How to Start a Dropshipping Business

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Posted by The Savvy Retiree on November 13, 2020 in Make Money, Online Income, Portable Incomes, Remote Working, Setting Up a Business

Dropshipping is one of the most accessible ways to become an online entrepreneur and build a new income you control. As the owner of your own dropshipping store, you can work from anywhere, choose what you sell, and set your own prices. In time, you could potentially even build your store into a brand and an asset that you could sell on for a large sum, even tens of thousands of dollars or more.

It’s also important to note that there’s arguably never been a better time to tap into the online retail sector. E-commerce sales hit $3.5 trillion globally last year and were projected to reach $6.5 trillion by 2023, according to Emarketer.com. And these forecasts were compiled before the pandemic, which has only boosted e-commerce revenues further.

So if you’re ready to grab your piece of this enormous pie, here’s my guide to what dropshipping is and what you need to do to get your dropshipping store up and running…and earning. 

What Is Dropshipping?

Dropshipping is an online retail model in which you own and operate an online store, but you don’t need to hold any inventory or handle shipping. Basically, you set up an online store with descriptions of the products you want to sell. When a customer places an order through this storefront, you pass the order on to your supplier, who then ships the product directly to the customer with your logo and branding.

So unlike with a traditional retail business, you don’t need a physical store, a storeroom, a distribution center, or even any employees (though you can outsource the customer service work to online freelancers if you like). All you need is an online store and these are surprisingly cheap and easy to build. 

If you’ve never heard of this retail model, it’ll surprise you to learn how popular it is. While exact numbers are hard to determine, it is estimated that between 20% and 30% of all products sold online are fulfilled through dropshipping. So if you’ve purchased products online, especially from sites like Amazon or eBay, you’ve likely bought something from a dropshipping business.

How Does Dropshipping Work?

Let’s dive deeper into the dropshipping business model. In this system, the supplier is responsible for manufacturing the product, managing inventory, conducting shipping, and replacing defective products. 

When you start a dropshipping business, you need to find a supplier for the products you want to sell and enter into a fulfillment agreement with them. Under this agreement, the supplier will sell you the product at a wholesale price.

You can then add the product to your website and set your retail price. When a customer visits your online store and purchases a product, you transfer their shipping information over to your supplier and pay them the wholesale price for the product. Your supplier then ships the product to your customer, with your branding on the packaging. Your profit is the difference between the wholesale and retail price, minus any expenses for taxes, advertising, etc.

As the storeowner, you are responsible for providing all the customer service, including handling any questions and communicating between the supplier and the customer in case returns are necessary. If this process is handled correctly, the customer will never know about the supplier or realize that the product did not come directly from you. 

Why Start a Dropshipping Business? 

The great advantage of a dropshipping business is that it allows you to work from anywhere. Since you don’t have to store inventory, you could start a dropshipping business selling to customers in the U.S. and run it from downtown Paris or the beaches of Thailand or the coast of Panama or…you get it.  

Another plus is the ease of starting a dropshipping business. To get started, you simply set up a website, find a supplier, and begin selling. And if some of these processes sound technically complex, don’t worry. They’re not.

Starting a dropshipping business is also inexpensive, since you do not need to buy inventory. Your only upfront cost is your website. And thanks to platforms like Shopify, you can build one for as little as $29 a month (after a two-week free trial).

Because it requires so little startup capital, operating a dropshipping business is also a low-risk proposition. You never have to assume the risk of unsold inventory. And even when you factor in things like a website domain (your .com address), advertising, and some other costs, you can easily get your operation off the ground and generating revenue for less than $1,000.

The Step-by-Step Guide to Setting Up a Dropshipping Business

Step 1: Choose a Niche

Choosing a niche is the first and perhaps the most important step in building your business, so let’s discuss what a niche is and why it’s so important.

A niche is the product or groups of products you want to sell. Dropshipping stores are specialty stores. To succeed in dropshipping, you need to focus on one, very specific area. A niche is not a category of products, but more like a sub-category, or even a subset of a sub-category.

So, for instance, apparel is not a niche, nor is men’s clothing. Men’s shoes could be a niche, but even that is almost certainly too broad. Drilling down deeper, you could choose men’s running shoes. That would be a niche. The narrower your niche, the easier it is to compete online and, crucially, brand your site. 

It can be helpful to pick a niche that you know a lot about and that you are passionate about. You will be marketing your site, so the more you know about your niche, the easier it will be to market and promote your product and to understand your customers’ needs. So, if you are an avid runner, then men’s running shoes could be a good niche for you. If you haven’t worn a pair of sneakers in 10 years, you should avoid this niche or commit to studying up on it. 

