How to start dropshipping: 8 steps to a profitable plan

Whether you’re taking the first steps as an entrepreneur, or want extra cash from a side hustle, dropshipping is a good venture – if you know what you’re doing.

With low startup costs, few overheads and no need to hold or purchase inventory, it has become an ideal bootstrapping enterprise.

But as easy as it is to sell the idea of dropshipping, it does come with a few challenges. So to help you on the road to dropshipping success, we’ve put together a guide to walk you through the set up, with plenty of insights on what to consider and potential pitfalls along the way.

How to start a dropshipping business in 8 steps

Dropshipping doesn’t have to be complicated. These are the eight steps you need to create your dropshipping business.

Step 1: Research your niche

Although dropshipping is an alluring venture, you shouldn’t dive straight in. You’ll need a clear plan to turn a profit, so doing your research should be the first step.

Finding a dropshipping niche will help you to identify your target audience. There are two methods to finding a niche – one that you’re knowledgeable about and one based on market demand. Whatever you go for, it’s important to find a niche with high customer interest and low competition.

How to research your niche

The best places to explore the viability of possible dropshipping products are:

Google Trends: A tool that analyses the popularity of search queries on Google over time and across different regions.

Amazon Best Seller list: Ranks the most popular products in various categories based on sales data updated hourly

TikTok or Instagram hashtags: These keywords or phrases categorise content through hashtags, making it easier to discover posts related to specific topics or trends.

Step 2: Carry out competitor research

Dropshipping is a competitive space, so it’s important to know your competition.

First, start by identifying your main competitors within your chosen niche. You can use tools like Google Search, social media platforms and ecommerce marketplaces (eg Amazon and eBay) to find businesses offering similar products.

Once you’ve identified competitors, take a look at their websites to assess their product offerings, pricing strategies and overall branding. Pay attention to product descriptions, images and customer reviews, as these can give you insights into customer needs and what resonates with them.

Next, analyse their marketing strategies. Look at their social media presence and engagement, as well as any advertising campaigns they might have on platforms like Facebook or Google Ads.

Tools like SEMrush or Ahrefs can also help you evaluate their website traffic, keyword rankings and backlink strategies. Additionally, consider using tools like SimilarWeb to gain insights into their website performance and audience demographics. That way, you can identify potential gaps in the market, understand customer pain points and gain a competitive advantage.

Step 3: Find reliable suppliers

When looking for suppliers, don’t just pick any at random. Instead, it’s important to find a reliable supplier to ensure product quality, timely shipping and good customer satisfaction. Here are a few platforms that can help you get started:

AliExpress: Connects you with suppliers who offer a wide range of products. Look for suppliers with high ratings, positive reviews and a history of successful transactions.

Alibaba: Integrates with Shopify and allows you to find products and suppliers specifically suited for dropshipping – providing insights into product performance and supplier reliability.

SaleHoo: A directory of verified suppliers that connects you with wholesalers and dropshippers, offering access to a vast range of products.

Step 4: Build your online store

The first step to building your online store is to choose an ecommerce platform. Once you’ve chosen one, you’ll need to create an account and select a pricing plan that fits your budget and needs.

Here are some popular platforms you can use:

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Next steps

Choose a domain name: This should reflect your brand and be easy to remember. You can use domain name registrars (eg GoDaddy or Namecheap) to check availability and purchase your domain.

Customise your store design: Choose a professional, responsive theme that aligns with your brand’s identity. Most ecommerce platforms offer free and paid themes to choose from. Ensure your website is mobile-friendly too, as a significant amount of web traffic comes from mobile devices.

Import your products: Use dropshipping apps (eg Oberlo or Spocket) to import products from suppliers directly into your store. Ensure that product descriptions, images and pricing are clear and appealing, and create product categories to make it easy for customers to navigate your store and find what they’re looking for.

Set up payment gateways: Set up payment gateways to allow customers to make purchases. Popular options include PayPal, Stripe and credit card processors. Payment options should be secure and user-friendly, and if you plan to sell internationally, consider enabling multiple currency options to cater to customers in different regions.

Configure shipping settings: Determine your shipping strategy, such as free shipping, flat-rate shipping or calculated shipping based on location and weight. Communicate your shipping policies clearly and specify the countries or regions you will ship to.

Implement legal pages: Develop clear policies for returns, refunds and privacy. Include a Terms and Conditions page to outline the legal framework of your business. If you’re selling to EU customers, ensure your site complies with GDPR around customer data protection.

Optimise for SEO: Identify relevant keywords for your niche and incorporate them into product titles, descriptions and meta tags. Utilise tools like Yoast SEO (for WordPress) or Shopify SEO apps to help optimise your store’s visibility in search engines.

