How to Start a Dropshipping Business

Is now the right time to start a dropshipping business? 

There’s no denying that technology has spurred a new breed of digital entrepreneurs who use connectivity and access to information to set up thriving businesses without ever touching inventory or products. Dropshipping is a popular ecommerce fulfillment model where customers are shipped products directly from the suppliers. The dropshipping website is just the medium through which the customers learn about and purchase the products.

As per Grand View Research, a leading market research and consulting firm, the dropshipping business is expected to grow by a stellar 23.2% between 2024 and 2030. The rise of online shopping has been one of the key drivers of this growth. With over 5 billion internet users worldwide, we can only expect the number of people shopping online to continue to increase. 

Other factors that make dropshipping an attractive business model for budding business owners include: 

• Low startup costs
• No involvement in back-end product inventory and shipping processes
• Ability to use free portals to set up business
• Ability to scale business as per customer demand 
• Ability to test new products without personally investing in them
• Flexibility to run business from anywhere in the world

How to start a dropshipping business in 12 steps

A dropshipping business isn’t exactly a walk in the park. It requires planning, strategy, and dedication. The listed 12 steps help you achieve all that and more. 

Step 1: Conduct market research

Market research helps you identify the right opportunities to position your business in the crowded ecommerce space. Market research goes beyond just researching competitors. It involves studying customer demographics, browsing social media to see what’s trending, and assessing viability. 

Do the following as part of your dropshipping market research:

• Create buyer personas by identifying demographics, purchase patterns, and spending habits. 
• Make a list of competitors and study their pricing, marketing strategies, and products. 
• Check the prices of products from wholesalers and dropshipping suppliers vs. what competitors are selling them for. The greater the difference, the higher the profits. 

Step 2: Choose your niche

Carving out a niche can be the difference between making little to no money and $500,000 a month. A niche gives you something that you can connect with the audience on while differentiating your company. Some of the most popular dropshipping niches are print-on-demand, mobile accessories, and pet supplies. 

While choosing your niche, consider: 

• What are you passionate about? It gets easier to market products you are knowledgeable and driven about. 
• What are the most popular items on ecommerce portals like Amazon, eBay, AliExpress, and AliBaba? AliExpress even allows you to filter products by growth rate, competition, and order volume. You can also look at consumer product blogs like HiConsumption and Design Milk. 
• What are the most searched-for products? Google Trends and Google Keyword Planner are great tools for this research. 

It might take you a few hits and misses before you find a niche that really works, and that’s completely OK. 

Step 3: Find reliable suppliers

Reliable suppliers form the crux of a profitable business. You want a dropshipping supplier that will deliver the right products at the right time to the right customers. A few popular supplier directories, like SaleHoo, Worldwide Brands, and Doba, can get your supplier research started. Dropshipping marketplaces like Modalyst, Spocket, and Global Sources can also connect you to multiple suppliers. Attending niche-related trade shows is another great way to discover suppliers and get product catalogs. 

However, not all dropshipping suppliers are the same, and you’ll have to vet them to ensure you’ve got a reliable supplier on board. Consider supplier ratings, product quality, delivery timeframes, pricing, and shipping and return policies before signing with any dropshipping supplier. 

Some questions that can help you vet suppliers are:

• Who is responsible for damaged products?
• What is your billing process like?
• Do you provide tracking numbers?
• Is insurance provided for products? 

It’s best to establish clear expectations and formalize your relationship by using a supplier agreement. 

Step 4: Choose a business structure

It’s important that you give some thought to your company’s structure, as it can have implications on tax liabilities, compliance requirements, and management. Each business structure comes with its own benefits and limitations. 

