You want to create your own drop-shipping company. You may have heard that it’s a low-commitment way to start a side business and earn more cash.
You may have a specific hobby, like collecting rocks, making historical dioramas, or growing ferns, and you think you know how to advertise it to your peers.
We’ll go over drop-shipping essentials as well as all you want to know to get your business up and running legally. We’ll also cover aspects that many first-time drop shippers need to pay more attention to, such as calculating sales tax and setting up your bookkeeping for success.
1 step: what exactly is dropshipping?
Drop shipping is an online business in which a third party controls inventory and shipment.
You are in charge of running the online business and advertising products; your specialty is convincing clients to click “Checkout.”
When customers pay for a product, you transmit the wholesale amount, plus shipping costs, to the vendor or vendors who supplied the product and retain the remainder for yourself.
The seller ships the product, and your sole responsibility after that is to ensure that it reaches the consumer and that they are satisfied with their purchase. This can be accomplished by tracking the package and sending follow-up emails to clients to ensure their satisfaction.
read more: 6-e commerce kpis you need to keep an eye on
2nd step: decide on a drop-shipping method
There are two methods for establishing your drop-shipping business and delivering products to clients. One option is to contact drop-shipping vendors directly. The other option is to use a drop-ship marketplace.
If this is your first drop-shipping firm, you should start with a drop-shipping marketplace before building partnerships with individual providers. When we compare the two ways, we can see why.
Direct Drop Shipping from Suppliers
Dropshipping straight from suppliers requires you to open vendor accounts with them in the same way that you would if you were running a regular retail company. That is, you form a seller relationship with them with agreed-upon rates and order thresholds.
The suppliers will package and ship purchases individually, which is the only distinction between this strategy and a typical retail store. You are not required to order products from them, maintain them in inventory, or fulfill orders yourself.
The most Significant Advantage of this Strategy is that your Profit Margin will be Higher.
It is less probable that other drop shipping companies will offer their products if you search out individual suppliers rather than using a drop shipping marketplace. With reduced competition, there is less need to undercut other stores, allowing you to raise your prices.
However, if you’re new to Drop Shipping, there are Certain Drawbacks to this Strategy.
Most individual suppliers have a minimum order threshold, which means you must place a certain number of orders with them each month. That is challenging to do when your shop is brand new. Many suppliers refuse to cooperate with a new, unproven drop-shipping company.
Furthermore, drop-shipping marketplaces automate a variety of activities for you. Individual suppliers do not, so you must invest more money in marketing assets and store administration.
But don’t quit just yet. Once your store is established and well-known, you can create partnerships with particular suppliers. For the time being, though, you should focus on a drop shipping marketplace.
making Use of a Drop-Ship Marketplace
A drop-shipping marketplace eliminates much of the legwork involved in establishing an online store.
A marketplace, which is typically coupled with existing sales platforms such as Shopify, allows you to surf around for wholesale merchants and rapidly add products to your store: There will be no contacting suppliers, taking product images, or creating web pages from scratch.
The advantage of this strategy is that you can gain access to millions of products from wholesalers all over the world. Adding and removing things from your business is virtually as simple as adding anything to your Amazon shopping basket.
That means you have a lot of leeway when it comes to experimenting with different products and prices and determining who your ideal consumers are for your store.
The disadvantage is that many other drop shippers will have the same simple access to those products, which means you’ll face increased competition. It requires more time and effort to fine-tune your marketing strategies and pricing in order to attract clients while maintaining a healthy profit margin.
However, while your drop shipping firm is still in the marketing phase, you can experiment, develop your abilities, and accumulate enough monthly orders to shift to dealing with specific vendors.
3rd step: decide on a drop-shipping marketplace
When selecting a drop-ship marketplace, there are a few factors to consider:
- Platform: Different marketplaces use different platforms. For example, if you’re already familiar with Shopify and want to build a Shopify business, Oberlo is the marketplace to use. Alternatively, if you plan to use your Facebook or Instagram account to run your store, you should consider using a marketplace that integrates with one of those networks, such as Spocket.
- Cost: Many marketplaces are free, but some demand a monthly fee.
- Supplier Location: Some marketplaces, like AliExpress, help you connect with large-scale Chinese vendors. Others focus on smaller providers in Europe or North America. What you intend to offer will have an impact on your marketplace choices.
Signing up for various accessible services and testing them out is your best bet. This is the only way to understand each platform and see which suppliers they work with.
