Drop shipping is a business model used to start and run a retail store without holding any inventory. In this sort of business, once you’ve made a sale, your supplier will be tasked with shipping the products from their warehouse directly to your customer’s doorstep, and you won’t have to bother about storing, packaging, or shipping.
Starting and running a successful drop shipping business can be quite challenging, however, it’s a wonderful and lucrative first step into the world of entrepreneurship. Aside from selling to customers without holding any inventory, you also don’t have to pay for products upfront. And if you’re serious about your new venture, you can grow a sustainable source of income in the long run.
Steps on How to Start a Drop Shipping Business in 2022
Table of Content
1. Conduct Market Research
The growth in eCommerce is promising for individuals looking to start a drop shipping business. However, it takes much more to start and run this sort of business efficiently. Therefore, you must conduct adequate research when putting together your drop shipping business plan to be successful in selling your products.
a. Who is the Target Audience for Drop Shipping Business?
Just like most businesses, it is imperative you know your customers and also focus your marketing efforts on them to get an ROI. If you try to sell to everyone you might end up selling to no one. One of the awesome facts about drop shipping is its global reach. This simply entails that you’re not in any way limited by geographical boundaries.
As a drop shipping business, you can choose some specific location or region to work with, but your customers can come from anywhere across the globe. The target audience of a drop shipping business can be a stay-at-home mother of two from Canada, or a 21-year-old student who needs stationeries in Miami, or a corporate worker from Glasgow who needs new exercise gear.
b. Is Drop Shipping Business a Profitable Business?
Yes, drop shipping is a very profitable and lucrative business model especially since you are not tasked with shipping or manufacturing. Drop shipping is also a low-risk business model that doesn’t warrant enormous startup or running costs like a wholesale business, and you can genuinely earn a good profit margin with the ideal suppliers.
c. Are There Existing Niches in the Industry?
Truth be told, coming up with niche and product ideas to sell in this line of business can be very tasking. Howbeit, by focusing on more niches and trending products, you can easily attract the attention of shoppers and gain traction without going toe to toe with bigger and well-established businesses.
Fitness, fashion, beauty products, electronics, phone accessories, and yoga-related items may be a good entry point to start drop shipping with no money. Other options to consider include;
- Health and personal care
- Wardrobe and accessories
- Kitchen and grocery
- Home décor and bedroom
- Office products
- Tools and home improvement
- Camera and cell phone accessories
- Car accessories
d. Who are the Major Competitors?
- J Goodin
- B & F System, Inc.
- Arett Sales
- Azim porter
- ASI Corp.
e. Are There County or State Regulations or Zoning Laws for Drop Shipping Business?
Yes, depending on where you reside and what you intend to sell; you may be expected to obtain certain business licenses and permits from your state, county, and local government. Coupled with general operating licenses, there are a good number of other business licenses that are necessary for selling online.
f. Is There a Franchise for Drop Shipping Business?
No, there are no franchise opportunities in this industry.
g. What Do You Need to Start a Drop Shipping Business?
- Adequate Research
- A Good Niche
- Reliable Supplier
- Necessary Licenses and Permits
- Ecommerce Marketplace or Platforms
- Customer Acquisition Plan
- EIN (Employer Identification Number)/Federal Tax ID Number
Choose a Memorable Business Name
- Premium Choice Products
- Perfect Spending
- Shop Lister
- Tush Households
- Popular Choice
- Gift Depot
- Dropship Zone
- Smart Shopper
- King of Shops
- Assorted Selection
- Home Stock
- Ship It Quick
- Top Clothing
- Quality Choices
- Available Today
- Better Price
- Organic Goods
- Trend Mode
- World Plush
- Bags and Boxes
- World of Apparel
Register your Business
a. What Type of Business Structure is Best for Drop Shipping Business?
If you are interested in making good money from drop shipping, then it is imperative to set up a legal entity for your business. There are three commonly used business structures in the drop shipping industry: sole proprietorship, C Corporation, and LLC. Of this three, the most ideal to consider is the LLC!
LLC offers increased protection of your assets by establishing your business as a separate legal entity. Although the liability protection isn’t entirely foolproof, it offers more protection than a sole proprietorship. You will only be expected to comply with additional filing requirements and will have to pay both incorporation and ongoing fees.
b. List Steps to Form an LLC
- Choose a Name for Your LLC.
- File Articles of Organization.
- Choose a registered agent.
- Decide on member vs. manager management.
- Create an LLC operating agreement.
- Comply with other tax and regulatory requirements.
- File annual reports.
c. What Type of License is needed to Open a Drop Shipping Business?
Licenses needed to start a drop shipping business will surely vary from one location to another. However, here are a few basic licenses to consider.
