Would you like to start an e-commerce business with an online store? There are a variety of operational business models to choose from. In recent years, entrepreneurs who value outstanding operational efficiency and low overhead are increasingly choosing dropshipping methods for handling products and fulfilling orders.
You may have heard about this trending business model, but you may not fully understand its various benefits and drawbacks. This article answers some of the most pressing questions about dropshipping and serves as a starting point for further research and research.
What is dropshipping?
Leading online retailer Amazon defines dropshipping as a consumer commerce model that “allows e-commerce companies to outsource the process of sourcing, storing, and shipping products to third parties (usually suppliers).” . By placing all these important business processes in the hands of others, dropshipping makes the administrative burden relatively light for business owners.
There are some disadvantages to understand and consider when learning about dropshipping. These drawbacks include highly complex customer service models, inventory management complexity, and flattened margins that can result in competing solely on price. However, the biggest drawback of dropshipping is that business owners implementing dropshipping have no control. This can be a great model for most entrepreneurs who want to sell generic or established brand products without establishing their own strong corporate brand presence. Conversely, dropshippers aiming for a trusted brand name often face an uphill battle.
Beyond branding concerns, the dropshipping model can pose problems in the areas of product quality control and inventory management. While it is certainly possible to develop methods of quality control regulation through dropshipping suppliers, the “manual” approach to dropshipping severely limits the opportunity to monitor and ensure high product quality. In a dropshipping business, managing your inventory is much easier because you outsource it to one or more suppliers. However, you may find yourself completely powerless to deal with supply shortages or other inventory issues that may arise.
Dropshipping, when executed properly by the right type of company, can eliminate the need for overhead costs while greatly streamlining and simplifying traditional tedious and time-consuming business operations tasks. . Simply put, the dropshipping model allows you to focus on promoting and selling your products through your online store. When a customer orders something from their online store, the company owner simply sends the order to a third-party dropshipper and notifies the customer that the order has been processed and is on its way. A third-party dropshipper then sends the order directly to the customer via postal delivery.
What exactly are these third-party dropshippers? Well, any number of product suppliers can be good third-party dropshippers. All you need to do is find a supplier that can ship directly to the consumer and provide you with a product that you can effectively sell to them at a reasonable markup.
In a traditional supply chain model, manufacturers sell products in bulk to wholesalers, who then sell those products at a higher cost to retailers, who then raise the price of the products again for consumers. To do. In many modern market sectors, companies are finding success by eliminating one or more of these often expensive supply chain steps. Drop shippers should consider working with wholesalers or manufacturers who are willing to ship directly to end customers.
Why start a dropshipping business?
Thanks to a streamlined supply chain structure and low overhead requirements, you can establish a new dropshipping startup with relatively little initial capital. The financial risk associated with starting a business is also significantly reduced, as there are no initial investments or ongoing inventory costs.
Businesses that adopt dropshipping can operate from virtually any geographic location because they sell products online and don't have to worry about shipping from their own warehouses. The dropshipping model also makes it much easier for businesses to test new product lines, expand business operations, and sell a wide range of products.
With limited branding opportunities, companies that adopt a dropshipping model often have to maintain low product margins to compete on price. However, independent agency Shopify reports that companies that find the right product to sell to the right consumer demographic through the right supplier relationships have relatively healthy profit margins of 10-15%. I am.
Legal aspects of dropshipping
Although some people mistakenly question the legality and ethics of the dropshipping model, dropshipping is a completely viable and legal method of order fulfillment that many global e-commerce leaders have adopted today . In fact, very few retail companies sell products they manufacture themselves, and product supply chains and distribution methods are rapidly evolving as online stores grow to replace brick-and-mortar stores in many ways. did. Before starting your dropshipping business, be sure to research the various local, regional, and national laws and regulations that may affect your dropshipping business.
start a business
No matter what type of company you want to form, you will need to complete several regulatory and licensing processes before you can legally start your business. One of the first steps you need to take is to choose the type of business structure you want to adopt.
Sole Proprietorship, C Corporation, or Limited Liability Company (LLC)
When you're ready to set up your business as a government-approved entity, you'll need to set it up as a sole proprietorship, C corporation, or limited liability company (LLC). When weighing the benefits and drawbacks associated with each option, consider the essential nature of your new business, including your mission and goals, level of risk tolerance, and tax incentives.
