What is dropshipping?

If you’re thinking of setting up an ecommerce business or just a side hustle to earn some extra cash, you’ll probably have heard of dropshipping. Dropshipping allows you to sell online without having to worry about manufacturing, storing or shipping products – that’s all managed by a dropshipping supplier.

But while it sounds simple in theory, setting up and running a dropshipping business can be quite complicated. This guide explains how dropshipping works, how to find a dropshipping supplier and how to increase your chances of success when selling online.

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What is dropshipping and how does it work?

Dropshipping is an online selling business model that doesn’t require you to keep any items in stock. Instead, whenever you sell an item to a customer, you buy that item at wholesale cost from a third-party supplier. This supplier then ships the product directly to the customer on your behalf.

This means that you never actually store or handle the product yourself. Essentially, dropshipping means selling someone else’s products and taking a share of the profits.

Here’s how it works:

• A customer purchases a product from your online store.
• You forward the order and the customer’s delivery details to a wholesaler or manufacturer (the dropshipping supplier).
• The dropshipping supplier packs the order and ships it to the customer on your behalf.

Do I need a business bank account to dropship?

If you’re operating as a limited company in the UK and want to use banking services – including making and receiving payments – then you’ll need to open a business bank account. This is because legally, you have to keep your business and personal finances separate.

If you’re working as a sole trader or doing dropshipping as a bit of a side hustle, then some banking providers will let you use your personal current account for a small number of business-related payments. However, if they see high volumes of transactions going through – which could be the case with dropshipping – they may ask you to open a business bank account.

Either way, there are other benefits to having a business account. It’s a sensible idea to keep your personal and business finances separate, plus it will make it easier to identify all the transactions related to your dropshipping activities. If you’re in a position where you need to pay taxes, some business bank accounts come with tools that help you manage invoices or work out your expenses and tax reporting.

There are a number of free or low-fee business accounts available in the UK – check out the best business bank accounts to find out more.

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Is dropshipping worth it?

Dropshipping can offer a simple way to earn extra income on the side or help your ecommerce business grow. However, there’s no guarantee of making a profit, so it’s essential that you plan carefully and set your dropshipping business up for success. The following are some key steps you should take:

• Research the market. Market research is crucial to help find a niche segment or product type you can target. You’ll also need to research your competition to get a better idea of how to price your products and an idea of which sales and marketing strategies are most effective.
• Crunch the numbers. Dropshipping sounds like an easy way to make money but that isn’t always the case. You’ll need to calculate your predicted income as well as any overhead costs and the time required to run a dropshipping store before deciding if it’s worth it.
• Find a good supplier. Finding the right supplier(s) is essential, so compare a range of businesses before deciding who you want to work with. If your supplier sends out defective items, is slow to ship products or is simply uncommunicative, it could cause big problems for your business.

How to start a dropshipping business: 5 steps

There are a few stages to setting up an online dropshipping store. We’ve created a 5-step guide to help. It’s free to download and includes expert tips, resources and links.

Finding the right items to dropship

Finding high-quality items that you can sell for a profit can be tricky, but doing as much research as you can will help. To start with, you should do the following:

• Research trending products. Use Google Trends and “top selling products” sections on various marketplaces to get an idea of what sort of items are in high demand.
• Find your niche. Select products in a niche that you are knowledgeable and passionate about. You’ll also need to decide whether you want to sell products with widespread demand, which means dealing with a lot of competition, or focus on targeting a very specific market sector.
• Consider pricing. You’ll need to find a happy medium between products that are easy to market but that are also easy to sell for a profit. Don’t forget to also consider packing and shipping costs and the effect they could have on prospective buyers.
  Research the competition. Finally, conduct detailed research into other sellers that stock similar items. Will you be able to match or beat their prices and still make a reasonable profit?

Products and categories suited to dropshipping tend to include items that are relatively cheap and easy to ship. The following are some examples of products that are suitable for dropshipping:

What marketplaces allow dropshipping?

