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Dropshipping has revolutionized the traditional retail market. It eliminates the risks associated with holding inventory and, with just an online presence, allows a wide range of products to be shipped directly from suppliers to customers.
It’s also a very attractive model for new business owners as it sidesteps the need to physically hold stock. In this article, we highlight the advantages of dropshipping, but also point to the drawbacks that the popularity of dropshipping has created for those looking to set up a new business.
Along the way, we will examine key considerations for would-be dropshippers and discuss great ways to help a dropshipping business succeed.
Before we delve into the detail of this beginner’s guide, let’s outline the key points.
Dropshipping is a business model in which a retailer (the dropshipper) doesn't keep products in stock. Instead, when they sell a product, they purchase the item from a third party (usually a wholesaler or manufacturer) and have it shipped directly to the customer. In other words, the merchant acts as an intermediary, handling the marketing and sales aspects of the business, while the actual inventory and fulfillment are managed by the supplier.
The great news is that for those looking to start selling online without any significant upfront investment, or the need to warehouse or even ship stock, dropshipping is very attractive.
It has been for many an easy-to-scale business venture that may be up and running in much less time than traditional businesses.
However, as this business model has grown in popularity several potential hazards have appeared. These include the low margins that dropshippers realize due to the commission they must pay to suppliers to hold and ship stock. It is also the case that many dropshippers now operate in a highly competitive environment, making scaling businesses tough.
Although dropshippers do not physically own the stock they sell, they still run the risk of legal liability for things like harm caused by defective products, trademark infringement, or consumer protection issues such as false advertising.
With high levels of competition, it is vital to select a niche market with growth potential.
Such research will help to establish where there is a growing audience looking for products whose demand is not yet being fully met by other dropshippers. More information on market research can be found in PayPal’s How to Conduct market research.
If the audience selected is too small, other businesses may not be addressing it due to a perceived lack potential. If, on the other hand, it has a massive audience that is saturated with other dropshippers, new dropshippers’ should probably turn their attention elsewhere.
Having discovered the sweet spot between demand and supply, the next step is to get the business set up legally.
Business owners will need to first decide on the business structure of their new venture. The most common structures in the US are:
Sole proprietorship
In sole proprietorships, a business owner is not legally considered a separate entity from their business. This type of business structure is the simplest and most common way to start a business in the US.
Sole proprietors are responsible for all aspects of their business, including its debts and liabilities.
Business partnerships
In partnerships, two or more people share the risks and rewards of running a business. While partners are still personally responsible for debts and expenses, they spread the risk by sharing the responsibility.
Corporation
A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it.
The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. It does not dissolve when ownership changes.
Limited Liability Company (LLC)
This is a relatively new, hybrid business structure designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The business owners are members, and the duration of the LLC is usually determined when the organization papers are filed. This may continue if all members agree.
LLCs must not have more than two of the four characteristics that define corporations: limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.
Sole proprietorships do not require formal registration, but LLCs and corporations must file Articles of Organization or Articles of Incorporation with the state in which they are based.
Next, an Employer Identification Number (EIN) needs to be obtained from the IRS.
The business may also need a General Business License and other permits. Check the state and local government websites for their specific requirements. A Sales Tax Permit is also required to collect sales tax on sales made within the business’ native state: this can be applied for through the state’s Department of Revenue or Taxation.
Finding reliable dropshipping suppliers is pivotal for new businesses. Useful steps in finding the best suppliers and establishing a strong relationship could be:
The best supplier relationships in the world cannot, by themselves, help dropshippers secure a sale. Dropshipping relies on providing a great customer experience whether visitors are researching, evaluating, or buying the products listed on the site.
Website layout – ensure the website’s layout is clean and easy to navigate, using clear categories and labels for products supported by high-resolution images and, where possible, videos to showcase products from different angles.
Website design – make sure that the site’s design makes it easy for customers to find what they’re looking for and to take action, whether it’s making a purchase or signing up for a newsletter.
Checkout process – a streamlined, user-friendly checkout process allows customers to make purchases with as few steps as possible. It can be supported by clear instructions and the offer of multiple payment options.
Mobile view – many visitors will be using mobile devices, so a responsive design that adjusts seamlessly to different screen sizes is essential.
Optimization – optimize the site so it loads fast across all devices by reviewing where it is hosted and minimizing unnecessary elements that might slow down the loading speed.
Secure payments -an important part of building trust with potential customers is to ensure that secure payment gateways are used, alongside digital wallets, and that testimonials and reviews are clearly highlighted.
As well as their own site, dropshippers can also consider expanding their reach through online marketplaces, such as Amazon, eBay, or Etsy. Such sites provide instant access to a larger customer base and benefit from built-in trust and an established customer base.
Providing excellent customer service will set the business apart from its competition and help retain customers. By streamlining order processing and fulfillment, customer issues and complaints can be reduced.
Research ways to automate order processing wherever possible, including order confirmation emails, tracking information, and updating customers. A smooth, seamless integration between a business and its suppliers can reduce delays or errors in shipping.
Important ways to reduce friction with customers include providing a clear and easy-to-understand return and refund policy and issuing timely refunds.
Managing finances effectively is critical for the success of a new dropshipping business. It enables effective planning that allows the allocation of resources for growth and the mitigation of risk.
By managing finances effectively, businesses can ensure that money due reaches the bank as soon as possible to improve cash flow. PayPal finance and money management solutions can support this.
Business owners will need to maintain accurate records of expenses and monitor incoming revenue. To calculate the profit margin of a business, all costs associated with selling a product must be deducted from its selling price.
Keeping accurate records of all financial transactions, including sales, expenses, and taxes paid, is also crucial for tax filing and audit purposes.
By researching market trends, it is possible to strategically identify relevant new products to add to the offering of a business. Such research can also reveal new demographics, regions, and sectors to target.
Scaling is achieved by automating areas such as order processing, customer service, and inventory management. Alternatively, it is obtained by outsourcing non-core tasks to third-party services.
Dropshipping is certainly no longer the fast-win, golden egg it once was.
New businesses need to research their market thoroughly, manage finances effectively, and select a robust supply network to succeed.
A key part of this is choosing a payment solution provider that delights customers and makes managing those all-important finances easy for new businesses. Find out more about PayPal’s business support.
In partnership with three expert business owners, the PayPal Bootcamp includes practical checklists and a short video loaded with tips to help take your business to the next level.
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