Dropshipping is an order fulfillment method that allows a business to sell products to customers without maintaining an inventory. The buyer pays for the goods from the seller who acts as the retailer, but a third-party supplier delivers them to the buyer.
Many are exploring the prospect of setting up their own e-commerce store this 2021 due to shifts in consumer behavior. Dropshipping is attractive since you won’t need a lot of capital to start out, at least in relation to other business models.
Dropshipping does not guarantee insanely high profits as many would like you to believe. But if you’re committed to it, like any other business, it can be a reliable replacement for your 9-to-5 job.
In this article, we’ll explain how dropshipping works and steps you can take to start your own dropshipping business!
How Dropshipping Works?
To understand how the dropshipping business model works, it’s best to introduce the three players involved in it and their respective roles in the process.
The dropship supplier manufactures the products and keeps them in inventory. When an item is bought from the retailer’s website, it is the supplier who fulfills the order and ships the product to the customer. It sells the products to the retailer at wholesale price.
Meanwhile, the retailer sells the products under its brand through its website or dropshipping store.
Since warehousing and inventory are out of the retailer’s hands, the bulk of its work focuses on marketing the products chosen from the supplier. It makes its profit from the difference between the wholesale price, which the supplier sets, and the retail price, which it determines itself.
Note that shipping costs are borne by the retailer, who can always incorporate them in the retail price.
Finally, the customer buys the products from the retailer. In case of questions or complaints regarding the product, the retailer will shoulder the burden of addressing them.
A Step by Step Guide to Starting a Dropshipping Business
Step 1. Start Your Dropshipping Business with a realistic mindset
The first step in starting a dropshipping business, or any undertaking for that matter, is to always keep a realistic approach.
Although many people are earning thousands of dollars monthly with this business model, keep in mind that it took them a long time to achieve that position. If you have unrealistic expectations, any bump along the way will quickly discourage you from pushing forward.
Embrace and learn from both positive and negative stories about dropshipping. Get inspiration and tips from success stories and be careful not to repeat their mistakes.
Invest your own time and energy to learn about the dropshipping business model and the direction you want to take for your brand. You’ll intimately understand how your business works, engage with your customers better, and learn a host of entrepreneurial skills that you can apply to other aspects of your life.
Although you might have saved enough money to hire marketers, developers, and other specialists to build your eCommerce business, allowing your money to do the work will cost you a lot in the long term. Having a close team of individuals with the same goal as you do (if you want to) and a sufficient amount of capital is enough to propel you to take the next steps properly.
Step 2. Investigate the niche you are interested in
Once you’ve committed to pursuing dropshipping, the next phase is identifying your e-commerce niche or industry segment.
Conduct market research to scrutinize the niche/s you’re eyeing on and discover other profitable business ideas. By doing this, you will narrow down your choices and save time and resources in the future.
Most e-commerce experts will advise you to choose a niche you’re passionate about. To a large extent, this is a correct statement. You’ll be spending a lot of time and energy researching and investing in that niche, and passion can keep you going despite all those challenges.
However, the niche or products you’ve been passionate about may not be profitable. You may even end up resenting your passion because it gives you little to no return on investment at all.
If you’re not keen on this outcome, choose where you can make the most profit. In reality, it’s motivating to work on something when we make a lot of money out of it and even end up earning enough for us to enjoy our passions in life.
Once you’ve decided on your niche, determine the trending products that you want to sell. These products may be popular due to seasonality, practicality, virality, among others. Either way, it’s always a good idea to check out curated lists of products prepared by e-commerce experts to make the most out of dropshipping.
Consider some of these niche products to sell on your dropshipping business in 2021:
- Health and fitness: resistance bands, yoga mats
- Beauty and skincare: peel-off masks, beard oil
- Pet care: dog supplements, pet carrier
You can validate product recommendations or conduct your own research using the following tools:
- Google Trends – This is a free service from Google that can help you determine whether a product is trending or not. It can also help you check during which seasons or periods a specific product is gaining interest (e.g. fitness-related items peak every January). Google Trends does not show search volume, so to confirm feasibility, use keyword research tools like Soovle or Ubersuggest.
- Keyword Research Tools – Keyword research tools show how many searches a product receives during specific periods and how competitive it is. Some of these tools require payment, while some don’t.