You can use dropshipping to sell products from your own online store, but it’s also permitted on a wide range of popular online marketplaces and ecommerce platforms, including the following:

Before you sign up for an account on any marketplace, check the terms and conditions to make sure dropshipping is allowed.

Thinking about starting an online store? Get 14 days free at Shopify!

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How to find dropshipping suppliers

You’ll need to carefully compare a range of dropshipping suppliers to find a reliable partner for your business. Cost will be a major consideration, but you’ll also need to factor in the supplier’s track record and shipping times as well as its refunds and complaints handling processes. Perhaps even more importantly, any supplier you choose must be a prompt and effective communicator.

You can contact individual manufacturers and wholesalers directly, or find them using supplier directories like Worldwide Brands and SaleHoo.

Check out the table below for details of a few popular dropshipping supplier directories.

Use the following checklist of questions to help you find the best dropshipping supplier for your needs.

How to increase your sales

The following are some of the strategies you can adopt to help boost sales for your dropshipping business:

• Marketing. Blogs and email marketing campaigns can help you attract new customers and encourage repeat business.
• Social media. Maintaining a strong social media presence helps increase the credibility of your business and also helps increase brand awareness.
• Reviews. Encourage happy customers to leave reviews for your online store – this will help prospective customers decide whether your business is legit.
• Paid advertising. There are also myriad paid advertising options available, including everything from promoted marketplace listings to banner and display ads.
• Search engine optimisation. Whether you’re selling on a marketplace or through your own store, make your site and listings SEO-friendly to increase visibility in search results.

Common problems you might run into

There are a few key risks and problems you’ll need to be wary of when dropshipping:

• Defective supplies. The reliability of your dropshipping supplier is crucial to the success or failure of your business. You don’t have any control over storage or shipping, so it can be difficult to ensure the quality of the items you sell to customers.
• Missing inventory. Keeping track of inventory can be a major challenge, particularly if you’re sourcing products for your store from multiple warehouses that are also fulfilling orders for other retailers.
• Shipping complications. If a customer orders two products from your online store, each of which ships from a different international warehouse, this results in two separate shipping costs.
• Customer service. While your supplier takes care of manufacturing, storage and shipping, you’re responsible for customer service. If there’s a problem with an order, for example if the customer requests a refund, you’ll need to be the go-between to sort out an unhappy customer’s issue with your supplier.
• Low profit margins. One of the biggest attractions of dropshipping is that you don’t need to invest a whole lot of money to get a business off the ground. However, the profits are also low, with most of the money from each sale going to the dropship supplier.
• Fierce competition. Because it’s simple and cheap to set up a dropshipping business, you can expect to face stiff competition from other entrepreneurs.
• Expecting easy income. On the surface, dropshipping seems like a simple way to earn passive income. However, you’ll still need to put in plenty of time and effort to give your business the best chance of success.
• Fees. Finally, don’t forget that many dropshipping suppliers also charge ongoing monthly or annual fees.

Do I need a business licence?

If you’re selling products online as a business rather than a hobby, you’ll need to register as self-employed with HMRC.

Depending on what you’re selling, you may also be required to apply for other business licences and permits.

Do I have to pay taxes on dropshipping in the UK?

There are two main types of tax you’ll need to consider when dropshipping: income tax and VAT.

If you’re selling online as a business, you’ll need to report all your earnings to HMRC and fill in a self-assessment tax return. You have a trading allowance of £1,000 a year before you have to start paying income tax or your earnings.

And if your business has an annual turnover of £85,000 or more, you’ll also need to register for and charge VAT.

Bottom line

Ultimately, dropshipping is worth considering if you’re looking to build an ecommerce business. But if you approach it expecting to earn easy money, you’ll be setting yourself up for failure.

A successful dropshipping business requires careful preparation and planning as well as an ongoing commitment to make each customer’s experience as smooth and seamless as possible.

So, if you think dropshipping is the way forward for your online business, it’s time to start researching your options.