How to Start a Dropshipping Business

Feb 13, 2018

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So you’re interested in starting a dropshipping business?

As e-Commerce spending increases year-over-year, many retailers are joining the dropshipping bandwagon to get a piece of the pending $600 billion pie.

But don’t worry, whilst the competition for sales and suppliers has increased substantially, there are many ways you can differentiate yourself to build a successful dropshipping business without going toe-to-toe with the likes of Amazon and eBay.

In this article we dispel the myths surrounding dropshipping and teach you, step-by-step, how to start a successful dropshipping business.

  • What is Dropshipping
  • Business Structure - LLC or Sole-Proprietorship
  • How to Select a Niche
  • What to Look for in a Supplier
  • How to Market Your Business

What is Dropshipping?

Drop shipping is a supply-chain management process where the retailer (you) transfers customer orders and shipment information to the manufacturer or supplier.

This eliminates the need for the retailer to manage or invest in inventory management strategies to monitor stock levels.

How do You Make Money Dropshipping?

The drop shipping business model works in 4 easy steps:

  1. You find and purchase a product at a low wholesale price from a manufacturer or supplier
  2. Sell this product on your store for a much higher price
  3. Collect payment and send customer’s shipment information to your supplier
  4. Your supplier will ship these products to your customers with your brand’s name

Since you won’t have to manage stock and inventory, you can focus your time and money on acquiring more customers and retaining them.

Like many online business models, the low barrier-to-entry makes it easy for anyone to start business activity quickly.

On the contrary, failure rates are high as many budding entrepreneurs underestimate the amount of work required to keep an e-Commerce business running.

According to Shopify, it usually takes 12-months of full-time work mainly focused on marketing for a dropshipping business to replace an average full-time income of $50,000.

Building a successful business requires you to maintain all of the moving parts including but not limited to:

  • Customer service
  • Marketing
  • Operations
  • Human Resources
  • Finances

How to Decide on Business Structure (LLC vs Sole-Proprietorship?)

As an LLC, there is a ton more paperwork to fill in, but many business owners prefer it as it makes it easy to separate your personal finances from your business’ and also provides you with more protection as it acts as a separate legal entity from yourself.

However, be sure to get a lawyer or an accountant to help you decide which works best for you.

Get Your EIN Number Today

If there is one thing you should do today, it is to get your EIN Number (and claim your domain name if you haven’t already).

You’ll need this number to be able to get a wholesale dropshipping account, your sales tax ID, open business bank accounts etc. Think of it as the Social Security Number for your business.

Here’s a link to where you can apply for one online.

How to Select a Great Niche

Niche selection is one of the primary, most important decisions you will make as an e-Commerce business owner.

If you’re selling something that doesn’t interest you, or has low margins - your work will only be made more difficult.

Here are seven things to consider when choosing which niche of products to focus on:

1. Do you have vested interest and passion for this industry?

As someone who’s built three successful businesses from the ground up, I acertain at least 40% of that success to being deeply passionate and interested in my core product and how it helps my customers.

Whilst choosing high-ticket items and seeking customers with a high disposable income is very important for dropshipping (as we explain later), it’s not enough to keep you in the game.

The most successful e-Commerce owners all have vested interest in the products they’re selling.

Your business’ core USP is what determines whether you’ll stay up all night to solve big problems or shut-up shop when things get difficult.

If you’re serious about getting skin in the game and building a business which stands the test of time, then you must be passionate about the products you sell.

2. Are your preferred products even profitable?

Many people advise e-Commerce business owners to check Amazon’s and eBay’s best sellers lists to identify the most profitable products. But your research needs to extend beyond this.

Extend your research to the suppliers you intend to use. SaleHoo’s market research lab simplifies this process by helping you to:

  • Identify profitable products before you contact suppliers
  • See how competitive your market it
  • Look at sales trends and averages
  • Find low-cost trusted suppliers

One of the biggest reasons why business ventures fail is due to improper market research.

Do your due diligence by getting all your information first before contacting suppliers and buying products to list on your store.

Keep an Eye on Your Profit Margins

When deciding on a retail price, you must take your supplier’s base price into consideration.

Remember your supplier will always take a cut of your profits since you have to pay them for their products.

This is partially why some e-Commerce business owners recommend choosing expensive products to sell, as you will have a higher average order value, resulting in very healthy profits.

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3. How competitive is your market?

Many people seem to believe that a competitive industry equals market saturation. But this couldn’t be further from the truth.

High competition indicates there is demand and money to be made.

Just because there is a lot of competition doesn’t mean it’s impossible to crack.

You ensure you have a solid go-to-market strategy and you’re better than the bottom half of players in your niche.

Low competition may indicate that there is not enough demand.

Ideally, you’d like to select a niche which has high demand and low competition.

Use tools such as Google Trends and iSpionage to research product interest and analyze your competitors’ SEO/SEM strategies respectively.

How to Pick the Perfect Supplier

Who you choose to be your supplier can make or break your dropshipping business.

How do they communicate with wholesale purchasers like yourself?

Since the majority of suppliers you choose will be located outside your country of residence, you must establish clear communication expectations so nobody is left in the lurk when problems need to be solved.

Not only must your responses with each other be lightning-quick, you must also be able to understand each other very well.