Step 3. Identify Potential Competitors
Once you have decided what niche you are taking, it’s now time to identify your possible competitors. You’ll have a deeper understanding of how dropshipping works and learn from your competitors’ strategies. Replicate what they’re doing excellently, and if you can, do them better.
Here’s a systematic approach to track your competitors and their respective business approaches:
1. List your competitors
In your chosen niche, identify around five dropshipping businesses to focus on. You can use any of the following search tools:
- Google – By searching the name of your products or the keywords you used to select a niche, you’ll be able to view your most successful competitors, especially from the top results. Besides using keywords, do a reverse image search using product images from potential suppliers.
- Amazon – Many sellers are also flourishing on Amazon because of its popularity and reach. It would help to identify at least one dropshipping business on this platform.
- SEM Rush and Ahref – These search tools will help you gather information about search results in another location, which comes in handy if you plan to sell to a region different from where you currently are.
- Alexa and SimilarWeb – Using these websites will give you valuable information on businesses in your niche that do not rank high in Google or other search engines. They will summarize your competitors’ websites, social media accounts, traffic information, advertising, and even a list of competitors.
- MYIP.MS – This can help you identify businesses within your niche operating through Shopify, arguably the most popular e-commerce platform. Type in your chosen keyword on the “Full/Part Website Name” field, then find and select Shopify, Inc from the “IP Owner/Parent IP Owner/Hosting” field.
2. Explore their websites
Conduct a general survey of their websites and take note of the following information, preferably in a spreadsheet:
- Product pages
- Website design
- Marketing strategies
You can use Buzzsumo to evaluate the content of each competitor’s website. You’ll be able to view how many visitors have shared their content and where they shared them. This can give you insight into what content to post on your eCommerce website.
If they offer newsletters, you can sign up to be updated on their latest promotions and offers.
3. Dig around their social media accounts
Nowadays, to stay relevant and connect with their customers, businesses must maintain social media profiles on Facebook, Twitter, and Instagram. Quickly going through their pages will give you a lot of information, such as their number of followers, promotions, tone, among others.
Step 4. Find a reliable supplier
The most crucial stage in starting your dropshipping business is finding a reliable and trustworthy supplier. Without a supplier, you won’t have any products to sell in the first place.
For beginners, the best way to find a supplier for a dropshipping business is with dropship marketplaces. These platforms connect dropshipping store owners with thousands of suppliers. They also offer millions of products sourced from manufacturers.
These marketplaces are apt for a budding entrepreneur, who will most likely set-up an online business with a popular eCommerce platform like WooCommerce, Shopify, BigCommerce, etc. You can connect to dropship marketplaces through readily available plug-ins or extensions on these platforms.
Related: Best Ecommerce Platform
Some of the more popular dropship marketplaces are the following:
If you’re way past the start-up stage, buying your products wholesale from manufacturers and importers will increase your profit margin.
Consider this option only if you’ve gained enough capital and reputation in your industry since these suppliers will require larger order volumes. Plus, they’re not as accessible as dropship marketplaces that can be integrated using the eCommerce platform of your choice.
When dealing with potential suppliers, order product samples to check their quality, which is a common problem experienced by dropshipping businesses. Make sure that you’re also satisfied with their track record, packaging, delivery times, fees, and other related matters.
Finally, maintain a good relationship with your chosen supplier from start to finish since it is inevitably your partner to success.
Step 5. Create and Design Your Ecommerce Store
Now that you have gathered your will to commit to this business model, identified your competitors, and found a reliable supplier, it’s time for you to build your online store.
Numerous eCommerce platforms allow you to create your dropshipping website without any web development experience. These platforms will allow you to start your dropshipping business through its built-in features or extensions.
Here are our top platform recommendations, in no particular order:
Wix is great for small businesses and is one of the most beginner-friendly platforms around.
Customizing each page of your online store is easy because of its drag-and-drop editor, which allows you to place text or images wherever you want them.
It’s a What You See Is What You Get (WYSIWYG) website builder, which means that you will immediately see how your store will look like as you edit it.
If you don’t want to start from scratch, you can choose from over 500 designer-made and customizable templates, 114 of which are eCommerce templates.
To launch your e-commerce store, all you have to do is activate the Wix Stores app, which is automatically integrated into its eCommerce templates. Its eCommerce features will allow you to do the following:
- Create product galleries with product zooms to help customers see your products up close and the option to place product videos.