- General Business License
- Zonal Permits
- Seller’s permit
- Sales tax license
- Home occupation permit
d. What Type of Certification is Needed to Open a Drop Shipping Business?
There are no mandatory certifications needed to start a drop shipping business, howbeit, you should consider some drop shipping courses to add more weight to your brand. Note that some of these courses mentioned below will provide you with certificates carrying your names…
- Certification in 10 Shopify Drop shipping Strategies
- Certification in Jack’s eBay Drop Shipping Companion Course
- Certification in Complete WordPress AliExpress Drop ship course
- Certification in how to Start and Scale a Shopify Drop shipping Store Quickly
- Certification in Build a Drop shipping Empire from Scratch
- Certification in Shopify AliExpress Drop ship course
e. What Documents are Needed to Open a Drop Shipping Business?
- Business License
- Business Plan
- Business and liability insurance
- Federal Tax Payer’s ID
- Terms and Conditions
- Refund policy
f. Do You Need a Trademark, Copyright, or Patent?
In this line of business, aside from protecting your business logo and name, copyright is an issue to take very seriously. It might seem boring or unrealistic, but you need to learn a few basics about copyright laws to avoid legal issues. A good place to start is the US Copyright Office, which can teach you a lot about the basics of copyright law.
You mustn’t use copyrighted images or videos when marketing or advertising your products. The most ideal place to start sourcing for product images or videos is your supplier. If they can’t provide you with good pictures or videos, other places to source for copyright-free photos and videos for your website, blog, or media posts include;
Do your Cost Analysis and Budgeting
a. How Much Does It Cost to Start a Drop Shipping Business?
Unlike other modern businesses, it doesn’t cost so much to start a drop shipping business, especially since you won’t have to handle inventory, invest in warehousing, or even spend time fulfilling orders. However, you will need an initial investment of $100–$500 for platform fees and marketing, a computer with internet access, and a good amount of time for research and setup (coupled with five to 10 hours a week in ongoing management of your new operation).
b. What are the Costs Involved?
- Total cost of business registration and licenses: $1,200
- Cost of Computer: $450
- Website development, web hosting, and maintenance: $600
- eCommerce software platform: $650
- Phone: $220
- Internet access: $485
- Marketing and advertising: $2,340
- Miscellaneous: $100
c. What Factors Determine the Cost of Opening a Drop Shipping Business?
- Ecommerce marketplace or platform
- The Cost for Insurance Policy Covers
- The Cost for Registering the Business
- Source of Your Supplies and Ongoing Expenses
- The Cost for Branding, Promotion, and Marketing of the Graffiti removal business
- The Choice of Location
- The Required Licenses and Permits
d. Do You Need to Build a Facility?
No, drop shipping is an order fulfillment approach that allows an entrepreneur (usually those with online stores) to sell products to customers. Instead of producing, packaging, storing, and shipping products themselves, drop shipping businesses tend to order products from third-party suppliers or manufacturers. Note that these third parties are tasked with maintaining product inventory and fulfilling orders.
e. What are the Ongoing Expenses for Running a Drop Shipping Business?
- Advertising costs
- Costs to maintain a team
- Product costs
f. What is the Average Salary of your Staff?
- Chief Executive Officer (Owner): $54,600/ Year
- Human Resources and Admin Manager: $48,930/Year
- Business Developer: $46,800/Year
- Information Technologist: $45,000/Year
- Accountant: $38,710/Year
- Call Center Agent: $23,490/Year
g. How Do You Get Funding to Start a Drop Shipping Business?
- Business loans
- Line of credit
- Friends and family
- Angel investors
Write a Business Plan
a. Executive Summary
Popular Choice is a well-established drop shipping business that will ensure that our clients are offered top-notch services regardless of the amount of product they purchase or the part of the world they reside in. Our website will carry a vast range of quality products like Electronics, computers, groceries, fashion, home appliances, and kid’s items. Our physical office will be located in the very hub of Chicago, Illinois.
b. Products and Service
- Phones, Computers & Accessories
- Men’s Fashion
- Women’s Fashion
- Home & Living
- Toys & Kiddies items
c. Mission Statement
At Popular Choice, our mission is to become a recognized drop shipping company that will make available a vast range of products from renowned brands at affordable prices to our customers that will cut across different countries and regions.
Our vision is to develop a drop shipping business that grows with modern retail and technology trends and also competes favorably with well-established drop shipping brands in the country.
d. Goals and Objectives
- We intend to reach the net profit margin of $15K/month by the first year, $25K by the second year, and $35K by the third year
- We also intend to inculcate 3 more categories of electronic appliances, sports products, and furniture by the end of the first year
e. Organizational Structure
- Chief Executive Officer/President
- Human Resources and Admin Manager
- Business Developer
- Information Technologist
- Call Center Agent
a. SWOT Analysis
- A world-class development team
- Strong brand affinity
- Good search engine rankings that will drive traffic
- New in the market
- Low sales revenue
- Unverified branding strategy
- Certain budgetary limitations
- Poor online reviews.