As a dropshipping business, you can choose from the following common business structures: 

• Sole proprietorship. There’s no paperwork or formalities required to start a sole proprietorship. You are automatically considered a sole proprietor the day your dropshipping business goes live. However, this business structure offers no personal liability protection. It means your assets are up for grabs in case your company is sued or is unable to pay its debts. 
• Limited liability company. The most popular choice for a business model is an LLC. They are easy to form—you just need to file the articles of organization with your state’s Secretary of State office. An LLC helps to protect your personal assets and can provide tax advantages. It’s also easier to secure funding with an LLC than it is with a sole proprietorship. LegalZoom can help you form an LLC for only the cost of state fees.  
• Partnership. A general partnership is a business that has two or more owners. In a general partnership, both partners share profits and debts. They also assume equal liability. Similar to a sole proprietorship, you do not need to file paperwork to form a general partnership, but most partnerships draft a partnership agreement.
• Corporation. It’s a more complicated legal business structure to form and maintain, but incorporation provides the most robust liability protection. But, corporations are also subject to double taxation. 

Most dropshipping businesses prefer to form an LLC for its simplicity, flexibility, and protection. A business formation company can advise you based on your risk appetite, need for funds, and company goals. 

Step 5: Write a business plan

A business plan will help you iron out the “how” you will conduct your business portion. Writing down your strategic and financial goals, policies, and processes will help you assess your business’s feasibility while preventing missteps. 

A well-thought-out business plan typically consists of the following sections: 

• Business mission and values
• Short-term and long-term goals
• Financial projections
• Customer demographics
• Product listings
• Marketing strategy
• Operating processes

Step 6: Obtain necessary permits and licenses

The majority of states require dropshipping business owners to obtain a general business license and a seller's permit or sales tax ID from the state government. Based on your jurisdiction, you may also be on the hook for local sales licenses or taxes. In some cases, you may have to get a home business license even if you’re running a purely online business with no inventory. 

The licensing requirements can be quite confusing because a lot is dependent on where you live. LegalZoom’s business license lookup service makes it simpler for you to identify necessary licenses and permits. 

Step 7: Build your online store

Your online store is the gateway to the world of business. It’s where you’ll display your products and what customers will interface with to place an order. Just as a traditional retail store must be organized and functionally structured, your ecommerce website has to be user-friendly and optimized for conversions.

Creating an online store requires a few steps, like securing a domain name, getting web hosting and a content management system, designing the layout, and integrating a payment gateway method. You can bypass all these steps by using Wix’s dropshipping website builder. Your online store will be created within minutes, and you can also set up multiple channels like Facebook and Amazon to drive traffic and sales.  

You can also consider using a platform like Amazon or Etsy, but those are highly crowded spaces that charge a significant listing fee. 

Step 8: Select products and set pricing

The right products can help you generate enough profit so your business can grow faster. While a lot of products you can sell are dictated by your supplier directory, you still want to make the effort to curate a selection that speaks to your niche audience. 

Consider the following points while selecting which products to list on your store: 

• Products that are popular and selling. Your market research will help you identify these. 
• Products that are easy to cross-sell. Additional products in customer carts mean more sales for you. 
• Products that are small and easy to ship. High shipping costs can deter customers. 
• Products that offer expedited shipping. This is especially important if you’re partnering with international suppliers. 

After you have selected products, order a few to test their quality.

Your market research will again play a big role when it comes to setting pricing. You want to ensure you remain competitive and profitable, while having enough to cover the expenses owed to your suppliers. Do account for shipping costs in your pricing strategy.

The most common and simplest pricing strategy to implement is fixed markup. With a fixed markup, you add a pre-set percentage or dollar amount to the wholesale price of the product. For example, you add a 15% markup to all products. While this strategy is easiest to manage, the profit margins can change based on product cost. 

One thing to remember is that pricing doesn’t have to be set in stone. Your pricing strategy can change based on trends and customer response. Also, don’t shy away from discussing pricing with your supplier. They’ve been doing this for years with many stores and may have valuable insights on which strategy will work best for your niche and products. 

Step 9: Set up finances

Keeping your business finances separate from personal money and transactions is the simplest and best way to ensure financial clarity.