- Send automated emails and newsletters.
- Choose from over 54 payment providers to choose from depending on your location.
- Get automated sales tax calculation.
- Notify customers who have left items in their cart through its abandoned cart recovery feature.
It also offers multichannel selling with its built-in feature to sell on Instagram. You have to download a third-party app like Ecwid to sell through Facebook and Pinterest.
Shopify is the most popular eCommerce platform fit for any business size. For dropshipping in particular, you can access its exclusive dropship marketplace Oberlo.
Shopify doesn’t have a drag-and-drop editor, but it offers unique and mobile-responsive themes. There are 10 free themes and 64 premium themes, which range from $140 to $180.
Shopify offers the most extensive sales features than any eCommerce platform through its App Store. It houses over 1,200 applications to make your eCommerce website scalable and powerful. Through apps and built-in features, you can enjoy the following features:
- Sell digital goods and services (installed through an app)
- Choose from over 100 payment providers (Note: Shopify charges a transaction fee unless you use Shopify Payments as your gateway)
- Receive automatic sales tax calculations
- Recoup lost sales through its abandoned cart recovery feature
With its multi-channel integration, you can sell your products through Amazon, Facebook, Instagram, etc. Install the application for each channel, and you’re good to go.
BigCommerce is likewise great for enterprises of all sizes, but it’s perfect for those who have a large business or are looking to expand it further.
You can choose from 12 free themes and 140 paid themes that are all customizable and mobile-responsive. Its Store Design tool allows you to customize each element of your chosen theme.
With BigCommerce, you can expand your business without relying on applications because of its robust in-house features, the most of any website builder. Although it has over 600 apps in its app store, you can keep your costs lower by relying on its features. You can enjoy the following when using BigCommerce:
- Sell physical, digital, and service-based products without installing an app (unlike Shopify)
- Accommodate up to 600 product variations
- Take advantage of its abandoned cart recovery feature.
- Choose from a good range of shipping options and manage them from a single hub.
- Enjoy strong SEO support.
It also offers multi-channel selling through Facebook, Amazon, Instagram, and eBay.
Magento is far from beginner-friendly. It is an open-source software that will require you to have web development experience or hire a developer. But if you overcome this hurdle and offer hundreds to thousands of products, Magento may be up your alley.
Magento only offers 11 themes in its Marketplace that range from $17 to $399. Only one of these is free, but you can source themes from third-party websites or pay a developer to make one for your online business.
The platform is extremely scalable and feature-rich without relying on applications. With Magento, you can capitalize on the following features:
- Categorize your products in unlimited ways
- Show related products
- Create customizable coupons
- Benefit from free Google Analytics integration
- Notify customers leaving items in their cart through its abandoned cart recovery feature
You can sell through multiple channels like Facebook, Amazon, Etsy, etc., from your store, but some will require payment.
It also offers 3,785 extensions, which can help you in Accounting & Finance, Customer Support, and Marketing.
Square Online is an eCommerce platform owned by Square, one of the most popular payment gateways used by businesses. This is a great option for a small eCommerce business with limited catalogs.
Square Online doesn’t provide a lot of templates. This may not be the platform of your choice if you want a lot of creativity with your website, but it is a great way to put your products at the forefront.
Some of its features are the following:
- Add multiple product variations.
- Allow customers to personalize their product of choice.
- Manage inventory from a centralized dashboard
- Automate your tax calculations
Square Online offers only one payment gateway: Square. However, when you subscribe to either the Performance or Premium plan, you can add Paypal.
WooCommerce is not a website builder but a plug-in for WordPress users to sell online.
You can access 20 themes in WooCommerce, three of which are free, while the others range between $39 to $129 each. These themes are customizable but may require you to have coding knowledge like any other WordPress site.
WooCommerce doesn’t have a lot of built-in features. Some notable ones include:
- Publishing blog posts
- Unlimited customization (for those with coding experience)
- Allow quick refunds.
- Choose from over 100 payment providers.
You’ll get the most out of WooCommerce through extensions, which is probably its biggest selling point. You can access thousands of free and paid extensions to help you in various areas such as Marketing, Shipping, Store Management, and many others. You can integrate abandoned cart recovery, tax automation, and multi-channel selling through extensions.
