How to Start a Drop Shipping Business

Posted May 9, 2017 | By Tricia Hussung

Laptop and other shipping icons with title text overlay

Drop shipping is a popular retail business model among aspiring entrepreneurs, as it allows the business owner to avoid owning or storing inventory. With drop shipping, business owners can buy products from a wholesaler and ship directly to their customers. As eCommerceFuel explains, “The supplier will ship the product directly from their warehouse to your customer, and charge you only for the price of the shipped item.”

Here’s how it works, according to A Better Lemonade Stand:

  1. A customer arrives at your online store and makes a purchase.
  2. You receive the order and forward it to your drop shipping partner.
  3. The supplier packages the order and ships it to the customer on your behalf.

 

The central benefit to drop shipping is a low capital requirement: There’s no need to invest in inventory because you’ll only need to purchase a product when there is an existing order to be filled. Another reason drop shipping is attractive to many entrepreneurs is that it involves less risk. As mentioned above, you work with a supplier and won’t be stuck with any unsold inventory. Drop shipping also allows for wider product selection because you can add products to your catalog with relative ease, without worrying about pre-purchasing. Finally, drop shipping is highly scalable because you won’t be fulfilling each order manually.

The drop shipping model is an especially good fit for high-margin accessories or as a supplement to a proprietary product catalog, eCommerceFuel notes. Starting a drop shipping business requires you to be knowledgeable about business processes like logistics, marketing and sales, but depending on your goals and objectives, it can help you get your business off the ground quickly. The following steps demonstrate how to start a drop shipping business.

How to Start a Drop Shipping Business

Decide on a Business Structure

The first decision you have to make is determining what type of business structure is right for you. Sole proprietorships are the most straightforward but don’t provide any personal liability protection. This means that your personal assets are at risk if your business goes under or is sued. The central benefits of choosing a sole proprietorship have to do with simplicity — you can report earnings on your personal taxes and don’t need to submit other state or business filings, Shopify explains.

Another option is choosing a limited liability company (LLC). LLCs offer “increased protection of your personal assets by establishing your business as a separate legal entity,” but they require you to comply with filing requirements along with paying associated fees, Shopify notes. If you decide to go with a C corporation, you’ll benefit from the maximum liability protection. In fact, this is why most major corporations are set up this way. However, they are “more expensive to incorporate and are subject to double taxation, as income doesn’t pass directly to the shareholders,” according to Shopify. Because of this expense, most small-scale entrepreneurs choose either sole proprietorships or LLCs.

Determine Product Niche

Next, you’ll need to decide what your product niche will be. A Better Lemonade Stand recommends finding “the right mix of ‘passionate niche’ and ‘competitiveness’ for your new business to thrive and succeed.” By focusing on a specific market, you can more easily attract a smaller subset of people by creating a business with their needs in mind. Begin by brainstorming and coming up with a list of 10-15 ideas for niche markets, such as yoga enthusiasts, home cooks or birdwatchers. The more specific you can get, the better.

Then, conduct keyword research using Google Keyword Planner. This tool “enables you to see how many searches any given keyword receives per month. Even though this tool is mostly used by SEOs and Google Adwords specialists, [it] is a great way to find what your potential customers are searching for online,” A Better Lemonade Stand explains. Your research will tell you how much demand there is for your product in terms of e-commerce.

After you’ve done some keyword research, check Amazon to see what your potential customers are already buying. If your product isn’t on the list, it’s probably time to rethink your niche due to lack of demand. You can also research using social media platforms like Facebook, Reddit and YouTube. This is a great way to find out “how your potential customers are engaging with your niche,” A Better Lemonade Stand notes.

Learn More About the Value of an MBA

Download our free guide, Climbing the Corporate Ladder: Your Guide to the MBA and Beyond for an in-depth look at career options, salary information, skills learned and more.

Get your copy

Find a Supplier

Once you know what your product is, it’s time to partner with a drop shipper. Look for suppliers that have experience and a good track record with past clients. SaleHoo also recommends you ask the following questions before signing a deal:

  • How long will it take for an order to be shipped once it is placed? As a general rule, faster shipping is more attractive to customers.
  • What shipping methods do they offer? Find out if they can ship internationally and overnight.
  • What are their quality control systems? Ensuring that the products are high quality will save you time and money in the long run.
  • Do they offer warranties? This is an important feature for many potential customers, especially at higher price points.
  • Can you use their product photos? This is particularly important because your listings will have a more professional appearance.

Choose a Selling Platform

One of the most important decisions you’ll make in setting up a drop shipping business is deciding which selling platform to use. You have a lot of options, each one with advantages and drawbacks. For example, Amazon offers built-in access to a large audience and heavy traffic. This is highly valuable to a new business venture. However, there are privacy concerns associated with using Amazon, because the company has full access to seller sales data.

You can also go with eBay, which has a simple setup process with built-in marketing and SEO services. High listing fees can make selling on eBay expensive, and the platform restricts your ability to build your brand due to limited customer engagement.

An online store or e-commerce platform is another good option. You will have full control over both product presentation and branding, which is a plus. However, the startup process is lengthy and can be complex. You’ll need to work with a website builder or hire someone to create a custom site for you. This means you won’t be able to utilize built-in SEO services or marketing.

Depending on your product type and business goals, any of these options could be right for you.

Promote Your Brand

Of course, promotion is key for new business ventures. One of the most effective ways to promote your drop shipping business is through SEO, getting traffic from search engines to your store. First, determine what keywords you want to rank for, and optimize your pages for the ones you chose. Next, you can build backlinks to your store. Completing these relatively simple steps can help drive people to your website — so you’ll gain free traffic.

It’s also a good idea to utilize content marketing, which is “a strategic marketing approach focused on creating and distributing valuable, relevant, and consistent content to attract and retain a clearly-defined audience — and, ultimately, to drive profitable customer action,” according to the Content Marketing Institute. Content marketing helps you engage with your customers at multiple points in the sales funnel through videos, blog posts and more. You should also create social media accounts for your company across platforms like Twitter, Facebook, YouTube and Instagram. In a few months, you should see considerable growth and increased brand recognition.

If you are interested in topics like these that are relevant to entrepreneurs and other business professionals, consider Concordia University, St. Paul’s online MBA program. Through mentorship and advanced coursework in core business topics, this program provides students with skills to advance their careers while becoming experts in their chosen industry. CSP allows students to specialize their studies with the online MBA in Health Care Management. Both degree programs are also available on campus.