Do you want to start an e-commerce business with an online storefront? In that case, you can choose among many different operational business models. In recent years, entrepreneurs who value exceptional operational efficiency and low overhead costs have increasingly opted for the dropshipping method of product handling and order fulfillment.
You may have heard of this trending business model, but you might not fully understand its various advantages and drawbacks. This article can answer some of your most pressing questions about dropshipping and serve as a launching pad for further investigation and research.
What Is Dropshipping?
The leading online retailer Amazon defines dropshipping as a consumer commerce model that “allows ecommerce businesses to outsource the processes of procuring, storing and shipping products to a third party—typically a supplier.” By leaving all these essential business processes in the hands of others, dropshipping places a relatively light administrative burden on the business owner.
There are some disadvantages to understand and consider when learning about dropshipping. These disadvantages include, a real complex customer service model, inventory management complications and level profit margins as you may end up competing solely on price. However, the biggest downside of dropshipping is the lack of control that it offers the business owners who adopt it. This makes it a great model for most entrepreneurs who want to sell generic or established branded products without establishing a strong company brand presence of their own. Conversely, dropshippers who aspire to become a trusted brand name often face a steep uphill battle.
Beyond branding concerns, the dropshipping model can lead to issues in the areas of product quality control and inventory management. You can certainly develop methods of quality control regulation through your dropshipping suppliers, but the “hands off” approach of dropshipping significantly limits your opportunities to monitor and ensure high product quality. Because it is outsourced to one or more suppliers, inventory management is extremely simple in a dropshipping business. However, you can also find yourself quite powerless to address supply shortages or other inventory problems that may arise.
How to Dropship
When executed properly by the right type of company, dropshipping can eliminate overhead needs while making the traditionally laborious and time-consuming task of running a business remarkably streamlined and easy. Briefly explained, the dropshipping model allows you to concentrate on promoting and selling products through an online store. When a customer orders something from that online store, the company owner simply sends that order to a third-party dropshipper and informs the customer that the order is processed and on its way. The third-party dropshipper then sends the order directly to the customer via postal delivery.
What, exactly, do these third-party dropshippers look like? Well, any number of product suppliers might make an excellent third-party dropshipper. You simply must seek suppliers that will ship to consumers directly and provide you with products that you can effectively sell to consumers at a reasonable markup.
In the traditional supply chain model, manufacturers will sell products in bulk to wholesalers, wholesalers sell those products to retailers at an increased cost, and then retailers markup product prices once again for consumer sales. In many modern market sectors, companies have found success by eliminating one or more of these often-expensive supply chain steps. Dropshippers should consider working with any wholesaler or manufacturer who is willing to ship directly to the final customer.
Why Start a Dropshipping Business?
Thanks to its streamlined supply chain structure and low overhead requirements, you can establish a new dropshipping startup with relatively little upfront capital. The lack of initial investment and ongoing inventory costs also significantly reduces the finical risk associated with starting a business.
Companies that employ dropshipping can operate from virtually any geographic location because they sell their products online and don’t need to worry about shipping from their own warehouse. The dropshipping model also makes it far easier for companies to test new product lines, scale up business operations and sell a broad spectrum of products.
Because they have limited branding opportunities, companies that adopt the dropshipping model must often maintain low product profit margins to outpace the competition in terms of price. However, the independent authority Shopify reports a relatively healthy profit margin of between 10 and 15 percent for companies that find the right products to sell to the right consumer base through the right supplier relationships.
Legal Aspects of Dropshipping
While some people mistakenly question the legitimacy and ethics of the dropshipping model, dropshipping is an entirely viable and legal method of order fulfillment that many global ecommerce leaders employ today. In fact, very few retail companies sell products that they manufacture themselves, and methods of product supply chain and distribution have rapidly evolved as the online storefront has grown to replace the brick-and-mortar shop in many respects. Just be sure to investigate the various local, regional and national laws and regulations that might affect your dropshipping business before you launch it.
Starting a Business
No matter what type of company you want to establish, you must complete several regulatory and licensing processes before you can legally go into business. One of the first steps that you must take is choosing what type of business structure you want to adopt.
Sole Proprietorship, C Corporation or Limited Liability Company (LLC)
When you are ready to establish your business as a government-recognized entity, you must establish it as either a sole proprietorship, a C corporation or a limited liability company (LLC). As you weigh the pros and cons associated with each option, consider the essential nature of your new business, including your mission and goals, level of risk tolerance and tax preferences.