Step 6. Pour Everything You Know About Marketing
Marketing a new business should be done passionately and diligently. You’ll need a good amount of courage and dedication to keep your spirits high. Remember that your mood and mindset can affect the tone of your marketing.
Here are some marketing ideas that will work for your dropshipping business:
- Social media – When it comes to which social media platform for your business, some products will thrive on certain websites than others. For example, if your products belong to the beauty or skincare niche, go for Instagram, Youtube and Pinterest, where visuals are emphasized. Running Facebook ads is useful for most products since you can select where to run your ad, who to target, how much to spend, etc.
- Influencer Marketing – The power that influencers have over their followers should not be underestimated. Collaborate with the appropriate influencers in your niche. If you can’t afford their rates, offer affiliate commissions instead.
- Blogging – Writing search engine optimized (SEO) content is the best way to drive organic traffic to your dropshipping business. Having a quality blog with your dropshipping store can bring many customers through Google. Choose the right keywords using websites like Google’s Keyword Planner and SEMRush.
- Retargeting Ads – Most of your online store visitors won’t purchase anything on their first visit. Bring them back in through retargeting ads, which will remind them of your products when they visit another site.
- Customer Reviews – Allowing your customers the opportunity to give their product reviews and ratings will help potential customers to trust your product more. Plus, it’s a great way to add SEO content for two reasons: Google ranks product pages with reviews higher, and the reviews will most likely contain keywords to improve your SEO.
Step 7. Organize Your Finances
You need to keep your personal and your business finances in separate wallets, which will help you prevent accounting and tax mishaps. Opening an account under your business name is the ideal thing to do.
Business checking account
To save yourself from stressing out with finances during tax payments, open a checking account for your business. All revenues and expenses should go through this account.
Use a credit card for business expenses like payments for advertising, e-commerce platform use, and dropshipping inventory purchases. Find the right credit card company can get a lot of rebates and rewards with
Collect Sales tax
There is no national sales tax in the US, so collecting it for business transactions with your customers depends on your state. It is only mandatory if you’re operating in a state that collects state tax and your customer lives in that state. If both conditions do not concur, then you won’t need to collect it.
To register as a retailer and collect these taxes, contact your state’s Department of Commerce and inquire about filing and payment details.
Local Business Licenses
Business owners must procure a business license from their local governments to operate legally. Inquire with the relevant city or town officials if you need this license or any other permit for your dropshipping business.
Incorporating outside the United States
If you’re a business based outside the US and want to take advantage of American dropshippers and customers, you can incorporate a business in the US to do so. Consult with a lawyer if you’re keen on doing this.
Step 8. Don’t forget to optimize
To generate more revenues, optimizing your dropshipping business should be a constant goal. Optimization entails increasing your conversion rate or the percentage of visitors who either purchase a product from your business or added it to their cart or wishlist.
Here are some quick ways to optimize your site:
- Make it easy for users to access your product categories from the home page.
- Improve product pages by adding high-quality photos and videos, crafting unique product descriptions, and using product reviews and ratings.
- Offer a wider range of payment options.
- Speed up your site by using a responsive theme and caching plugins.
- To reduce cart abandonment, don’t require registration when checking out and use a persistent shopping cart.
Step 9. Review all your past decisions and analyze results
After some time, you can now review all your past transactions, marketing style, and the results of your hard work. Your goal is to identify all the things that you miss and learn from them.
There are online analytic platforms available to help you answer important questions about your online store on the technical side.
Google Analytics and Search Console can track site traffic at every stage and improve search engine optimization. They can help you monitor how each product performs, where your traffic comes from, and which pages your visitors are spending most of their time on. If you want more advanced reports, try tools like KISSmetrics and Mixpanel.
In any kind of business today, making data-driven decisions is key to beating the competition. Set specific periods to evaluate your dropshipping business’ performance and improve customer experience.
Today, having your own dropshipping business is a very feasible and profitable way to become your own boss. Finding your niche is the easiest for many and identifying rivals can be accomplished within a day, but the succeeding steps will pose the real challenges.
We want to highlight that finding a reliable supplier and making your products desirable through your online store and marketing efforts will make or break your dropshipping business. Above all, always stay realistic and grounded throughout your dropshipping journey!
If you want to learn more about dropshipping and e-commerce in general, subscribe to Mint Chip’s newsletter to get the latest tips!