Step 5: Develop a pricing strategy

This step is crucial for both maximising profit and remaining competitive in the market. You can set up an effective pricing strategy by:

Understanding your costs

There are four costs you’ll need to keep in mind when creating your pricing strategy – product, transaction, shipping and marketing and overhead.

Product costs Calculate the price you’ll pay for your supplier for each product, including shipping fees.

Transaction fees: Factor in transaction fees from payment processors, as well as any fees associated with the platform you’re using (eg Shopify or WooCommerce)

Shipping costs: Decide if you’ll offer free shipping – and factor this into your product prices or charge separately. Look into different shipping methods and find the most cost-effective options.

Marketing and overhead costs: Include any costs related to marketing, website maintenance and any other overhead expenses in your pricing calculations, such as digital advertising practices like business insurance or inventory management.

Researching competitor pricing

Check prices for similar products offered by your competitors. Look at both direct competitors in the same niche and indirect competitors that sell related products. From there, consider how your product offerings compare to competitors in terms of quality, features and customer service. If your products have greater value, you might be able to charge higher prices.

Determining your profit margin

Here, it’s important to strike a balance between covering your costs and remaining attractive to customers.

A typical dropshipping margin can range from 15-20%, depending on the product type. You should also experiment with different price points through A/B testing, as this will help you find out what works best and determine the optimal price to maximise sales.

To get mathematical, you can calculate your profit margin using this formula:

Selling price = product cost + desired profit margin

Step 6: Register your business

To set up your dropshipping business, you’ll need to register it, which you can do through HMRC online. You can set up as a sole trader, limited company, or partnership. Here’s a quick breakdown of the different options:

Sole proprietorship (trader): This is the simplest business structure, but it offers no personal liability protection. If your business is sued, your personal assets might be at risk. However, it is the easiest to handle. You just report your business’s earnings on your personal taxes.

Limited liability company (LLC): This model offers increased protection of your personal assets by establishing your business as a separate legal entity. You may need to comply with filing requirements and pay incorporation and ongoing fees.

C Corporation: This offers the most liability protection. It is more expensive to incorporate because it is subject to double taxation, as income doesn’t pass directly to shareholders.

Step 7: Set up your finances

Once you start making sales, you’ll need to set up your finances to properly monitor your cash flow, expenses and profitability. Here’s what you need to do:

Open a business bank account

Open a dedicated bank account to separate your personal and business finances. This will help you track your business income and expenses more easily and maintain clear financial records. When choosing the right bank, make sure to look for one that offers features specifically for small businesses, such as low fees, online banking and easy-to-access funds.

Set up accounting software

Accounting software tools can help you manage your finances by letting you track income, expenses, invoices and financial reports. Here are some useful platforms to consider:

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If possible, you should integrate your accounting software with your ecommerce platform to automate transaction tracking and reduce manual data entry.

Track your income and expenses

Regularly input all income and expenses into your accounting software. This includes categorising expenses to identify areas where you can cut costs or improve profitability. Additionally, create and send professional invoices for any services provided (eg freelance work). Ensure that you keep track of paid and unpaid invoices.

Monitor your cash flow

Create cash flow statements to track the movement of money in and out of your business. This will help you identify potential cash shortages and make necessary adjustments. Unexpected payments can sneak up on you too, so make sure to maintain a cash reserve for these instances or any slow sales periods.

Set up payment processing

Choose reliable payment processors that suit your business needs. Compare transaction fees, integration capabilities and supported payment methods. Also, familiarise yourself with the fee structures of your chosen payment processors to factor these costs into your pricing strategy.

Consider taxes

Your tax obligations will depend on your business structure and location and may include sales tax, income tax and other local taxes. The UK also introduced a side hustle tax in January 2024, meaning that you’ll need to register as self-employed through HMRC if you earn over £1,000 in sales.

That’s why you should regularly set aside a portion of your income for taxes to avoid any surprises when the tax season arrives.

If you’re stuck on how to handle your tax, you can talk to a tax professional to ensure your dropshipping business is compliant.

Review your financial performance

Conduct regular reviews of your financial statements to assess the health of your business, including profit margins, expenses and sales trends. From there, you can use those insights to adjust your pricing, marketing strategies and operational processes to improve your financial performance.

Step 8: Market your dropshipping store

Now you’ve got everything set up, it’s time to get selling!

The primary aim here is to make sure you get a good Return On Investment (ROI) on your marketing budget, so here are a couple of robust marketing channels to pursue:

Paid advertising

Paid ads are a great way to quickly drive targeted traffic to your dropshipping store, increase brand visibility and boost sales. But it can get expensive, especially as paid search accounts for 39% of advertisers’ budgets.

