How to start a dropshipping business, or add it to your existing business

You may have heard the buzz around starting a dropshipping business - the low cost of entry and the potential to make good money. It's true that you don't need much to get started, but owning and managing a successful dropshipping business takes a lot of grit. Here's what you need to know if you're thinking of starting a dropshipping business or if you have an existing business and want to expand into dropshipping.

What is Dropshipping?

Dropshipping is an online business model in which the owner of an e-commerce store works with third-party suppliers to stock the products they sell. As the owner of a dropshipping business, you do not stock any of your items, which means you save money on a warehouse and inventory expenses. 

When a customer buys an item from the online shop, the shop owner requests the items from the supplier and pays for them, thus only paying for products once they have a confirmed order. Then the items get shipped to the customer directly from the supplier.

This model allows the owner of the e-commerce store to act as a middle man between supplier and customer, giving the supplier access to buyers that they may have otherwise missed out on, and providing a more personalized experience for the customer.

How do I make money dropshipping?

When you operate a dropshipping business, you are working with manufacturers and wholesalers, so you receive a small discount on the items you’re selling – usually about 5% to 15% off the price they would charge a consumer. You pay the supplier the discounted price, and sell to your customer at the retail price. Your profit comes from whatever is left over after you sell the item to the customer. 

However, margins are usually low with dropshipping. This is because there is a lot of competition in this space. In order to compete with other online stores, you need to offer your items at a better price than the next guy, but when you cut prices, your profit margins shrink.

Related: How Long Until Your Dropshipping Business is Profitable? Use our Profit Calculator

What will my expenses be?

As the owner of a dropshipping business, you don’t have the traditional expenses that a brick and mortar store has nor those of an online retailer who owns their own distribution site. However, here are the types of expenses you will have. 

• Web hosting. For instance, Shopify charges $29 a month. You can choose free hosting, but you will have to build your e-commerce website from scratch. Companies like Shopify provide the capabilities to transact business online.
• Domain name cost
• Marketing budget
• Test orders (so you have a thorough understanding of what you’re selling)
• Credit card processing and transaction fees
• Customer service/support

Although these might seem minuscule compared to businesses that have expenses like rent and the cost to stock all the items, keep in mind that the biggest chunk of change will probably go towards marketing. 

Remember that with dropshipping, it is hard to get an exclusive deal with suppliers, meaning if your supplier is selling something to you, they’re also selling it to other owners of dropshipping businesses.

What am I responsible for, legally?

There could be some legal stickiness as a dropshipper, mainly because you have very little control over the products you sell. For example, if a customer has an issue with the quality of their product or if it arrives broken, this is really on the supplier, not you. But as the owner of the online store, you are the one who will get contacted. So how can you make this whole process easier on yourself? 

• Publish your refund policy: Although stating a refund policy is not required, you should do so for your own protection from disgruntled customers.
• Obtain a business license: In some states a business license may not be required, but having one could protect you from lawsuits and make you appear more legitimate in the eyes of suppliers. Check your state’s requirements for more information.
• Use a contract with suppliers: Look into a dropshipping agreement contract to use with suppliers to make sure you don’t get into any legal issues with trademarking, etc.
• Publish your Privacy Policy: For any business conducting online transactions where personal information like names and addresses are collected, a Privacy Policy is a legal requirement.  

Dropshipping for existing businesses 

Dropshipping can be a great way for existing businesses to do some market research. Rather than stocking your own warehouse with products you’re not sure will even sell, work with a third-party supplier to conduct a test run and gauge consumer demand by how well the product sells. Here are some other ways dropshipping can benefit existing businesses. 

1. Expand product offerings without expanding warehouse space: Existing businesses who get into the dropshipping game have the opportunity to start selling new products without having to actually stock them. You won’t have to buy and store inventory, but you can still test a new product line on your customers.
2. Flexible margins: Existing businesses may have the ability to cut into their margins to keep prices low. Since dropshipping has such a low threshold to get into the game (start-up costs are low enough that many people can start an online store), there is a lot of competition. The best way to beat the competition is to beat their prices, and existing businesses may have more flexibility to do this.
3. Established customer base: An existing business most likely already has a customer base. That also means they’ve got a regular traffic source to their website. New dropshipping businesses will have to hustle to build brand awareness and web traffic. But established businesses have already done this.
4. Bigger marketing budgets: Besides slashing prices, the other way to beat the competition is by gaining loyal customers who will buy from you no matter what. But that takes time and money. Existing businesses are more likely to have the cash needed to develop a marketing strategy that will get more eyeballs on their e-commerce site.  

Do I need dropshipping insurance?

If you own any kind of business, online or otherwise, you need business insurance. Hiscox offers insurance specifically for businesses that operate 100% online. 

For an online retailer, you’ll want to consider a general liability policy, which offers basic protection for claims against your business. Some common risks that insurance can protect you from are claims of bodily injury, property damage, and personal injury.

For more inspiration for budding entrepreneurs, check out our Start Your Business page. If you’re an existing business, make sure you head over to our Grow Your Business page for more great tips.