George Harrison
Dropshipping is a popular business model, favoured for its low start-up costs and low overheads. Plus, you can start a dropshipping business from practically anywhere in the world, since all you need to get going is a laptop and an internet connection.
In this article we explain what dropshipping is, how it works, and how you could become your own boss by starting a dropshipping business.
What is dropshipping?
Dropshipping is a way of selling products online without ever having to handle or stock your own inventory. With dropshipping, you pay a third party to take care of procuring, storing, and shipping the goods you’re selling. In other words, you act as the middleman between the supplier and the consumer.
If you start your own dropshipping business, you’ll decide what you want to sell and how much you want to charge. You’ll also need to set up an online store. This store may be hosted on your own website, or you might use an existing ecommerce platform – like Amazon – as your storefront. Then you find a supplier (or multiple suppliers), often known as a ‘dropshipper’, who you want to work with.
When a customer orders something from your online store, you send the customer their order confirmation. At the same time, you send the details of your customer’s order straight to the dropshipper.
From this point on, the dropshipper takes responsibility for fulfilling your customer’s order. This means the dropshipper holds the stock, packs the order, arranges the shipment, and gets the product to the customer on your behalf.
The customer pays you when they place their order, and you pay the dropshipper to fulfil the order. Whatever is left over is your profit on the sale.
With a third-party handling fulfilment, this leaves you to essentially act as a marketer. You present a storefront to the customer and connect the customer with your supplier or suppliers – depending on how many you want to work with. All you need to focus on is managing your online storefront, marketing your goods, and maintaining good relations with customers and suppliers.
Bear in mind that even though you use a dropshipper to fulfil your orders, you will still legally be known as the Seller of Record. So even though you won’t handle any of the goods you’re selling, you still technically own them until they get to the customer. This means you are responsible for paying any taxes and surcharges which the goods might incur.
Why start a dropshipping business?
Dropshipping has become a popular ecommerce business model in recent years. It appeals to many people for the following reasons:
- Low start-up costs: If you were setting up a traditional online store, you would have to buy or manufacture your inventory before you could sell anything. This requires significant upfront investment. With dropshipping, however, you don’t need to stock the inventory you plan to sell, which keeps start-up costs very low.
- Low overheads: Dropshipping businesses have very low overheads, as sellers don’t need to warehouse the goods they’re selling or worry about the logistics of fulfilling customer orders. Many dropshipping businesses are run from home – requiring just a laptop, website, and an internet connection.
- Flexible location: In theory, you can run a dropshipping business from anywhere – so long as you have an internet connection to keep up with orders and keep your suppliers in the loop.
- Low-risk business model: Starting a dropshipping business can be less risky than opening a traditional brick-and-mortar store or even starting a traditional ecommerce business. Because dropshipping businesses outsource stocking and shipping responsibility to their suppliers, the seller doesn’t need to worry about paying for stock that may never be sold. Likewise, the seller in a dropshipping business doesn’t need to invest in expensive shipping or logistics infrastructure.
- Be your own boss: If you run a dropshipping business, you’ll be working for yourself. This means you make the rules – so you’ll be able to decide when you work and where you work. You’ll also be responsible for all business decisions – including what to sell, how much to charge, and how to market your business.
Bear in mind, however, that despite its many advantages, dropshipping isn’t a ‘get rich quick’ scheme. As with any commercial venture, setting up a dropshipping business requires work, and you’re unlikely to make a fortune overnight. Instead, success is more likely to come as the business grows or scales over time, so patience and persistence are key.
Start a dropshipping business in 5 steps
Here’s our guide to getting your dropshipping business off the ground – plus the potential financial and regulatory hurdles you’ll need to consider before you get started.
Research and choose your market
Market research is an essential first step to starting a dropshipping business. Your aim is to find out more about your potential customer base and competitors, which will leave you better prepared to set up your business and compete in a potentially crowded market.
This process may involve conducting online research, talking to customers and competitors, or looking at rival ecommerce stores to check out the competition.
While conducting market research for a dropshipping business, the two most important questions are:
- Is there demand for my product?
- Who is my target market?
If you want to start a dropshipping business, you’ll also need to research:
- Products: A key variation between dropshipping businesses is the kind of products they sell. Dropshipping businesses can sell everything from T-shirts to tech, and you may find that the marketplace for what you want to sell is already so crowded that it’ll be hard to compete. You are likely to stand the best chance of succeeding if you pick a niche and take your time testing and researching the products you want to sell.
- Suppliers: Researching dropshipping suppliers is important, since you’ll be relying on them to fulfil customer orders. Consider the quality of any supplier’s goods and the price the supplier charges to get them to your customers. You should also make sure that any potential supplier is capable of fulfilling orders in a timely and professional manner. Additionally, you might want to investigate returns policies in case any of your customers are unhappy with what they ordered.
- Ecommerce platforms: If you want to start a dropshipping business, you’ll need an ecommerce platform to showcase your wares, make sales, and facilitate payments. One option is to use an existing platform to market your goods and act as an online storefront. In this case, research online platforms and see which one would be best for your business.Amazon, eBay, and Shopify are all examples of ecommerce platforms used by dropshipping businesses, but there are many more out there, so do your research.