That’s why you should keep your budget low at the beginning to experiment and test out what content gets the most conversions. Create several ads to figure out which products sell best. You can also run Google Shopping Ads and target long-tail keywords, which tend to have high conversions due to high user search intent.

Influencer marketing

If you have a limited budget, influencer marketing is a great way to reach an audience quickly. After all, 45% of young European consumers depend on influencer recommendations, while 69% trust what they say and recommend.

Focus on looking for influencers within your niche or industry. For example, if you’re selling fitness products, you can collaborate with fitness influencers. You can then negotiate an affiliate fee as well as any other fees for their service. Try this out on TikTok and Instagram.

Content marketing

This includes search engine optimisation (SEO), blogging and video marketing.

The top result in Google’s organic search gets around 27.6% of clicks, while 49% of marketers report that organic search gets the most ROI of any marketing channel. Ensure to optimise your product pages, descriptions and blog posts with relevant keywords to improve visibility on Google and other search engines.

86% of B2C businesses also use blogging to grow their online presence. A good way to attract potential customers is to write blog posts that offer value. For example, posts that address their needs, offer tips or solve problems.

And finally, 91% of businesses use video as a marketing tool. Short-form videos are particularly popular, driving the highest ROI compared to other marketing trends. 81% of consumers also want to see more short-form videos from brands in 2024.

For video marketing, utilise platforms like YouTube, TikTok and Instagram to reach a wider audience and optimise videos with relevant keywords and descriptions for SEO. For the content itself, storytelling, product demonstrations or customer testimonials are useful for building trust and engaging potential customers by showcasing real-life experiences, as well as the benefits and value of your products.

Social media marketing

There are many ways to market your dropshipping business effectively on social media. The best ones are:

Instagram: Using Instagram for dropshipping is ideal for showcasing visually appealing products (eg fashion, beauty or home decor). Use posts, stories and shoppable posts to engage your audience. Also a good platform for influencer marketing and paid ads.

Facebook: Great for targeting a broad audience through Facebook Ads, which offer detailed targeting options based on demographics, interests and behaviours. It can also be useful for building a community through groups and engaging content.

TikTok: TikTok dropshipping is a good option for targeting younger audiences (Gen Z and Millennials) with engaging and creative short videos. Use trending challenges, hashtags and influencer partnerships to promote your products.

Pinterest: Pinterestf is an effective platform for visual discovery and product promotion, particularly in home decor, fashion, DIY and lifestyle. Make sure to use rich pins and optimise content for Pinterest search to drive traffic.

YouTube: With 1.9 billion active users as of September 2024, marketing on YouTube is a no-brainer. Create product tutorials, reviews or unboxings to showcase your products. You can also collaborate with YouTubers in your niche for authentic product endorsements.

Email marketing

A good marketing strategy can both engage customers and drive sales for your dropshipping business.

Start by creating an email list through attractive offers like discounts or free shipping. You can also use newsletters to keep your customers informed about new product launches, exclusive discounts and upcoming sales events.

Additionally, leverage automated emails to boost conversions. For example, abandoned cart emails can be used to remind customers to complete their purchases if they leave their items in the shopping cart. This gentle reminder can help lead to a recovery in lost sales, as abandoned cart recovery emails have an open rate of 41.18% – a lot higher than the 21% open rate of a typical marketing email.

Can you start a dropshipping business for free?

Technically, yes. There are ecommerce platforms that are highly budget-friendly like eBay and Amazon, so you won’t have to pay a subscription like you would with Shopify.

For instance, with Amazon, you pay a fee when you sell an item. While both these platforms are great for selling items, they’re not necessarily the most scalable solutions, especially if you want to set up a serious business.

If you’re worried about throwing money at a platform that doesn’t work for your dropshipping vision, we’d recommend doing a free trial first. For example, Shopify offers a 3-day free trial and lets you sign up without adding your card details. This gives you access to all its features, commitment-free.

Subscribing to a robust ecommerce platform for your dropshipping business is key because it builds your digital storefront. You need it to look good so customers can trust you. If you want to build a reputable brand and receive good reviews, we’d say the investment is definitely worth it.

Dropshipping Do’s and Dont’s

To successfully manage your dropshipping business, here are the practices you should follow and avoid to ensure steady growth and profitability:

DO – Thorough marketing research

By analysing market trends, customer preferences and competitors’ offerings, you can make informed decisions about which products to sell and how to position them. This will help you uncover potential opportunities, avoid oversaturated markets and tailor your marketing efforts to attract the right audience, in turn increasing your chances of success in dropshipping.

