• Searching for suppliers online: You can simply type your product plus “supplier” into Google and see what comes up. Or you can search for your product on websites like Alibaba.com or Aliexpress.com. A lot of China-based suppliers use these websites to sell their wares.
• Using a wholesale directory: This can save you a lot of time and help you avoid eCommerce fraud. SaleHoo has more than 8000 suppliers that have been vetted and verified. You can contact them in just a couple of clicks and have confidence in their ability to provide good service.

Bonus:

Questions to ask dropship suppliers before doing business with them

A more in-depth look at how to find dropship suppliers

Finding US dropship suppliers for your online store

Step 3: Get a Sales Tax ID

If you’re setting up your business in the United States or Canada then you most likely need a sales tax ID (also known as retail or reseller’s license, tax ID, resale number, resale certificate or vendor's license).

Sales tax is a tax levied on all sales of physical goods to consumers and is typically about 6-9% of the sale price. Most states require you to have a tax ID, but there are exceptions, including Alaska Delaware, Montana, New Hampshire, and Oregon.

Click on your state to find the right sales tax information for you,
and register for your license.

 

 

 

 

Sales Tax Applies

 

No Sales Tax

 

It’s standard for businesses to pass this expense on to consumers by adding it to the retail price.

Applying for a tax ID is easy and inexpensive. You can do it by visiting your local county clerk’s office or online – just Google “[your state] + sales tax ID”.

To get a sales tax ID, you may need to be a business entity, a company, or a sole proprietor (which applies to a lot of at-home online businesses), and have a Federal Tax ID number.

While it's important you collect the exact amount of sales tax (otherwise you’ll be held liable for the difference), not all eBay sellers need a tax ID.

That said, some wholesale suppliers require you to have one before they will do business with you.

Related: What is an EIN number?

Step 4: Choosing a selling platform

So you’ve decided on a product and you’ve lined up a supplier - now you need a place to start selling and making money.

Choosing the right selling platform or online marketplace is crucial to the success of your business - but which platform is best for you?

You need to decide between selling on an established platform, or starting your own independent online store.

Let’s take a look at the pros and cons of the different selling platforms and online marketplaces.

The Most Popular Online Marketplaces

Most dropshippers use a well-established online marketplace like Amazon or eBay, especially when starting out. Why?

• It’s easy to set up an account and start selling
• They already attract huge amounts of traffic (potential customers)
• Consumers trust these platforms
• You can make significant money through them

However, there are some cons to be are of:

• You will be charged fees for every sale you make
• You have limited control (branding, customer service, product photography etc)
• You’re in direct competition with sellers on the same platform
• Consumers have a huge amount of choice in one place

That said, here are a few of the most popular online marketplaces for dropshipping businesses.

• Amazon: The most well-known of the online marketplaces, Amazon is said to have 300 million active users. In 2016, more than 100,000 sellers made more than $100,000 on Amazon. Amazon offers additional services such as Fulfillment by Amazon and Amazon Prime. Fees vary a lot, but it’s estimated that most sellers will pay about 15% of their sale price to Amazon. It’s a popular option for dropshippers.
• eBay: eBay is said to have 171 million active users with about 1 billion products listed across 190 different markets. eBay charges listing fees (but offers a limited number of free listings) and sale fees, which are generally less than 10%. eBay has an auction option and also operates as a standard online retail platform.
• Etsy: Etsy is said to have 54 million members, about 2 million active sellers, and about 32 million active buyers. It’s extremely popular with women (84% of sellers are female). Etsy has established itself as a more trendy online marketplace with a focus on arts, crafts, homeware, and handmade goods.

Bonus:

For a full list of alternative eCommerce platforms, check out this post.

Creating Your Own Online Store

A lot of dropshippers take the route of starting their own online store. While it requires more investment up front, this is really the ultimate long-term option for making money and building a business online. There are plenty of online tools, like Shopify and SaleHoo Stores, that make it really easy to get started.

PROS

• You have complete control over branding, design, layout etc.
• You’re building a business independent of a third-party platform
• No fees and higher profit margins
• No direct competition from other sellers on the same platform

CONS

• It costs money to set-up and design your own store (web hosting etc)
• You miss out on the guaranteed traffic (customers) from established platforms
• It takes time to rank on Google and you’ll have to invest in SEO and marketing

If you have the time and money to invest in your dropshipping business and you’re planning to be in it for the long haul, then starting your own store is a good option, especially with established platforms becoming more and more saturated every year.