• Open a business bank account. A business bank account separates personal and business finances while making it easier to track sales, calculate profits, and pay taxes. It also allows you to get a business credit card, which is handy to cover startup expenses. 
• Select a reliable payment method. Pick a payment gateway that supports multiple payment options, from credit cards and digital wallets to alternative forms like Amazon Pay. Also, check to see how easily the gateway integrates with ecommerce platforms and whether you can customize it to match your branding. Some of the most popular payment gateways are Stripe, PayPal, and Square. 
• Choose a bookkeeping method. The bookkeeping method you use can impact your financial statements and tax burden. A tax accountant can help you pick between cash vs. accrual accounting. 
• Register for sales taxes. It’s your responsibility to accurately record revenue on every purchase made through your platform and pay the necessary sales tax on it. How much sales tax to collect varies by your selected dropshipping platform. For example, Amazon and eBay levy a sales tax based on whether they have a connection or nexus in the state, while Wix charges taxes based on the customer's state of residence. A tax consultant can help you understand the complexities of tax laws.  

Step 10: Manage orders

Customer service is not only one of the most important factors in the dropshipping business, it’s also one of the few elements you have complete control over. 

Providing excellent customer service isn't just about meeting expectations. It’s about anticipating them and exceeding them. So, set clear policies about the purchase process, shipping and returns, and privacy. Offer multiple customer service channels such as e-mail, chat, or WhatsApp Business. Another proactive tip is to have a dedicated and easy-to-find FAQ section on your online store that addresses common concerns. 

Step 11: Market your business

The beauty of dropshipping is that you have complete control over the marketing efforts, even if the products aren’t technically yours. And because you are free from managing the logistics of inventory and shipping of products, you can go all out in this department. 

The following strategies can help your store attract customers and stand out in the online marketplace: 

• Create a social media presence. Don’t limit yourself to your website. Use social media to drive additional traffic, showcase products, and build customer loyalty. There are a lot of social media channels, so pick one or two that resonate with your target audience. 
• Optimize product photos and descriptions. Don’t use generic descriptions or stock photos given by suppliers. Take the extra effort to write catchy descriptors with the right keywords and even take your own photos and videos of products. 
• Add customer reviews on the website. There’s no better way to build trust and credibility. Authentic customer reviews can even bump your website’s SEO ranking—so more people can find your business. 
• Leverage email marketing. Start collecting customers’ email addresses and send them personalized newsletters and campaigns. HubSpot offers free marketing tools that can get you started. 

Step 12: Launch and grow your business 

Ensure the successful launch and growth of your dropshipping store by following one or more of our best practices: 

• Register your business. Formally registering your business with the state adds legitimacy to your business. It also strengthens the distinction between the business and you. 
• Get an employer identification number (EIN). This nine-digit federal tax ID number helps with filing taxes, opening a bank account, and hiring employees while protecting your SSN from identity theft. 
• Track sales data. Understand which products are selling the most vs. which ones are giving you the greatest profit. Most dropshipping platforms have an in-built tracking system. Utilize that data, and don’t be afraid of pivoting if required. 
• Optimize the website. Your dropshipping website is not a once-and-done deal. Continue to optimize it by adding relevant keywords, tags, and other SEO best practices. 
• Stay updated. The ecommerce space is ever-changing, and you can’t get complacent. Read up on different ecommerce trends and strategies by subscribing to newsletters like Carthustle or Ecommerce magazine. 

How much does it cost to open a dropshipping business?

You can start a dropshipping business for as low as $300 or a more mid-budget expense of $1,500–$3,000. 

Platform and website costs

It’s free to set-up a dropshipping website on Wix, however paid plans are required to accept payments. Wix’s paid plans start at $17 per month. There could be additional fees like payment processing and domain name to consider.

If you choose to go the DIY way, account for the expense of getting a website designer and hosting space. A graphic designer charges around $25 per hour, while a hosting company costs anywhere from $10–$110 per month. 

