If you’re interested in starting a business with minimal investment, dropshipping is one option you might consider. Dropshipping involves selling products online without maintaining any physical inventory. Instead, orders are fulfilled through a third-party company.

Starting a dropshipping business has the potential to be highly profitable, but it’s important to know exactly how it works.

The Dropshipping Business Model

Dropshipping is a type of ecommerce business that allows customers to place orders for goods through one party, which are then fulfilled by another party. Here’s a rundown of what dropshipping looks like in action:

• A dropshipper enters into an agreement with a wholesaler, manufacturer, or retailer to sell its goods online.
• Customers visit the dropshipper’s website and place orders for goods.
• The company that the dropshippper entered into an agreement with processes the orders and ships the goods to the customer.1

  Michigan Department of Attorney General. “Dropshipping: What You Need to Know Before You Buy or Sell Online.”

Essentially, a dropshipper acts as a go-between for the customer and the product manufacturer or supplier. So, how do you make money dropshipping?

When you set up a dropshipping storefront, you can decide what products to offer. You purchase those items at the manufacturer or retailer’s wholesale price and then resell them at a price point of your choosing. Dropshippers make money from the difference between the wholesale price they pay for an item and the retail price they charge for it.

Pros and Cons of Starting a Dropshipping Business. Dropshipping can have advantages and disadvantages.

In terms of what makes it an attractive business model, the startup costs can be much lower than those of other types of businesses. You don’t need to maintain any physical inventory or a brick-and-mortar storefront. And since someone else handles order shipping, you don’t have to worry about that, either.

But there are several reasons why dropshipping can be problematic. For one thing, it’s not a get-rich-quick scheme—you may need to sell a lot of products to make any real money. For another, you don’t control the supply chain, which means that if an item becomes unavailable, you’re essentially at the mercy of the supplier.

How to Find and Select Profitable Products

One of the keys to success as a dropshipper is finding the right products to sell. You could take a broad approach, but it can make more sense to target a specific niche. Your niche reflects not only what you sell but also the customers you are targeting.

The following strategies can help you find a good niche for your dropshipping business:

• Conduct market research. To choose a niche, you’ll need to know what’s popular and trending, as well as the types of products people are likely to continue buying over the long term. You can use free tools like Google Trends or Amazon Best Sellers to see which products consistently generate sales. If you’re interested in dropshipping on TikTok, you can also glean insights from trending videos and hashtags.
• Check the competition. If you have an idea of what you’d like to sell, then researching your competitors is the next step. Specifically, it’s helpful to look at what they’re selling, how they’re marketing those products, and what they charge. It’s also important to look for any product gaps that you might be able to capitalize on in order to gain some traction in your chosen niche.
• Consider seasonality. Selling products that are seasonal in nature could deliver big sales numbers, but it’s important to get the timing right when deciding what to push. For example, sunglasses might be a trending item during the summer, while chunky knit scarves could be a hot seller for fall. If you plan to sell seasonal products, you also might want to feature items that sell well all year long to help even out sales.

Taking your niche for a test run with just a few products can give you a chance to see how profitable it might be before going all-in.

Setting Up Your Online Store

You’ll need an online storefront to showcase the products you plan to sell. There are three steps involved in setting up an online dropshipping store:

• Choosing an ecommerce platform
• Designing a user-friendly website
• Establishing pricing, payment, and shipping options

The ecommerce platform that you use is ultimately your dropshipping business’s “home” online. Some of the most popular platforms for dropshipping include Shopify, WooCommerce, and Magento, but it’s up to you to decide which one is the best fit for your needs.

As you compare platforms, consider:

• The time and cost required to set up your site
• Features and ease of use
• Scalability
• Customization options
• Marketing tools
• Integrations with suppliers
• Customer support
• Pricing

A good ecommerce platform should give you the tools that you need to design your dropshipping website. Looking at the sites of competitors can give you an idea of what customers tend to prefer when it comes to layout and design. The most important thing to remember is that your website should be easy for users to navigate so that they can complete purchases with minimal hassle.

Once you’ve designed your site, you can begin adding listings for the products you plan to sell. At this stage, you’ll need to decide how you want to price your items and which payment methods you’ll accept.