There’s a hotly contested debate in dropshipping circles about whether you should focus on niches in the high-ticket or low-ticket space.

With high-ticket products, you will need less traffic to your site and fewer sales to make a good profit, though you will likely have more customer service inquiries. With low-ticket products, you will have more orders because of impulse buying and less customer email to manage. However, your marketing strategy will have to be well thought out, as you will need lots of traffic coming to your site daily to get the sales you need to make a good profit.

Let’s look at some examples of both these models in the drone niche. A high-ticket dropshipping site focused on drones might sell high-end aerial photography drones in the $1,000 to $5,000 price range. The low-ticket site might sell beginner and toy drones for as little as $20 to $50. 

In the first example, you would need to sell just one drone a day to make a very good living with your dropshipping business, but with the low value drones, you would need to sell at least 10 to 20 a day to make the same money.

This is why high-ticket items may be the best way to go. However, to sell high-ticket products on a dropshipping site, you need to be (or become) an expert in that niche. Customers will not make impulse purchases, so you will need to have high-quality, detailed product guides, videos, and other explanatory content on your site. You may even need to speak to your customer a few times, either through email, chat, or even on the phone, before they make a purchase.

Step 2: Find Suppliers

After you have a general idea of what niche you might like to work in, the next step is to look for suppliers. The important factors to consider are price (difference between wholesale and retail), quality of the product, the supplier’s shipping time from when they receive the order, and whether they maintain good inventory levels.

Having a good supplier is going to make or break your dropshipping business. If you cannot fulfill the orders you get through your site in a timely manner, your customers will never come back, or they will cancel the order and look for a refund.

To choose a supplier, you first need to define where your target customer lives. If you are selling only in the U.S., find an American supplier with warehouses located in the U.S. If you are selling in Europe, do the same. The important thing is always shipping time. On most products, excluding furniture and other very large items, customers expect to get their order in less than a week. 

Once you have identified your target customer, spend some time on Google. Input searches like “men’s running shoes dropshipping U.S.” and you’ll find some options. You can also search online databases of dropshippers like Wholesale Central.

When you have identified some suppliers that you believe could be promising, reach out to them and take note of how long they take to return your initial email. This is often an indicator of overall efficiency. The initial areas to inquire about are product pricing, shipping times, shipping methods, pre-order fees, and integration into your website’s platform.

Once you have narrowed things down to three companies you like, get a sample product sent to you, so you can learn firsthand about the quality, packaging, and shipping times. You can use more than one supplier for your business. In fact, it is a good idea to do so when starting out, in case one of them is out of stock of an item. Over time, one supplier will probably emerge as your preferred partner and you’ll end up sending them most of your business.

An important point here is that some suppliers may require you to have a website before they establish a relationship with you. So you have may to build your website and upload some sample products before you can finalize the fulfillment agreement.

Step 3: Look at Your Competitors

Competition analysis should initially take place when you are choosing your product niche. But now that you have identified potential suppliers, it’s time to study in-depth what other sites in your product category are doing. Researching your competitors will help you understand and make changes to your business that will positively affect it. 

First, do a Google search for your product, and look for retail stores like the one you plan to build. If your product has a manufacturer stock (part) number, you can also search for that to see who else is selling it. You can make use of free niche finder programs like FindNiche to assist in your search.

A great paid alternative to help you analyze your product and find your competitors is software package SaleSource, which offers a $49, 7-day trial, which you could use to do all your research.

When you find and review your competitors’ websites, make sure you will be able to offer equal pricing, shipping charges, and shipping times based on the information you got from your suppliers. If your competitors are offering free shipping, you probably will have to do the same. 

Step 4: Choose a StorePlatform

The two most popular platforms for building and running a dropshipping business are Shopify and WordPress. Choosing which one to go with is quite simple. If you are new to building websites, go with Shopify. If you have built websites, managed web servers, or have multiple dropshipping sites, use WordPress. 

Shopify is an online platform used by everyone from beginners to advanced users. (It’s even used by big corporations including Budweiser and Tesla.) It allows you to design and build your website, add products to your online store, take credit card payments, communicate with your buyer, and fulfill your orders. 

Shopify is relatively low cost, starting at $29 per month per site. As your business grows, you can add apps from its app store to boost the functionality of your site. Most of the apps are paid, so in the end, you could end up paying up to $100 a month for a medium volume store. The great thing is you will need no technical knowledge at all, as the background processes and updates are all handled for you.

One add-on that dropshippers usually use, once their business is generating lots of sales, is software to streamline ordering to their supplier. When a customer orders a product from your website, this software automatically orders the product from your supplier. This can really save you a lot of time and speed up delivery times for your customers.