6 Important Questions to Ask Each Supplier

Take supplier research as seriously as you would take applying for a mortgage or renting a property.

You wouldn’t rent a property if the landlord was impossible to reach, or the property had signs of damp or rot.

So the next time you schedule a call with a wholesale supplier, ask them the following questions:

  1. What’s their production cycle like? Do they have processes in place to scale alongside your business if you experience rapid growth?
  2. Can you put your brand on their products? What kind of white-labelling options do they offer?
  3. Will they provide you with the latest photos and videos of your chosen products?
  4. How long an average will it take for a product to be shipped to a customer, the moment they receive the order?
  5. What order tracking systems do they have in place to ensure orders don’t need lost?
  6. Which inventory management strategies (if any) do they implement to ensure they always have enough stock?

Where to Find Dropshipping Suppliers

Finding wholesale suppliers for your dropshipping business can be difficult if you don’t know where to look. In addition to SaleHoo, here’s 10 more general dropshipping suppliers worth looking into.

  1. Alibaba
  2. Dropshipper
  3. Dropship Direct
  4. InventorySource
  5. MegaGoods
  6. National Dropshippers
  7. Sunrise Wholesale
  8. Wholesale 2B
  9. Wholesale Central
  10. WorldWideBrands

Remember, just because a supplier is big and well-known doesn’t mean they’ll be right for your e-Commerce business.

How to Start Marketing Your Dropshipping Business

So you’ve registered your business, chosen a profitable niche and found your perfect suppliers.

Great! Your dropshipping business is online so you can start marketing it.

But where should you begin?

With over 70+ marketing channels worth exploring, how do you know which channels will generate traction for your e-Commerce business?

“Shouldn’t I just try a little bit of everything and hope for the best?”

Believe me, that’s the fastest way to get overwhelmed, waste time and lose money.

A half-assed, scattergun approach to marketing, doesn’t work.

Whether you’re a startup or a seasoned entrepreneur, you need a process for choosing traction channels worth spending your time and money on.

Introducing the Bullseye Framework

The bullseye framework is a 5-step-process and one of my favorite startup exercises for identifying which marketing channels to invest in.

They are:

  1. Brainstorm
  2. Rank
  3. Prioritize
  4. Test
  5. Focus

Step 1: Brainstorm

Simply note down the key marketing channels available to you and your industry.

Through market and competitor research you should know which customer acquisition strategies yield positive results, and which tend to not work so well.

You don’t just want to identify the channels worth doing, you also want to know which channels aren’t so great for your industry.

E.g. Google Shopping ads might be brilliant for your e-Commerce store, but Twitter ads and offline ads, not so much.

By the end of this exercise, you should have ~20 marketing channels listed down.

Step 2: Rank

Next, you’ll want to rank and sort each traction channel into three columns, based on how promising they are to you now.

For example, if creating a viral marketing campaign for your dropshipping business will generate the most return, then assign it an ‘A’ (high potential).

Whereas, if offline advertising looks like it’ll cost too much money for little gain, then assign it a ‘C’ (low potential).

You should now start to see a pretty clear picture of where your marketing dollars should go.

Step 3: Prioritize

It’s time to leave all emotion at the door.

You must now decide and pick just three traction channels you’d like to focus on. Ensure all of these come from column ‘A’, the inner circle. These will be the channels you’ll build starter strategies for.

Step 4: Build Minimum Viable Marketing Strategies (MVMS)

Here’s where it gets fun.

You now need to build minimum viable marketing strategies for each of your chosen traction channels.

Essentially, you’re putting your marketing channels under the pressure test to see whether they’re worth investing serious time and money in.

For example, rather than spend $5,000 on one influencer to promote your dropshipping business to his network, you could spend just $500 on three Instagram influencers with a highly-engaged and targeted audience as a test.

The results you get from these experiments will help you decide whether its worth spending more money on.

Using the same example, if you get a positive result from the $500 test, there’s nothing stopping you from investing twice as much on 6 influencers and scaling your efforts from there.

5. Focus on Your Best-Performing Channel

As you implement your MVMS’s, you’re bound to see success from at least one marketing channel.

The channel which performed the best during this period should be prioritized above all others. This isn’t to say that you shouldn’t focus on the ones which didn’t do as well, but if one channel is working so well, why not invest in it properly?

For most startups and businesses, there is usually one marketing channel which reigns supreme and dominates their analytics in terms of traffic, lead quality, sales and return on advertising spend (ROAS).

The more time you spend learning this channel inside-out, the higher your returns will be as you uncover more effective strategies that’ll help you grow and scale.

That said, don’t fall into the trap of allocating your entire marketing budget to one channel.

What works now, might not work as well or at all in a few years time.

So there you have it, now you know how to start a dropshipping business. To recap, we covered:

  1. The Dropshipping Model
  2. The Importance of Setting up an LLC
  3. A Simple Process for Choosing Profitable Niches
  4. What Makes a Good Supplier, Great - and 6 Powerful Questions to Ask
  5. How to Choose the Right Traction Channels to Market Your Business

Have you started a dropshipping business? What advice, tips or strategies do you have for building a successful e-Commerce business? Let us know in the comments below.

David Oragui

Written by David Oragui

While also running 3 businesses of his own, David writes super helpful content to help businesses better navigate the uncharted territory of the web to rapidly increase profits and sales