The Best Marketplaces for Drop Shipping
| Drop-shipping supplier | Starting Price | Best for | Notes |
| AliExpress | Free | Any Seller | Prepare for competition—many drop shippers source Chinese products from AliExpress. |
| Oberlo | Free | Shopify users | simple integration with Shopify. connects with both individual suppliers and AliExpress. |
| Doba | $29/month | Shopify and Volusion customers | Connects with vendors in the United States and abroad. |
| WooCommerce | Free | WordPress users | simple connection with WordPress. While it is free to open a store, it costs $79 to link to third-party providers. |
| Modalyst | free | Any vendor | They specialize in quick shipping from US and European vendors. |
| Sprocket | Free | Any seller | Trendy products from suppliers in North America and Europe |
| Printful | Free | Any seller | Print-on-demand service. Add your designs to things and sell them in your online store. |
| Etsy | Free | Any Seller | While not officially a marketplace, Etsy allows you to connect with small-scale makers of handcrafted goods, which can help you stand out from the crowd. |
4th step: investigate your business
Typically, the first step in starting a business is to conduct research. This includes researching what your competitors are doing, how demand is in the market you’re targeting, and what buyers are seeking.
However, because of the way drop shipping works, you may adopt a more hands-on approach right away.
Conduct Research
One of the finest research methods is to start your business immediately.
Most of the time, trying out new products in your store is free. Running test marketing costs only what you’re willing to pay. You can begin trying right away without first conducting extensive competitor profiling or market studies.
You can experiment with several platforms and marketing channels before settling on one. So start enjoying that flexibility—even if you’re starting with dropshipping and don’t have your firm set up.
Investigate Dropshipping Products
Trial-and-error research can be fascinating for many novice drop shipping business owners. However, if you’re new to drop shipping and have yet to learn what you will sell or how to promote it, you should start with some standard research methods.
Here are some basic methods for determining which products your company will sell.
Investigate the Competition
If you already have a product type in mind, a quick Google search will give you a taste of your competition. Examine the top sellers for the products you’re considering and ask the following questions:
- How do they market themselves?
- What is their social media presence like? How many followers do they have?
- What do they charge?
- What profit margin are sellers making based on the wholesale pricing of identical products?
If you can’t compete with other established providers, you might wish to try a different product area. If you believe you can offer comparable costs, seek an advantage.
Do your competitors’ websites have no content and few followers? Those are potential sales channels. stores filled with misspellings and strange grammar? A more straightforward storefront may make you appear more trustworthy to customers.
Search Amazon’s Best Sellers for Gold
Amazon research is simple and free. By researching best-selling products, you can learn what types of things clients are looking for and how much they are willing to pay.
Begin with Amazon’s complete directory and work your way down via the categories and subcategories.
For example, did you know that the most popular novelty item under “Dining & Entertaining” is a Bobby Robb coffee mug that paints a calming landscape when you add hot liquid?
You can’t locate a source that supplies Bobby Robb mugs at a reasonable price. However, research like this can be inspiring. It’s worth looking into vintage coffee mugs as a drop-shipping product.
Infiltrate a Specialized Market
There are millions of online communities depending on users’ interests. Finding a part of the Internet that hasn’t been used in a while could lead to the creation of a whole new market.
Investigate interests and activities, and then delve into Facebook Groups to identify the people who are passionate about them. Seek out “buy and sell” groups in particular. They’ll show you what people want to buy.
Assume you want to try drop-shipping craft items, and you know polymer clay is a popular substance to work with. A quick Facebook search shows a polymer clay buy-and-sell group with thousands of members.
However, when you join, you will find many people buying and selling pasta machines. Further investigation reveals that pasta machines are a popular technique for flattening clay.
You can now look for suppliers who provide low-cost pasta machines, promote them as polymer clay tools in your store, and target hobbyists with your marketing. Best of all, because you’ve immersed yourself in the world of polymers, you’ve already researched the demographics to target.
5th step: plan your (minor) initial investment
You only need a little money to start a drop shipping business. In fact, a $1,000 cushion buffer should be sufficient to cover the essentials, such as the cost of creating an online store, signing up for a premium marketplace subscription, and employing freelancers to build brand materials.
It is better to You’re better off spending as little money as possible to get started. Hiring designers, programmers, and marketers to manage your firm for you costs you more than a massive portion of your profits: it costs you precious experience.
You’ll discover how every business component works by building it from the ground up. If inspiration strikes, that offers complete control over how it functions and positions you to start future drop-shipping businesses.
6th step: select a business structure that protects you
Your business structure determines how you will file your taxes. It also determines your guilt. Specific business structures can shield you from being sued or having your personal property tax collected.
- Sole proprietorship
- Limited liability company (LLC)
- Partnership
- Corporation
Each has its advantages and disadvantages. However, if you want to start a drop-shipping firm, you should form a sole proprietorship or an LLC.