A sole proprietorship is the easiest and lowest-cost business entity to set up, and it gives you complete control over your business, both in terms of day-to-day operations and strategic decisions. However, sole traders are personally responsible for all business risks, which can severely limit their ability to fund future expansion and growth of their company.
A C corporation is owned by shareholders who purchase shares and provides limited liability by separating the company from its ownership. It is considered a separate legal entity with its own rights (such as property ownership) and obligations (such as tax liability).
LLCs are a very popular business structure for medium-sized and larger businesses that want the limited liability of a C corporation, but with a formal management structure, compliance requirements, and more flexibility when it comes to profit distribution. is. One of the main advantages of an LLC is tax-related.
C corporations tend to be subject to double taxation. The corporation itself is taxed on its profits, and its shareholders are taxed on their dividends. In contrast, an LLC transfers all profits and losses to shareholders. This means that for tax purposes, only the shareholder needs to report the profits to her IRS.
Both C corporations and LLCs have much more complex structures than sole proprietorships. Before choosing one of these structures for your dropshipping company, you should consult a qualified professional.
laws and regulations
Besides registering your dropshipping business with the government as a sole proprietorship, C corporation, or limited liability company (LLC), there are many other legal standards that must be met for your business to operate successfully. When selling things online, you must be careful to comply with all applicable sales tax and value added tax (VAT) requirements. These requirements may vary by business sector and legal jurisdiction.
Remember that even if the products you sell never reach human hands, you are still responsible for ensuring that all products you sell comply with relevant product safety, quality, and labeling standards. It is important to do so. You are also responsible for complying with all laws relating to the marketing of those products. Before shipping internationally, you should research all relevant import and customs regulations. The company's website and e-commerce operations must also comply with all payment processing and general online business regulations.
How to start a dropshipping business
Setting up a dropshipping business is easy if you keep in mind all the intricacies detailed above. Use the following series of steps as a guide.
Step 1: Develop your business concept
All great companies start with an idea. Regardless of how you prefer to handle your products or fulfill orders, you should be drawn to business concepts that have potential for future profits and that fall into your personal interests and areas of expertise. While using dropshipping techniques to ship a wide range of products is a surefire way to succeed, concentrating on a specific type of product will help you differentiate yourself from your competitors and build your credibility in a single area. You can also establish yourself as a capable resource.
Step 2: Product Determination and Sourcing
It is important to do extensive research before committing to a particular market niche or business concept. You'll want to know everything you can about the products you offer, the target consumers you want to reach, and the different ways you can reach them. Thorough competitor research is also very important. Is there a real need for your product among consumers? Or is your chosen market already saturated? Will your closest competitors also be fragile startups, or are global Are you going to compete with huge corporations? What types of dropshipping suppliers are there for your chosen product line? Let the answers to these and similar questions guide your business development.
Step 3: Establish relationships with suppliers
Your success or failure as an entrepreneur using the dropshipping model depends on your ability to choose a dropshipping supplier that delivers the right quality products to the right customers quickly and on schedule. Some suppliers go beyond these essential features and add complementary features, such as offering branded products with special packaging to help further integrate marketing efforts.
Step 4: Create your online store
Just as a physical storefront reflects the overall quality and style of a brick-and-mortar business, an e-commerce storefront represents your dropshipping business online. Even if you don't offer branded products or lead a unified advertising campaign, e-commerce websites provide an opportunity to project a strong corporate image and provide detailed information about the products you offer. You can also place online storefronts and e-commerce links on your social media pages and existing online marketplaces. Most successful dropshipping businesses take a multichannel approach to sales.
Step 5: Register your dropshipping business
Besides choosing a name for your dropshipping business and filing it as a sole proprietorship, C corporation, or LLC, there's a lot you need to do to register it as a property. Although specific registration requirements vary by field and jurisdiction, common registration steps include securing an Employer Identification Number (EIN) for tax purposes, applying for appropriate industry-based licenses and permits, and filing with IRS and other registration with relevant government agencies.
Prepare for dropshipping business leadership
No matter what kind of product handling or order fulfillment you prefer, you need to be prepared before embarking on your entrepreneurial business. Dropshipping in particular can be relevant to multiple business and accounting degrees, such as the graduate programs offered at Keizer University. To find the program that's right for you, request more information today.