If you’re looking to start an online store and don’t want to deal with managing inventory, product development, manufacturing, or shipping, a dropshipping business model may be the perfect fit.
But how do you start a dropshipping business? It may seem easy because you’re selling products that other people create and ship, but there’s still a lot of planning, setup, and management involved. Read on to determine if starting a dropshipping business is right for you and learn how to set yourself up for success.
What is dropshipping?
Dropshipping is a business model where an online store sells direct-to-consumer without designing or manufacturing any products, warehousing actual inventory, or shipping orders. You may be wondering, “What exactly do I do if my dropshipping business doesn’t make, store, or ship any products?”
As a dropshipper, it’s your job to find products that you want to sell and source them from companies that are willing to ship directly to your customers. You then make those products purchasable on your website or eCommerce platform, mark up the price to cover your overhead and generate a profit, then send any orders directly to the manufacturers to fulfill. You’re also responsible for attracting customers to your website, paying your manufacturers’ wholesale price for the products you’ve sold, and handling most of the customer service.
Why don’t manufacturers just make their own websites and sell directly to the consumer? Why partner with a dropshipping company? Not every manufacturing company is interested in dealing with managing an eCommerce site, marketing, and expanding their customer service team. They may create products people want and need, but they don’t want to worry about the rest of the effort required to sell to consumers. For them, it’s a lot easier to sell their products wholesale to retailers or dropshipping companies.
Examples of dropshipping businesses
One of the most well-known dropshipping companies is Wayfair. When they started out, they didn’t make anything; they just listed an array of home furnishings on their online store, manufactured by a variety of other companies. All the products were listed in one place, making it feel like a physical brick-and-mortar store. They bought from vendors, marked up the prices, attracted customers, and made profits off of their sales.
Over time, they’ve actually established their own manufacturing relationships and developed branded products. They also started warehousing inventory and doing some of their own fulfillment. They still use the dropshipping model for a lot of their products, but have also developed a more traditional online retail side of their business.
Houzz, on the other hand, is a popular dropshipping business for home improvement and decor items that has stayed true to the dropshipping model. They keep zero inventory and all products are shipped direct from manufacturers.
What’s the difference between a dropshipping business and a multi-vendor marketplace?
A multi-vendor marketplace is a much broader category of store than a dropshipping business. Multi-vendor marketplaces may operate on a mixture of fulfillment models. Some marketplaces require their sellers to ship all their own products or allow sellers to use their own dropshipping partners. Some ship from their own warehouses in addition to allowing sellers to fulfill orders.
The way that multi-vendor marketplaces generate revenue is also different than businesses that are exclusively engaged in dropshipping. Whereas dropshippers usually pay a wholesale price to the manufacturers for the goods sold, multi-vendor marketplaces take a percentage of a seller’s sales.
Customer service is usually handled differently with multi-vendor marketplaces than with dropshipping businesses. In a multi-vendor marketplace customer service regarding account or payment issues might be handled by the marketplace, but product questions and shipping issues are handled directly by the seller. Dropshipping companies often take on much more of the customer service, although they may still refer customer service to the manufacturer for product-specific issues.
Examples of multi-vendor marketplaces include:
- Etsy. Etsy is the most popular multi-vendor marketplace for independent artists, craftspeople, and small creative businesses. All products are shipped directly from sellers and while use of some dropshipping partners violates Etsy’s terms, sellers are allowed to use production partners and certain types of dropshipping arrangements provided they don’t violate any of Etsy’s policies.
- eBay. eBay is the oldest and most well-known multi-vendor marketplace on the internet. You have the option to fulfill products from your own inventory or use your dropshipping partner for fulfillment as long as you comply with eBay’s policies.
- Amazon. While Amazon does have their own warehouses for their Fulfilled by Amazon (FBA) products, they also allow vendors on their platform to ship from their own warehouses or use dropshipping partners to fulfill orders.
- Walmart. To diversify their offerings and compete with companies like Amazon and Wayfair, Walmart has opened their website up to external vendors. In addition to products that they stock in their brick and mortar stores and warehouses, vendors can sign up for their own seller account and ship products using Walmart’s fulfillment system, their own warehouse, or dropshipping partners.
Dropshipping businesses can leverage multi-vendor marketplaces as part of their overall strategy, but most dropshippers also have their own websites with carefully curated products that are part of a specific brand identity. Running your own dropshipping store gives you more control over your brand, you don’t have to compete against other sellers on the same website, and you keep a higher percentage of the sales revenue.
What are the pros and cons of dropshipping?
Dropshipping isn’t right for every store. It’s important that you sit down and consider if it’s the route you want to take to meet your goals.
Benefits of a dropshipping business:
- Relatively low costs. You can avoid the costs involved with product development, manufacturing, and inventory storage — fees most traditional stores incur.