- New and growing markets
- The evolution of technology
- A steady increase in population
- New paid advertising channels such as Instagram and Pinterest
- Several competitors are currently undercutting prices
- The website can be challenging to use on a mobile device even though mobile traffic is increasing
- A strong dollar could drive down international sales
b. How Do Drop Shipping Businesses Make Money?
Businesses in this industry generate revenue by keeping an agreed percentage of the sale. A good number of manufacturers offer a flat rate payment as well. In this line of business, a manufacturer can also dictate exactly how much money you will make on each sale.
c. Payment Options
- Payment via bank transfer
- Payment via online bank transfer
- Payment via mobile money transfer
d. Sales & Advertising Strategies
- Encourage shoppers to buy more with upsell and cross-sell marketing
- Turn visitors into subscribers with compelling email pop-ups
- Build trust by adding customer reviews, ratings, and testimonials to your site
- Leverage Facebook Ads/TikTok Ads to suit our marketing goal and budget
- Invest in video content for better targeting
- Share social videos to drive traffic and engagement
- Leverage retargeting techniques
- Start a blog that drives organic traffic to your drop shipping business
a. How Much Should You Charge for your product/Service?
According to experts, it is imperative you stay competitive with your pricing, but try not to charge more than what the manufacturer or supplier noted in your agreement. In addition, you can choose to offer manufacturer pricing or provide a discount to encourage more orders via your drop shipping business.
b. How Much Profit Do Drop Shipping Business Owners Make a Year?
According to industry reports, this will vary from one business to another, however, drop shipping business owners tend to control the amount of profit they make by keeping advertising costs low. The profit they make will also depend on the amount of time, resources, and percentage of the sale they receive from the manufacturer.
For instance, if a drop shipper earns $50 for every $200, they can easily earn $150 profit on that order. If they are expected to pay $25 of advertising costs on that order, then their profit now reduces to $125.
c. What Factors Determine the Amount of Profit to Be Made?
- Marketing and Customer Retention Strategies
- Business Agreements
d. What is the Profit Margin of a Drop Shipping Business?
Unlike standard eCommerce ventures, you don’t need to acquire any expensive inventory, invest in warehousing, or spend time fulfilling orders. This makes drop shipping a low-cost, low-risk entry into online retail, with profit margins averaging 15–20% of each item’s selling price.
e. What is the Sales Forecast?
- First Fiscal Year (FY1): $98,000
- Second Fiscal Year (FY2): $280,000
- Third Fiscal Year (FY3): $420,000
Set Up your Office
a. How Do You Choose a Perfect Location for Drop Shipping Business
In this type of business, location is not a priority as you can start this business even from home. Since a drop shipping business does not hold products, pack them, or ship them, location is really not a determinant of success.
b. What State and City are Best to Open a Drop Shipping Business?
Just like it was noted above, one of the awesome facts about the drop shipping business is its global reach. This entails the business is not in any way limited by geographical boundaries. As a drop shipping business, you can choose a specific location or region to work with, but your customer can come from anywhere across the globe.
c. What Equipment is Needed to Operate?
- Internet facility
- Office furniture (chairs, tables, and shelves)
- eCommerce software platform
Although you may not need to hire employees when starting this business, but you may have to put together a team when you can no longer handle the volume of orders coming in. You can choose to hire virtual assistants to help you manage customer support and order processing.
Launch the Business Proper
When starting a drop shipping business, aside from leveraging eCommerce marketplaces like Amazon, you must build an eCommerce website. You may not need a launch party, but your marketing is what will set you apart from your competitors. Indeed, there are numerous eCommerce providers out there. The ideal one for your business will depend on who your drop shipping supplier is, as some offer direct integrations.
a. What Makes a Drop Shipping Business Successful?
According to experts, to make your drop shipping business successful, you have to learn ways to more effectively market your business. Have it in mind that you can earn a higher return on investment (ROI) with each campaign, especially when done well. When you optimize your campaigns, you can drive more traffic without spending more.
b. What Happens During a Typical Day at a Drop Shipping Business?
In a drop shipping business, since you are not tasked with storing, packing, or shipping any of the products you sell, your typical day will involve marketing your products and cultivating customer support. Additionally, you will need to build your social media following, maintain your website, and follow up customer inquiries.
c. What Skills and Experience Do You Need to Build a Drop Shipping Business?
- Time Management Skills
- Adaptability Skills
- Accounting Skills
- Creativity Skills
- Strategy Skills
- Customer Service Skills
- Sales Skills