By default, a small business is set up as a sole proprietorship.
The IRS considers you a sole proprietor as soon as you begin making an income on your own, that is, without the assistance of an employee.
An LLC can function similarly to a sole proprietorship—you are still the single owner of your business—but with additional safeguards. “Limited liability” means that your personal and corporate money is separate. If your LLC fails to pay its payments, is sued, or even goes bankrupt, the money in your personal bank accounts will be unaffected.
Only your corporation, as a separate tax entity, is liable.
The extent to which an LLC protects you from liability varies depending on the state in which you operate.
7th step: create a business name and register it
You must register your business name as soon as you begin doing business under a title other than your own.
Make Sure that your Name is Distinct
First, conduct some web research to determine if another firm with the same name as yours already exists. Then, go to your county clerk’s office to see if anyone else in your area uses your name.
Finally, if you want to be confident that you are not infringing on someone else’s name, contact a patent and copyright attorney.
Register your Name
You can register your name as a sole proprietor by filing a DBA with your state.
For federal or state tax purposes, you’ll have to register your name when you choose an LLC or another business structure.
However, if you intend to operate under a name other than your chosen name—for example, “Sid’s Polymer Boutique” instead of “Sid’s Polymer Pantry”—you must obtain a DBA with your state.
8th step: obtain federal and state tax identification numbers
When you submit taxes, the IRS keeps track of your business with a tax ID number. You can get a tax ID by going to the website of your state’s Secretary of State.
At the federal level, a “tax ID” is any of a number of different ID numbers that can be used as your tax ID. That’s perplexing. Fortunately, this means you may already have a tax ID that you can use for your firm.
related resource: tax returns guide for seed stage companies
9th step: apply for local licenses
Fortunately, drop shipping is a relatively low-impact business. The most important components are you, your computer, and a comfy place to sit.
In comparison to a restaurant or auto dealership, the number of permissions and licenses required to operate is small.
Still, be sure you know what official documents you require and that you obtain them.
Standard requirements include a general business license and a sales tax permit. Find out what licenses you need to start your drop shipping business on your Secretary of State’s website.
10th step: establish a company bank account
Even if you run a sole proprietorship and your personal and business finances are similar for tax reasons, keeping your personal and business finances separate is critical.
When you have two accounts, you use your business account to pay for expenses and collect revenue before transferring earnings to your personal account. This makes managing your books and filing your taxes easier.
Furthermore, it can assist you in developing a relationship with your bank, which may be beneficial if you decide to request a loan in the future.
Opening a business bank account is simple if you know what you want.
11th step: calculate sales tax
What exactly is the connection between sales tax and drop shipping? It can be challenging.
If your state mandates that you pay sales tax, but the buyer is from another state, and the company shipping your product is from another continent, who collects sales tax? Who pays for it?
helpful resource: business entities understanding tax implications
12th step: set up bookkeeping and keep track of your profit margins
Spend enough time lurking in dropshipping online communities or following the social media profiles of any drop-shipping luminary, and you’ll see that profit margin is a key concern.
Undercutting competition is the only way to earn sales for many drop shipping companies. It’s a race to the bottom as businesses try to outbid each other to get more customers.
For high-volume products, a 12-cent variation in profit margin can make the difference between breaking even and falling into the red for the month.
Even if you are not immersed in the ruthless world of high-volume drop shipping, it is critical to monitor your margins. Drop-shipping firms have smaller profit margins than traditional retail stores (think 15% instead of 50%), so every penny matters.
A comprehensive bookkeeping system shows how money comes in and goes out of your business. This allows you to figure out how much you want to sell at what profit margin to make money.
Learn how Countick handles your bookkeeping to understand how good financial management from the start may help your drop shipping business thrive.
related resource: ultimate guide to bookkeeping costs factors pricing more
13th step: begin automating right away
Once your drop-shipping company consistently produces sales, you can put day-to-day tasks on autopilot to devote more time to finding new products or exploring new markets.
Fortunately, numerous ways to automate your small business allow you to handle everything from social media posts to customer service without lifting a finger.
One issue with this strategy is that your time is more valuable today than ever as you start your firm. Even if you only have a few hours a night to devote to your drop shipping side hustle, the more time you can devote to study, planning, and experimentation, the sooner you’ll be on your way to a stable income.
related resource: how to automate the bank reconciliation for your business
For example, effective customer service is critical to retaining positive ratings for your company and gaining new customers. However, you may need more time to respond to every email or letter. That’s when a solution like ZenDesk, which outsources your customer service to real people, comes in handy.
So start saving time right away!