Supplier and product sourcing

The cost of supplier and product sourcing varies significantly. Some suppliers charge an initial setup fee to work with them, while others charge a monthly fee. You may also have to pay for sample products you order for quality check purposes. 

Some of the supplier directories also include a cost. For instance, SaleHoo charges $67 annually to access its database. Spocket’s basic plan starts at $39.99 per month. 

Business registration and licenses 

Business registration fees vary by state. In a state like Kentucky, forming an LLC costs only $40, while in Nevada, an LLC costs $425. If you decide to operate your fishing accessories dropshipping business under a different name, such as “Blue Fishing Accessories,” instead of your legal name, you will need a DBA. A DBA costs anywhere between $5–$150. 

Likewise, license and permit costs are dependent on the type, size, and location of the business. You can ballpark a business license to run between $50 and $300. For instance, if you run your dropshipping business from California, obtaining a seller’s permit is absolutely free. However, if you operate from Connecticut, you will have to pay a $100 fee. 

Insurance

The cost of insurance depends on the type and number of products your dropshipping store is selling and the coverage you seek. According to NEXT Insurance, ecommerce insurance that protects against product issues, shipping, and data breaches, starts as low as $25 per month. 

Marketing 

The majority of these costs will be related to online marketing strategies, and depending on how aggressively you want to go after your customers, you can set aside $200 to $1000 for these. Here’s a further breakdown of marketing costs, as per the method used:

• Email marketing: According to Statista, the average email marketing spend per user is $1.91.
• Pay-per-click ads: Google Ads can cost $0.11–$0.50 per click. Facebook ads average around $0.25 per click. 
• Social media marketing. Even if you decide to manage your social media accounts yourself, you can expect to spend $10–$20 per day on social media ads. If you outsource your social media marketing to a freelancer or company, then these costs could increase to $500–$10,000 per month. 

How to decide which business structure is right for you

Your chosen dropshipping business model affects a lot of things—how much you pay in taxes, your ability to raise external funding, the paperwork you need to file, and your personal liability. Choosing the right one can get complicated, but working with a business attorney can make the process less stressful. 

Evaluate the following factors as you make your decision: 

• Liability  
• Taxes
• Management and control
• Costs and complexity
• Need for funding 

Only an LLC, corporation, and limited liability partnership offer personal liability protection. With a sole proprietorship or general partnership, your personal savings and assets can be used to cover business debts. 

An LLC, considered a pass-through entity provides the most flexible tax filing options. You can choose to file your dropshipping business income on your personal tax return or then opt to file an S corp. It also prevents you from facing double taxation—something that’s common with corporations. 

If you prefer more control over your business while ensuring there’s a distinction between you and the business, forming an LLC is the best way to go. 

FAQs

What are the risks of starting a dropshipping business?

It’s an extremely competitive business with a high dependence on suppliers and low profit margins, especially if the products aren’t selected properly. The nature of the business is such that dropshippers have limited control over the supply chain. It’s not like a traditional business where a customer complains about product quality, and you can just step in and fix it yourself. But, you can easily overcome this hurdle by performing your due diligence when it comes to finding suppliers and establishing pricing.

How long does it take to start dropshipping?

The time it takes to officially set up a dropshipping business ranges from two to three weeks to a few months. It depends on how quickly you can decide on a niche, identify trustworthy suppliers, build a website, and secure the right licenses. 

What are common mistakes when launching a dropshipping business?

Forgetting to optimize the website for SEO, not tracking sales data, and providing poor customer service are some of the most common mistakes made by a dropshipping store owner. Another mistake many business owners often make is that they pick products, tools, or processes that aren’t conducive to growth. Sticking to just one supplier or relying on an Excel-based order processing template can become a hindrance. 

What are some tips for building my ecommerce store? 

Outside of sourcing products and finding dependable suppliers, as a business owner, you want to spend the majority of your time making sure your products get in front of the right customers. Spend time understanding the customer so you can build your ecommerce store in a way that speaks directly to them. Test out different marketing techniques, like paid ads or content creation, that will attract those niche customers.