- No inventory management. You don’t have to concern yourself with storing products, risk losing money on unsold inventory, or worry about selling out of items.
- Improved cash flow. Receive payment for your products at the same time as you pay your providers rather than waiting to recover your investment.
- No shipping. Avoid potentially complicated shipping processes and trips to the post office.
- Reduced staffing requirements. Since you’re not managing inventory and shipping, you’ll require less staff to keep your business running.
- Minimal risk. Have the freedom to test new items with your target audience without risking a significant amount of money.
- Passive income. Let your supplier manufacture and fulfill orders while you work on other aspects of your business.
Downsides of a dropshipping business:
- High competition. Other online stores could potentially sell the exact same products.
- Lack of control. Since you don’t personally create and ship each product, you turn over a lot of control to your manufacturing company. They could suddenly decide to stop manufacturing a product that is a best-seller on your site, substantially change the design of and materials used in the product, or they could dramatically increase rates that you would then have to pass on to customers.
- Higher shipping costs for customers. If you sell products from multiple manufacturers, a customer might receive their order in different packages. This could potentially cause higher shipping costs as well as brand confusion or even frustration.
- No bulk discounts. Since you’re essentially purchasing one product at a time, you probably won’t receive supplier discounts and may have lower profit margins.
- Difficulty standing out. Since your products are similar to those of other stores, it’s hard to be different. In some cases, you may have to compete only on price, which is often a race to the bottom.
How to start dropshipping
Ready to find out how to start a dropshipping business? The following is a guide that will set you up for success. But remember, the exact dropshipping business model will vary for every store, so feel free to customize it based on your needs and audience.
Step one: Choose a niche
You must choose a niche — a specialized area within a larger industry that you focus your products and business on. No company can sell everything to everyone.
A good niche is one with products people are willing to pay for online. There should be some demand — dropshipping isn’t the place to roll out a bunch of untested products.
The good news is, your niche can be almost anything. You can pick any sport or recreational activity and sell related products to enthusiasts. Or sell products specific to food, fashion, home improvement, electronics, entertainment — the list can go on forever.
Each niche also has sub-niches. Hats can be narrowed down to outdoor adventure hats, women’s hats, sports hats, hats with funny messages on them, and more.
Step two: Determine your product lines
If you already have a specific idea of the products you want to sell, you might start by searching for vendors that make the products you’re interested in. However, if you’re not sure what kind of products you want to sell within your niche, you’ll want to take the time to determine the best fit for your store.
Step three: Select vendors
One of the most important steps when considering how to start dropshipping is choosing reputable, high-quality suppliers to work with. Some suppliers offer a huge variety of products from different manufacturers that fit into nearly any niche. Examples of those include AliExpress and Spocket. Keep in mind, if you’re wanting to put your products on a multi-vendor marketplace, some marketplaces like Etsy expressly ban you from using some of these bigger dropshipping partners.
Step four: Select specific products and order samples
You’ve decided on the types of products you want to sell, created a dropshipping business plan, and determined the vendors you want to source from, but now you’ll need to choose each individual product that you want to offer on your site. You don’t want to just pick a product directly from a manufacturer’s website, sight unseen, and list it in your store. Make sure that the product is exactly what you are looking for before you offer it to your customers.
Order some samples and test the products you’re going to sell as part of your online store. This is key to maintaining a high-quality store and ensuring that the items look like their pictures and work as described. The last thing you want is to sell something you can’t personally stand behind.
Step five: Develop a marketing plan
Marketing is pivotal when it comes to learning how to start dropshipping. And marketing begins with knowing your audience and niche. Who are you marketing to, and why? Once you know your target audience, you’ll need to figure out the best ways to connect with them. Are they best reached with online marketing, through the mail, in person, or somewhere else?
Step six: Watch your expenses
Though your dropshipping business doesn’t have to create packaging, acquire materials, manufacture anything, or ship products, your dropshipping business will still have costs. Many marketing strategies (like paid ads) require an upfront investment. You may want to create special, custom packaging if your supplier allows it. You’ll need to purchase a domain name, hosting plan, and any necessary extensions for your online store.
And while some of these are relatively minimal investments, marketing costs can especially add up fast. It’s important that you understand what’s involved before you start dropshipping. Take the time to make a budget and then adjust the pricing of your products to accommodate your overhead.
Step seven: Create your website
With vendors, products, and a marketing and business plan in place, you’ll need to consider your website and technology. This is one of the most exciting parts of learning how to start dropshipping.
Step eight: Deliver excellent customer service
A guide about how to start dropshipping wouldn’t be complete without discussing customer service.
Customer service is essential to standing out from the competition. And since you won’t control shipping, you must have a plan and a team in place to keep customers informed and happy if anything goes wrong — even if the mistake is your vendor’s, customers will look to you to make it right. But how do you do that?
