How to Start a Dropshipping Business: A Complete Playbook for 2021

Learning how to start a dropshipping business, as with any type of venture, isn’t easy. Nevertheless, it’s a great first step into the world of entrepreneurship. You can sell to customers without holding any inventory. You don’t need to pay for products upfront. And if you’re serious about your new venture, you can build a sustainable source of income in the long run. 

If you’re contemplating dropshipping, consider taking the following business and financial steps in this complete dropshipping tutorial.

Some are mandatory from the outset, while others are just a good idea, but dealing with them up front will save you time and headaches down the road.

How does the dropshipping business model work?

Dropshipping is an order fulfillment method that lets store owners sell directly to consumers without stocking any inventory. When a customer purchases a product from a dropshipping store, a third-party supplier ships it directly to them. The customer pays the retail price you set, you pay the suppliers’ wholesale price, and the rest is profit. You never have to handle products or invest in inventory. 

In order to sell the best dropshipping products, you just need to register an account with a supplier.

 Two common ways to find a supplier for your dropshipping store are:

1. Through a supplier database, like Dropship Direct, Alibaba, or AliExpress.
2. Using an integrated supplier directory in your store’s backend, like Oberlo. 

The easiest dropshipping process for Shopify stores is through Oberlo. You can source millions of products from the Oberlo marketplace through AliExpress and import them directly to your store with the click of a button.

When a customer buys something in your store, Oberlo fulfills the order automatically. All you have to do is double check that the order details are correct and click the Order button. The product then ships from the AliExpress dropshipping supplier to the customer, no matter where they are in the world. 

In the dropshipping business model, you are responsible for creating a website and your own brand, as well as choosing and marketing the products you want to sell. Your business is also responsible for shipping costs and establishing prices that result in a good profit margin. 

9 steps to starting a profitable dropshipping business

1. Commit to starting a dropshipping business
2. Choose a dropshipping business idea
3. Do competitive research
4. Choose a dropshipping supplier
5. Build your ecommerce store
6. Decide on a business structure
7. Get your finances in order
8. Market your dropshipping store
9. Analyze and improve your offering

1. Commit to starting a dropshipping business

As with any other business, dropshipping takes significant commitment and a long-term perspective. If you’re hoping for a six-figure income from six weeks of part-time work, you’re going to be sadly disappointed. By approaching your business with realistic expectations about the investment required and your potential for profit, you’ll be much less likely to get discouraged and quit.

When starting a dropshipping business, you’ll need to invest heavily using one of the following two currencies: time or money.

Investing time in your dropshipping business

Bootstrapping and investing sweat equity to build your business is our recommended approach, especially for first-time dropshipping entrepreneurs. We favor this approach over investing a large sum of money for numerous reasons:

• You’ll learn how the business operates inside and out, which will be crucial for managing others as your business grows and scales.
• You’ll intimately know your customers and market, allowing you to make better decisions.
• You’ll be less likely to spend large sums on vanity projects that aren’t critical to success.
• You’ll develop several new skills that will make you a better entrepreneur.

Realistically, most people aren’t able to quit their job to spend six months ramping up their new online store. It may be a bit more challenging, but it’s definitely possible to get started with dropshipping even if you’re still working a 9-to-5 position, assuming you set appropriate expectations regarding customer service and fulfillment times for your customers. When you start to grow, you can transition into working full time on your business as much as cash flow and profitability allow.

All businesses and entrepreneurs are unique, but it’s possible to generate a $1,000–$2,000 monthly income stream within 12 months working approximately 10 to 15 hours per week building your business.

If you have the option to work on your business full time, that’s the best choice to improve your profit potential and chance of dropshipping success. Focusing all your efforts on marketing is especially helpful in the early days, when building momentum is crucial. Based on our experience, it will usually take at least 12 months of full-time work with a strong emphasis on marketing for a dropshipping business to replace an average full-time income of $50,000.