WordPress is a free, online content management system for intermediate to advanced users. To use this, first you will need a web hosting platform, but you can get that for $10 a month or less. With one web hosting platform, you can run many sites. 

With the addition of WooCommerce to WordPress, also free, and a payment processor, you can set up your online store. With WordPress, you have access to more than 5,000 additional plugins, many of them free. So this can be the most economical option. If you ultimately plan to set up multiple dropshipping stores, it can be worth learning this system.

Step 5: Research Your Audience

Once your store is up and running, you’ll need to define your target audience so you will be able to better understand their needs. Start with a deep analysis of what you are selling and who is most likely to buy the product. Look at the basics first: language spoken, gender, location, age, income, and personality type. You are looking to create an idea of your “ultimate customer.” 

In the niche example we spoke about above, “men’s running shoes,” your ultimate customer might look like this: male, English speaking, U.S., 25 to 40 years old, athletic, professional, and $75,000+ income. To this customer, you would sell expensive, high-quality running shoes.

Look closely at the needs of a customer like this. They have no problem dropping $150 for a pair of shoes, but they expect fast delivery and a quality product. They buy quality products all the time and expect no less from your company. This customer also expects professionalism throughout the entire buying and shipping process. They are not looking for any gimmicks, coupons, or promotions. They just want their $150 running shoes. Learning who your customer is, and what their needs are, is crucial to the success of your dropshipping business.

Step 6: Create a Marketing Strategy

Now that you have selected your niche, identified your product, found suppliers, built your website, and learned who your customer is, you need to get buyers to your website, engage them, collect their email addresses, and retarget market to them.

Set your business up for success from the beginning. On your website, add a pop-up on exit encouraging your visitors to give you their email addresses in exchange for an offer, such as information about upcoming promotions. Once they enter their email, they are now on your email list and you can market to them.

Start a weekly newsletter and provide value to the customer. Talk about new products, trends in your niche, and offer sales and promotions.

In terms of advertising, I recommend using Facebook ads to drive traffic to your site. Facebook ads are highly customizable, so you can directly target your “ultimate customer” directly. With your Facebook ads, target males between 25- and 40-years-old who are English-speaking, in the U.S., and like athletic activities and high-end apparel. Set a monthly advertising budget and drive traffic to your site.

Next, use Google Ads to retarget market to your visitors. Most visitors will not buy on the first visit, but retarget marketing will to get them back to your site. It works like this. You get a visitor to your website and a cookie is left on their browser. They are on another site online at a later time, and Google Ads sees that cookie, so they show that visitor your display ad for the product they were interested in days before. When they click on it, they are back on your site, more likely to buy this time.

Also, start a blog on your website and write about your niche. Write articles about your product totaling about 1,000 to 1,500 words. (You can also hire freelancers to write this content cheaply on sites like Upwork or Fiverr.) You should strive for at least one blog post a week.

In time, Google and other search engines will pick up these articles, so people will find your site when they type your product niche into an internet search. This is called organic search traffic. This literally “free” advertising works great if you do it consistently and learn a bit about using search engine optimization (SEO) techniques to properly write your articles. 

Set Your Business Up for Success

My final piece of advice is this: If you want your dropshipping store to succeed, set up your business processes and environment before you even begin.

This is perhaps the most overlooked part of starting an online business, yet it is central to success. It starts with simple things you may not even think of. You will need a quality, fast laptop or desktop, and stable, fast internet. Since you will probably be working from home, find a quiet spot in your home where you can work and not be constantly interrupted. A dedicated office space is best. A good desk and comfortable chair are also very important.

Set a schedule for work, even if you are working part-time in your business. If you are full time in your dropshipping business, treat it like a job. Break down all the activities in your business and assign them a time, things like answering customer emails, processing orders, ordering from suppliers, maintaining websites, doing research on new products. Assign a time in your day, and a process that works for you.

You will need to answer customer emails at least twice a day. A customer inquiry should never go unanswered for more than 12 hours. People shop 24 hours a day, so you are going to need to be there, every day, even weekends. I am not saying that you have to work 80 hours a week, but three to four hours a day, and one to two on weekends, can be enough time for you to run your dropshipping business. And remember, you can cheaply outsource this customer service work in time. 

Order processing is also very important. The quicker you get your order into your supplier, the quicker your customer receives the product. If you are not automating this process, you should always look at checking your orders twice a day, with Sundays off if necessary.

Starting a dropshipping business is not rocket science, but it requires research, practice, and commitment. The steps outlined here worked for me, allowing me to build not one but several profitable online dropshipping businesses. If you follow them, they could do the same for you.

By Rod Taylor

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