When setting prices, it’s important to consider your profit margins as well as how competitors price their items. Your prices should be high enough to ensure that you’re making money from each sale, but not so high that you’re sending your potential customers to the competition instead.

With regard to payment methods, your options can depend on which platform you’re using. Shopify, for example, allows you to accept credit cards, gift cards, Tap to Pay on iPhone, Shop Pay, and even cash. You can also set up your storefront to allow for full or partial payments.2

You’ll also need to consider shipping when setting prices. For example, offering free shipping could entice more customers to buy from your shop, but that could mean lower profits if you’re not adjusting your product prices to account for that. If you would rather not shoulder any of the burden of shipping costs, you could charge customers a flat rate to ship instead.

Inventory and Order Management

Dropshipping inventory management encompasses where your inventory is located, the amount of inventory you have, and what the supplier maintains in their inventory. There are different ways to track inventory for your business, which can include using a spreadsheet or an inventory management app.

Keeping track of inventory is important, as it can keep you from selling items that are out of stock. Monitoring orders ensures that items are shipping on time and that customers are actually receiving what they’ve purchased through your business.

Here are some of the most useful metrics to track for each item you sell:

• Product title and description
• SKU or UPC code
• Quantity available
• Wholesale cost

This is the same data your supplier should track, and it’s helpful to know how often they update their information so that you can adjust your product details accordingly. Setting inventory minimums with your suppliers can ensure that you don’t run out of any items unexpectedly. You can also set up a system to track the dates when orders are placed, when they’re filled, and when items are shipped.

Ideally, your customers are satisfied with their purchases, but it’s important to have a policy in place for handling returns. This policy should reflect the suppliers’ policies and specify exactly what customers will need to do to send an item back for a refund or exchange. You could also consider allowing customers to keep the item in situations where a return might prove too difficult or expensive to execute.

Marketing and Promoting Your Dropshipping Business

To make money with dropshipping, you need customers, but you can’t expect them to come to you automatically. You’ll have to come up with a plan for successfully marketing your store and the products that you sell.

Social media can be an invaluable tool for developing your brand and increasing its visibility. The key to using social media to market your dropshipping business is to target the channels where your prospective customers spend the most time. That goes back to understanding your niche and target audience.

Some of the platforms that you could use to market your business include TikTok, Instagram, X (formerly Twitter), and YouTube. When you’re creating marketing content, it’s important to keep SEO in mind. SEO stands for search engine optimization, and it means creating content that’s designed to make it easier for buyers to find you in a search. That includes the use of keywords that are relevant to your niche.

Doing some product research on the social media platforms where you plan to promote can help you identify the types of keywords that make the most sense for your niche. Researching hashtags or using keyword tools can make it easier to find keywords that have high search volume but low competition.

Ensuring Customer Satisfaction

Customer service is always important when running a business. Satisfied customers can become loyal customers who come back to buy from you again and again.

Here are some of the best ways to ensure loyalty when providing customer service.

• Listen to customer complaints and absorb feedback before offering solutions.
• Keep response times short and answer questions thoroughly the first time they’re asked.
• Set clear policies and expectations for your store.
• Be polite and professional at all times.
• Make sure your business contact information is readily available.
• Consider adding an FAQ section to your website to reduce customer inquiries.
• Respond to negative feedback promptly, and attempt to find a resolution that’s agreeable to both you and your customer.
• Ask for suggestions on what you can do to improve.

One thing to keep in mind is that no amount of service or support will satisfy some customers. There will always be people who complain or leave negative reviews. Maintaining professionalism at all times, and being proactive rather than reactive, can help you navigate those situations without casting your business in a negative light.

The Bottom Line

Starting a dropshipping business begins with choosing a niche and doing market research. From there, you’ll need to set up your storefront and establish your policies for managing inventory and customer orders. Once you launch your business, you can use social media to market it and focus on strategies for building customer loyalty.

It may sound daunting, but running your own business can be rewarding, and there’s no time like the present to get started.

By Rebecca Lake

Reviewed by Andy Smith. Fact checked by Suzanne Kvilhaug

Sourced from Investopedia