That may seem like a lot of effort for a relatively small payoff, but keep these two things in mind:

• Once your dropshipping business is up and running, maintaining it will likely take significantly less time than a 40-hour-per-week job. Much of your investment pays off in terms of the efficiency and scalability offered by the dropshipping model.
• When you build a business, you’re creating more than just an income stream—you’re also building an asset you can sell in the future. Make sure you consider the equity value you’re accruing as well as the cash flow generated when looking at your true return.

Investing money in your dropshipping business

It’s possible to create and grow a dropshipping business by investing a bunch of money, but we advise against it. We’ve tried both approaches to growing a business (bootstrapping it ourselves versus outsourcing the process) and have had the most success when we’ve been in the trenches doing most of the work.

In the early stages, it’s crucial to have someone who is deeply invested in the success of the business building it from the ground up. Without understanding how your business works at every level, you’ll be at the mercy of expensive programmers, developers, and marketers who will quickly eat up any profits you’re generating. You don’t need to do absolutely everything yourself, but we strongly recommend being the primary driving force at the outset of your venture.

You will, however, need a small cash cushion in the $1,000 range to get your business launched and operational. You’ll need this for minor operating expenses (such as web hosting and dropshipping suppliers) and to pay any incorporation fees, which we’ll discuss below.

2. Choose a dropshipping business idea

The second step in learning how to start a dropshipping business is performing the necessary market research. Just as if you were opening up a retail store and looking into the different locations, competitors, and trends, you want to investigate a niche you’re interested in and make decisions based on how profitable it can be. But the truth is, coming up with product ideas to sell is tricky. 

To help inspire your next dropshipping business idea, Shopify curates a list of trending products based on the top selling product categories on the platform. By focusing on more niche and trending products, you can help get the attention of shoppers and gain traction without competing with larger, established businesses. 

Niche products often have a more passionate customer base, which can make selling to specific crowds easier by raising awareness for your products. Fitness, fashion, beauty products, electronics, phone accessories, and yoga-related items may be a good entry point to start dropshipping with no money. 

Some examples of a niche dropshipping store could be:

• Dog bow ties for dog lovers
• iPhone cases for iPhone owners
• Camping gear for campers
• Exercise equipment for fitness folks

You can also use the following tools to test out your dropshipping business ideas:

Google Trends. Google Trends can help you determine if a product is trending upward or downward, as well as the seasons they tend to trend in. Note that Google Trends doesn’t show search volume. So if you use it, be sure to cross reference your data with a keyword tool like Keywords Everywhere to determine the product’s popularity in search. 

Keywords Everywhere. This keyword research tool shows you the monthly search volume for your product and how competitive it is. You can use this information to gauge the popularity of your dropshipping business idea and inspire new product ideas for the future.

Oberlo order volume. In Oberlo, you can search for products based on order volume to determine the potential of your business idea. 

Although the growth in ecommerce is a great benefit for those looking to start a dropshipping business, it also creates a lot of competition. That means you’ll want to do competitor research when putting together your dropshipping business plan to find success in selling your products. 

3. Do competitor research

Now that you know what you’re going to sell in your store, you want to look at who your competitors are and understand the way they work. Your competitors may hold great clues to success and can help you build a stronger marketing plan for your dropshipping business.

If your market has a lot of competitors (which is a good thing in dropshipping), limit your research to about five other dropshipping companies, including one or two big players like Walmart or Amazon. It’ll help you keep focused and plan your next steps. 

Some ways to go about your competitor research are:

• Run a Google search. Search engines are an obvious starting point. Use Google to build a list of your top five competitors. Start with key search terms in a simple search, like “ear plugs.” The top 10 results will show you who your top competitors are and how they are promoting their products. If you want to focus on a specific country, you can use a third-party tool like Ahrefs or SEMRush to find keyword data in those areas. 