Step 5: Implementing a Customer Acquisition Strategy

Now that you have a selling platform for your dropshipping business, you need to attract customers to your store. This is where a customer acquisition strategy comes in.

Customer acquisition is the art of persuasion. You can think of it as advertising and marketing. Sounds expensive, right? But it doesn’t have to be. You can take the fast (paid) path or the slow (free) path to gaining new customers. Let’s take a look at both strategies in more depth.

Fast Results (paid)

Facebook Ads for Dropshipping

Facebook is the world’s largest social media platform. It’s a great place to advertise your products as you can tap into a huge audience. This is how Facebook makes its money, so every customer you acquire through this method comes at a cost. Facebook ads are a good option for the following reasons:

• It’s easy to get started
• You control how much you spend each day
• You can target highly-specific demographics (location, interests, relationship status etc)
• It can yield fast results
• It helps to increase brand awareness
• A good ad or boosted post can go viral

For a comprehensive guide to Facebook ads for beginners, check out this post.

Google Ads for eCommerce

Google is the world’s most popular search engine by far. If you have an online store, you want it to rank on the first page of Google. You can achieve this organically, or you can buy ads for your store to appear at the top of the page for the keywords you want to rank for. Google ads are a good option for the following reasons:

• You can achieve great exposure in search results
• It’s the largest advertising platform in the world (Google search, Youtube, Gmail)
• You can target highly-specific demographics (location, language, device etc)
• Maximise exposure to your ads with high volume keywords related to your niche

Social Media Influencer Marketing

Influencer marketing has become a huge part of customer acquisition for retail brands in recent years. It could play an important part of any customer acquisition strategy in 2020. It can be particularly effective if you are in a trendy niche. For instance, if you’re selling a new style of handbag, you could reach out to an Instagram model and ask if she will share a post of her with the bag, tagging your business. One post can result in a bunch of new fans and customers. The cost of influencer marketing depends on how famous the influencer is. A post from Kim Kardashian might cost $250,000, while a post from a model with 10,000 followers might only cost a few hundred dollars.

Slow Results (free)

Blog or Forum Marketing

This involves finding blogs or forums that are related to your product/niche and actively participating in discussions. By positioning yourself as an authority in your niche and including a link to your website, you can increase traffic and acquire new customers.

Content Marketing

This most commonly takes the form of a blog on your store website, a Youtube channel, trendy Instagram posts, or witty posts on Twitter. Content marketing is meant to involve the creation of valuable content that helps to build an audience that you can then convert into customers. It’s not as explicit as advertising and should always be more about serving your audience than your brand.

If you're looking for a guide, here's a great resource from Adam Enfroy on how to start a successful blog this year.

Social Media Marketing

It’s getting harder and harder to achieve organic reach on social media, but it is still possible. If you can consistently create and share great content on your social media channels you’ll eventually build a following, which you can then convert into customers.

Email Marketing

Building an email list is still one of the most effective ways of acquiring customers. You need a way of capturing email addresses, such as a request to sign-up at checkout, or an offer or competition that requires an email address. Once you have a decent list of email addresses you have a way of reaching a large group of people regularly, for free.

Poll

As you can see there are several strategies to attract customers to your store. What is your preferred method of growing a new dropship business?

Conclusion

Huzzah! We’ve reached the end and, by now, you should be well on your way to starting an eCommerce dropshipping business from scratch.

The work is far from over, though. Now you have to successfully run your business.

But don’t worry! As long as you follow these next few tips, you’ll have a successful eCommerce drop shipping business for years to come.

• Continue to update your website. Work on your SEO and create high-quality content to bring in traffic.
• Maintain your relationship with your supplier. Keep tabs on the products you’re offering and, when you’re ready, look into adding more (Hint: You can use SaleHoo’s market research lab to find hot new products)
• Keep up with your customer service. Answer emails and questions, and update your FAQ page (if you have one)
• Stay on top of your social media. Refine your ads, run contests, and promote like crazy.

We hope you’ve enjoyed this article on how to start a dropshipping business. Did this inspire you to create one? Leave a comment down below. And don’t forget to share this article with your entrepreneurial friends.