- Website providers: If, on the other hand, you would rather sell your products through your own website, then you’ll need to research website providers and the associated ecommerce services you’ll need to process orders. Either way, your store should function as an easy-to-use shop window for your products. Research what other dropshipping companies are doing and think about the best way to showcase your products to future customers.
Create a budget for your dropshipping business
Creating a business plan and a budget will give you a better idea of exactly how much money you need to start your dropshipping business. A business plan will normally also be required if you plan to apply for a start-up loan or business loan. For a detailed guide on business plans, read our article on how to write a business plan.
Given the low overheads and low start-up costs associated with dropshipping businesses, you may not need much capital to get off the ground. A major advantage to the dropshipping business model is that you only pay for the goods you’ve already sold. This eliminates the risk of ending up with an expensive warehouse full of expensive goods which you just can’t shift.
Still, you will need an internet connection and an ecommerce platform before you can make your first sale. You may also choose to purchase products from potential suppliers to test quality, delivery speeds, and reliability. You can plan for these costs by creating a budget.
For a detailed guide, explore our five-step guide to creating a small business budget.
Register your dropshipping business
When starting up any business, it’s important to choose a business structure and then register your business. You should take your time and research which business structure will best suit your needs:
- Sole trader: A sole trader is the exclusive owner of a business and keeps all post-tax profits. This means there is no separation between you and your business – making you personally responsible for any losses your business makes. If you choose to become a sole trader, you will need to register for self-assessment with HMRC.
- Partnership: A business partnership is when two or more people, known as partners, share the responsibilities, risks, profits and losses of a business. The three main types of partnerships are general partnerships, limited partnerships and limited liability partnerships.
- Limited company: If you choose to incorporate your dropshipping business as a limited company, you will be legally and financially distinct from your business. As a limited company, you will have shares and shareholders and can keep any post-tax profits. You can register as a limited company at Gov.uk.
» MORE: Should I register as a sole trader or limited company?
Bear in mind that businesses must be VAT-registered if they sell goods to UK customers from overseas. This rule applies to dropshipping businesses too.
If you start your own dropshipping business, you’ll also need to follow UK consumer protection laws when selling goods online. This means your customers will be allowed to return any goods bought online for a full refund within a 14 day ‘cooling-off period’.
Fund your dropshipping business
Of course, most businesses need money to get started. Once you have created a budget and registered your business, you are ready to seek funding. With dropshipping, you may be able to afford the low start-up costs yourself, but it is still worth considering the various funding options available to UK businesses:
- Personal savings: Starting your business with personal savings means you will keep full ownership of the business. You may already have enough money saved up to get your dropshipping business up and running, but be careful not to endanger your individual financial health if you spend your own money on your business.
- Friends and family: Borrowing money from friends and family can be tricky, so it is best to draw up a written agreement in order to avoid disagreements down the line.
- Small business grants: There are a range of non-repayable and partially repayable start up business grants across the UK, as well as grants for those based in Scotland, Wales and Northern Ireland.
- Government business loans: Different government business loans may be available depending on where you are in the UK. The costs associated with starting a dropshipping business, however, may be low enough that you don’t need to take out a loan to get started.
- Business loans: A traditional small business loan might be difficult to secure as a dropshipping start up, but it is still wise to research your options before starting a business.
- Angel investors: Angel investors tend to be wealthy individuals looking to invest in new businesses in exchange for equity or convertible debt.
- Crowdfunding: This involves securing funding from more than one source in exchange for things like equity or early access to products. Crowdfunding often takes place through an online campaign.
You will also need somewhere to put this funding and manage the ongoing cash flow of your dropshipping business. This may mean opening up a business bank account. While it is not a legal requirement if you are a sole trader or business partnership, you must open a business bank account if you incorporate as a limited company or set up as a limited or limited liability partnership.
Find your first dropshipping customers
Now you’ve done the research and registered your business, it’s time to set up your online store and get going. Because dropshipping involves selling goods online, the internet is likely to be your best friend when it comes to marketing your business. Consider using social media to put your business out there – either by posting on social media platforms or by paying influencers to promote your business (a practice known as influencer marketing).
Another option is to use paid advertising to get eyeballs on your store. Facebook and Google are popular platforms for advertisers, and because you can set your own advertising budget, your campaign doesn’t need to break the bank.
How much do dropshipping businesses charge?
When it comes to dropshipping, every business is different. Because any two dropshipping businesses may sell radically different products, it’s impossible to generalise about how much dropshipping businesses charge. However, ecommerce platform Shopify estimates that typical dropshipping profit margins are between 10% to 15%, which should give some idea of how much profit you can make running a dropshipping business.
Shopify also estimates that it’s possible to make up to $2,000 (around £1,600) in revenue per month by spending just 15 hours a week running a dropshipping business.
» MORE: How to start a cleaning business
Image source: Getty Images
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