• Use competitor spy tools like SimilarWeb and Alexa. Online tools like these are great for finding (and keeping track of) your competitors’ online activity. They give you a list of competitor website information, such as their social media profiles, top traffic sources, number of visitors, and who their competitors are.

• Browse social media. Search for Facebook ads in your niche and check out the top brands in the market. Look at how the business communicates with its customers, how its feed is designed, how much engagement it gets—you can even follow its feed to never miss a beat. Use this information to find ways for your business to stand out and improve your social media marketing strategy. 

• Subscribe to competitors’ email lists. Want competitors’ updates straight to your inbox? Sign up for their email list and get a look inside their marketing strategy. You can also learn more about the promotions and deals they use to entice customers to buy. 

Learn everything you can about your top competitors: their website, prices, marketing methods, product descriptions, reputation, etc. Keep your research organized in a spreadsheet so you can easily refer to it when making decisions for your store. For example, if you want to use email marketing to promote your business, you can look to your spreadsheet to see if competitors are already doing it and the tactics they are using, all in one place.

4. Choose a dropshipping supplier

Choosing a dropshipping supplier is a critical step toward creating a successful dropshipping business. Without suppliers, a dropshipping business wouldn’t have any products to ship to customers and, therefore, cease to exist. 

At this point, you vetted what products you want to sell and know they can be profitable—now you want to make sure you find a dropshipping supplier that gives you the high-quality service you need to grow. Ecommerce platforms like Shopify offer a plug-and-play style option for finding potential suppliers by connecting Oberlo to your online store. 

Oberlo is a marketplace that makes it easy to find products to sell online. Whether it’s electronics, fashion, toys, or other trending items, you can find products with good profit potential from dropshipping suppliers around the world and add them to your store with one click. The app manages forwarding the orders to your dropshipping supplier, so you never need to worry about packaging, shipping, or managing inventory. It costs nothing to get started. 

The Oberlo app uses AliExpress to help you find and add products to your store. If you want to read more about product quality, shipping times, or further vet a supplier, you can do so from the Oberlo product page. 

When you click a supplier’s link, you end up on its AliExpress page, where you can find reviews, top selling products, and more. 

One thing to keep in mind: Aim to sell products from Oberlo that provide ePacket shipping if your supplier is from China. EPacket is an affordable shipping strategy for dropshipping items from China to countries like the US, the UK, and Canada. Rather than wait months for a package to arrive from China, your customers will only have to wait up to two weeks or less, for a cost of only a few dollars.

5. Build your ecommerce store

The next thing you need to start a dropshipping business is an ecommerce platform like Shopify. This will be the home where you send traffic, sell products, and process payments. 

Shopify makes it easy to build and launch your ecommerce website. It’s a complete commerce platform that allows you to sell in multiple places, including online, sell in multiple currencies, and easily manage products and accept payments. 

You don’t need to be a designer or developer to use Shopify either. You don’t need to be a designer or developer to use Shopify either. We have tools to help with everything from domain name suggestions and logo design, and you're easily able to change the look and feel of your store with the store builder and Shopify themes.

Need help building your online store? Sign up for a free trial of Shopify and read How to Start a Shopify Store: A Step-By-Step Guide. 

6. Decide on a business structure

If you’re serious about your venture, you’ll want to set up a legitimate business entity. We’re not lawyers and can’t offer legal advice, but we can give you a rundown of three commonly used business structures:

Sole proprietorship

This is the simplest business structure to implement but also offers no personal liability protection. So if your business is sued, your personal assets also may be in jeopardy. Filing requirements are minimal and you simply report your business’ earnings on your personal taxes. No other state or federal business filings are required.

Limited liability company (LLC)

An LLC offers increased protection of your personal assets by establishing your business as a separate legal entity. While the liability protection isn’t foolproof, it does offer more protection than a sole proprietorship. You may need to comply with additional filing requirements and will need to pay both incorporation and ongoing fees.