A sole proprietorship is the simplest and least expensive business entity to set up, and it allows you to assume full control over your business in terms of both daily operations and strategic decisions. However, a sole proprietorship also leaves the business owner personally liable for all business risks and can severely limit the potential to fund future company expansion and growth.
Owned by shareholders who have purchased stock in it, a C corporation offers limited liability by separating the company from its ownership interests. Considered an independent legal entity with its own rights (such as property ownership) and obligations (such as tax burdens).
An LLC is an extremely popular business structure for mid-sized and larger business that want the limited liability of a C corporation but want more flexibility when it comes to formal management structure, compliance requirements and the allocation of profits. One of the primary advantages of the LLC is tax related.
C corporations tend to be doubly taxed. The business itself is taxed on its profits, and its shareholders are taxed on their dividends. An LLC, by contrast, passes on all profits and losses to the shareholders. This means that the shareholders alone must report profits to the IRS for tax purposes.
Both the C corporation and the LLC have far more complicated structures than the sole proprietorship. Before choosing any of these structures for your dropshipping company, you should consult with a qualified professional.
Laws and Regulations
Beyond registering your dropshipping business with the government as a sole proprietorship, a C corporation or a limited liability company (LLC), there are many other legal standards you must meet before you can successfully operate your business. To sell things online, you must take care to adhere to all applicable sales tax and value added tax (VAT) requirements, which might vary between business sectors and legal jurisdictions.
Even if the products you sell never pass through your hands, it is important to note that you are still responsible for ensuring that everything you sell complies with relevant product safety, quality and labeling standards. You are also responsible for following all laws that relate to marketing those products. Before you make a shipment overseas, you should research all relevant import and customs regulations. Your company website and ecommerce operations must also comply with all payment processing and general online business regulations.
How to Start a Dropshipping Business
If you bear in mind all the intricacies detailed above, the establishment of a dropshipping business can be straightforward. Let the following series of steps be your guide.
Step 1: Develop a Business Concept
Every great company begins as an idea. No matter what methods of product handling and order fulfillment you happen to favor, you should gravitate toward business concepts that hold promising profit potential and that fall within your personal areas of interest and expertise. While you can certainly find success using the dropshipping method to ship a broad spectrum of products, you can also set yourself apart from your competitors and establish yourself as a trusted resource in a single area if you concentrate on a specific type of product.
Step 2: Decide and Source Product Offerings
Before committing to a specific market niche or business concept, it is important to perform extensive research. You will want to know all that you can when it comes to the products that you offer, the target consumer you want to reach and the different ways that you will reach that consumer. It is also extremely vital to conduct thorough competitor research. Is there a real need for your products among consumers, or is your chosen market already oversaturated? Are your closest competitors also vulnerable startups, or will you be going toe to toe with global corporate giants? What kinds of dropshipping suppliers exist for your chosen product line? Let the answers to these and similar questions guide your business development.
Step 3: Establish Relationship With Suppliers
Your success and failure as an entrepreneur using the dropshipping model hinges on your ability to choose a dropshipping supplier that delivers the right high-quality products promptly and on-schedule to the right customer. Some suppliers go above and beyond these essential functions to add supplementary touches, such as providing branded products with special packaging to help further unify your marketing efforts.
Step 4: Create an Online Store
Just as the physical storefront reflects the overall quality and style of a brick-and-mortar business, your ecommerce storefront will represent your dropshipping business online. Even if you don’t offer branded products or spearhead a unified advertising campaign, your ecommerce website offers you the opportunity to express a strong company image and offer finely tuned information about the products you offer. You may also want to place online storefronts or ecommerce links on your social media pages or existing online marketplaces. Most successful dropshipping businesses take a multichannel approach to sales.
Step 5: Register Your Dropshipping Business
Beyond choosing a name for your dropshipping business and filing it as a sole proprietorship, a C corporation or an LLC, there are many other things that you must do to property register it. While specific registration requirements will vary between sectors and jurisdictions, common registration procedures include securing an employer identification number (EIN) for tax purposes, applying for appropriate industry-based licenses and permits and registering with the IRS and other relevant government agencies.
Prepare Yourself for Dropshipping Business Leadership
No matter what type of product handling and order fulfillment you happen to favor, you should prepare yourself before embarking on an entrepreneurial business venture. Dropshipping, in particular, can relate to multiple business and accounting degrees such as those in the graduate programs offered at Keiser University. To find the right program for you, request more information today!