DON’T – Choose a saturated market

If you enter a saturated market, it’ll be difficult to stand out. When too many sellers offer the same products, you risk fierce competition, lower price margins and struggling to capture a good share of the market. That’s why it’s better to find a niche with lower competition and strong demand, as it’ll allow you to build a more unique value proposition and target a specific audience.

DO – Choose a reliable supplier

A reliable supplier is the backbone of any dropshipping business, so it’s important to find one that has consistent quality, timely delivery and good communication. Working with dependable suppliers ensures that your customers receive their products on time and as described, helping you avoid negative reviews, returns and lost sales.

DON’T – Neglect quality control

You might not handle inventory directly in dropshipping, but neglecting quality control can still damage your business. Poor-quality products lead to dissatisfied customers, negative reviews and high return rates, which can severely hurt your reputation. By monitoring product quality effectively, you can maintain a positive customer experience and minimise potential issues.

DO – Optimise your online store

Remember – your online store is your storefront, so optimising it properly is essential for converting visitors into customers. Make sure your website is user-friendly, is easy to navigate, uses high-quality images, has detailed product descriptions and a smooth checkout process. This will help improve the shopping experience, boost conversion rates and help you rank higher on search engines.

DON’T – Ignore shipping times

Shipping times are a major concern for customers. That’s why you should be transparent about them and manage their expectations, especially if you’re sourcing from overseas supplies with longer delivery windows. Provide customers with realistic shipping estimates, and tracking information to build trust.

DO – Set competitive prices

Attractive pricing plays a huge role in attracting customers. As mentioned earlier, product costs, shipping costs, transaction fees and marketing expenses should be considered when pricing your items, while competitor research will help you find a balance between affordability and profit margins. Offering fair, competitive prices without undercutting your profitability will help you stay competitive and ensure that you can cover costs and earn a profit.

DON’T – Overlook legal obligations

Ignoring legal obligations can lead to costly consequences for your business. Ensure you comply with tax regulations, privacy laws and ecommerce legal requirements in your region. Staying compliant with these regulations will help you avoid fines and protect your business from potential legal issues.

DO – Implement effective marketing strategies

Effective marketing is key to driving traffic and sales to your dropshipping store. Use a mix of digital marketing channels like social media, email marketing, SEO and paid ads to reach your target audience. A well-rounded marketing plan ensures you reach a broader audience and continuously attract new customers to your store.

DON’T – Rely solely on one supplier

Relying on a single supplier can be risky, especially if they experience stock shortages, delivery delays or quality issues. Diversifying your supplier base reduces dependency and ensures you have alternatives, just in case one supplier fails to meet your needs. It also allows you to compare prices, delivery times and product quality – giving you more flexibility in running your business smoothly.

DO – Monitor your financials

This is essential for maintaining profitability and understanding the financial health of your dropshipping business. Understanding your cash flow helps you make informed decisions about pricing, marketing budgets and reinvestments. Meanwhile, keeping a close eye on your finances enables you to stop potential issues early and adjust your strategy accordingly.

DON’T – Skimp on marketing

Consistent marketing efforts will help build brand awareness, attract and retain customers and increase sales. Even if you have a great product, it doesn’t mean anything if it doesn’t reach your target audience. Allocate a reasonable budget for paid ads, influencer marketing and content creation to ensure your store gets the exposure it needs.

DO – Stay updated on industry trends

Staying updated on industry trends allows you to adapt to changing customer preferences and market demands. Regularly researching new products, ecommerce tools and marketing techniques can help you stay ahead of the competition. Plus, you can introduce new products and marketing strategies that match with what’s currently popular, ensuring your business remains relevant.

DON’T – Price too high or low

If your price is too high, you risk driving potential customers away, as they might find similar products at a lower price. On the other hand, pricing too low can devalue your product, as customers will question its quality or authenticity. Underpricing may also leave you with slim profit margins, making it difficult to cover important costs. Striking the right balance is crucial – your pricing should reflect both the value of your product and the market’s expectations, while also allowing for a healthy profit margin.

DO – Test and optimise

Great products are one thing, but if your website doesn’t work well, you’ll miss out on a lot of sales. That’s why you should carry out A/B testing to see what works best for your audience and make data-driven adjustments. Make sure to regularly analyse metrics like traffic, conversion rates and customer feedback to find areas of improvement.

Conclusion

Starting a dropshipping business can be a viable and lucrative venture for aspiring entrepreneurs and those looking to start a side hustle. By following the above steps, you can create a solid foundation for success.

While dropshipping offers low startup costs and minimal overhead, it also comes with challenges that require careful planning and execution. That’s why leveraging tools and insights for market research, competitor analysis and different marketing channels will help position your business effectively.

Ultimately, commitment, adaptability, and a customer-centric approach will be key to achieving growth and the best results for your new business.