C corporation

Most major corporations are set up as C corporations, which, when done properly, offer the most liability protection. They are likely to be more expensive to incorporate and are subject to double taxation, as income doesn’t pass directly to the shareholders.

So which structure to choose? Again, we’re not lawyers and would advise you to consult with one before making any incorporation decisions. Most small entrepreneurs tend to go with either a sole proprietorship or an LLC. Personally, we’ve used an LLC for all of our dropshipping businesses because we feel it offers the best trade-off regarding liability protection, autonomy from personal finances, and costs.

Note: The business structure and EIN (employer identification number) information discussed above is applicable for entrepreneurs in the United States and won’t apply to other countries. For information on incorporating a USbased business from outside the US, please see the notes at the end of this article.

Request an EIN number for your business

The IRS requires all businesses to have an employer identification number (EIN), which acts as a Social Security number for your business. You’ll need this number to file your taxes, apply for wholesale dropshipping accounts, open a bank account, and do pretty much anything related to your business.

Fortunately, getting an EIN number is easy and free. You can apply for an EIN number online. 

7. Get your finances in order

One common mistake entrepreneurs make when starting a business is blending their personal and business finances. This causes confusion, makes accounting more difficult, can lead to personal assumption of business liabilities, and is a big red flag for the IRS if you’re ever audited.

You’ll want to keep your business and personal finances separate as much as possible. The best way to do that is by opening up new accounts in your business’ name. You’ll want to open the following:

Business checking account

You should run all of your business finances through one primary checking account. All business revenue should be deposited into it and all expenses should be withdrawn from it. This will make accounting much easier and cleaner. 

Credit card

You should have a business credit card that is used for business expenses and dropshipping inventory purchases only. Because you’ll be buying a lot of merchandise from suppliers, you can rack up some serious rewards with the right rewards travel cards. We’ve found that Capital One has the best travel rewards program and that Fidelity Visa/American Express offers the best cash-back program. 

Collect sales tax

You’ll need to collect sales tax only if both the following are true:

• The state you operate from collects sales tax 
• An order is placed by someone living in your state

For all orders placed by residents of other states, even if those states charge their own sales tax, you won’t need to collect any tax. There’s a good chance we’ll see changes to these laws in the coming years, but for now the tax laws for small online merchants are very advantageous.

If your state does charge sales tax, be prepared to collect it on the limited number of orders from customers in your home state. You’ll want to contact your state’s Department of Commerce to register as a retailer and find out how frequently you need to submit the tax you collect.

Local business licenses 

Most cities and towns require businesses to get a business license that needs to be renewed on a regular basis. However, this requirement may differ for dropshipping businesses, many of which likely will be operated from home offices. You’ll want to look into your local laws and regulations to see what, if anything, is required.

Incorporating outside the United States

It can be complex, but it’s possible for international merchants to incorporate a business in the United States, giving them access to USbased dropshippers and customers. The merchant will need to come to the US to complete the necessary paperwork, have a trusted business partner in the US who can act on his behalf, or hire an agency to set everything up.

The following resources can help get you started with understanding this process, but we strongly recommend consulting with a legal professional before making any decisions:

• Doing Business in the USA: A “Bullet Point” Guide for Foreign Business People, by New York attorney Aaron Wise
• Non-resident Delaware LLC and Corporation for Foreigners, by Delaware Corporate Headquarters 

Read more: How Does Amazon Dropshipping Work? A No-Nonsense Guide

8. Market your dropshipping store

Now that you know how to start a dropshipping business, it’s time to talk about marketing your new store. To stand out in your market, you may want to put extra effort into your marketing and advertising efforts when building your dropshipping business plan. 

With so many things about dropshipping being automated, you can spend time focusing on marketing and promoting your business in the following ways:

1. Paid ads (Facebook and Google). The average cost for a Facebook ad is around .97 cents per click, which isn’t too bad if you’re newer to advertising on the social media platform. Facebook ads are scalable, products can perform well on them, and they tap into people’s desire to impulse buy. You can run Shopping Ads in Google and target long-tail keywords where shoppers are more likely to buy. There’s typically more price competition with Google ads, but it may be worth your time to test it out.
2. Influencer marketing. As a new dropshipper, you may have a limited budget to market your business. Influencer marketing is an affordable way to reach your target audience because people tend to trust influencers more than traditional advertising. If you go this route, negotiate an affiliate fee with the influencer versus a flat rate. It’s a win-win situation, because they’ll make money off of each sale and the cost will be less for you.
3. Content marketing. If you want to build a long-term stream of traffic for your store, add content marketing into your dropshipping business plan. Start a blog around your dropshipping niche and create content that entertains and educates your target audience. You could also start a YouTube channel, create infographics, or start a podcast to help get the word out about your brand.
4. Communities. Get involved with groups of people who are passionate about your niche. You can start conversations with potential customers on Reddit, Facebook Groups, or online forums. Remember not to be too sales-y when engaging with a community. Aim to help and build relationships with potential customers so they trust your brand and want to buy from it.
5. Mobile marketing. Mobile marketing is a broad term that refers to a business connecting with customers on their mobile phones. For example, you can start a VIP text club and encourage website visitors to sign up for exclusive deals and promotions. Or provide customer support in a live chat conversation with shoppers through Messenger. With a mobile marketing platform like ManyChat, you can create automated lead generation, customer retention, and cart abandonment campaigns to drive sales and revenue for your dropshipping business. 

As with any successful online business, keep an eye on what channels are working and which aren’t—especially if you’re investing money in them like paid ads. As you continue to grow and improve your business, you can always adjust your marketing strategy to lower costs and maximize revenue. 

9. Analyze and improve your offering

After you’ve been marketing and managing your dropshipping business for some time, you can start looking at the results of your hard work. Shopify analytics can help you answer some important questions about your online store, such as:

• Sales: What are my best performing channels? Where should I put more ad dollars? What are my best selling products? Who are my best customers?

• Shopper behavior: Are people buying more on desktop or mobile? What’s the conversion rate for each device? 

• Profit margins: What products and variant SKUs are the most profitable? What are my sales and gross profits looking like month over month? 

You can also use tools like Google Analytics and Search Console to measure search traffic over time and improve your search engine optimization (SEO) efforts. Plus, if you’re using a third-party app for your social media or Messenger marketing, you check the reports monthly to make sure your overall strategy is working for your business. 

When creating a dropshipping ecommerce store, you want to create a data-informed analytics system. Remain consistent with what you analyze over time and measure your store’s performance against clear KPIs. This will help you make smarter decisions for your store and take your small business to the next level over time.

Where to find a dropshipping business for sale

If you don’t want to create a dropshipping business from scratch, you can find a dropshipping business for sale on Exchange, Shopify’s marketplace for buying and selling online stores—from ready-to-go stores to dropshipping ecommerce businesses to established empires. With over 10,000 online stores for sale, you can find a dropshipping business that matches your interests and budget and start running it right away. 

Through Exchange, you can see information about a potential dropshipping business for sale, including traffic and revenue data, in the listing. The data comes directly from Shopify and cannot be edited, so you know exactly what to expect once you buy your dropshipping store.

Read more: How to Buy a Business on Exchange: A Step-By-Step Guide

Start your dropshipping store today

Whether you’re a new entrepreneur or an ecommerce vet, a dropshipping business is a great low-risk, low-cost way to start selling online. With the rise in third-party apps and marketing automation tools, it’s no longer a struggle to run your business online. Hopefully this dropshipping guide inspires you to create a pathway to success and financial freedom, so you can live the life you’ve always dreamed of, like so many other ecommerce entrepreneurs. If you are looking at other money making avenues, check our how to make money online guide to get started.

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