How to Start a Drop Shipping Business (in 5 Easy Steps!)

First: A little background on drop shipping

The idea of drop shipping is that a wholesale drop shipper (the supplier) offers you the option of selling products without buying them first. They also act as service providers who prevent you from having to:

• Store items
• Package and ship items
• Risk money on items when you aren't sure about how they will sell

But they don't do all that for free! When you buy from a wholesaler offering drop shipping services, they add a fee to cover the costs involved with offering this service. This is usually US$2-US$5 per item, which means you must be careful when you think about the products you want to drop ship, as there are some items which are much more suitable for drop shipping than others. We suggest going for:

• Deep niches such as rear brake lights for late model Honda Civics
• Items with low-volume sell-through rates and high profit margins – meaning you won't sell 150 per week but you will make a decent profit on them when they do sell
• Don't have a great deal of competition. This is important when you are drop shipping as you have to take those drop shipping fees into consideration, which makes keeping up in a competitive market really tough on sellers who are drop shipping.

As promised: Your 5 Step Guide to starting a drop shipping business

Step 1: Find a supplier!

You need to explore a few different possible suppliers. Try our own SaleHoo Directory which is full of reputable sellers stocking a wide range of products from cosmetics to faming equipment. For local suppliers, try flicking through your Yellow Pages in the Wholesale or Suppliers sections. Look for ones who have plenty of experience in drop shipping and who understand the importance of sending out your items in a timely manner. Before negotiating a deal with them, ask:

1. How long it will take for an order to be shipped once you have placed the order with them
2. What shipping methods they offer, e.g. overnight courier, or for international suppliers, which company they use and what their tracking systems are like.
3. About their quality control systems (you don't want to be dealing with sub-standard products, it will mean lots of hassles with returns, which wastes valuable time you could spend on making money)
4. If they offer warranties
5. If you can use their product photos for your eBay listings/ecommerce site. Large wholesalers often have professional product photos taken which will make your listings all the more professional looking

Step 2: Select products from your new supplier's range

This step could also be Step 1 those who know exactly what they want to sell. Start by trawling through your suppliers product range and pick out a few items which interest you and do some market research. Find the best selling items by:

1.    Using a service like SaleHoo Research Labs, which performs market research for you when you input key words into the search tool, and tells you all sorts of valuable information including the average selling price, average shipping price and sell-through rate (ratio of listings which sell in relation to those which do not). It's free with your SaleHoo membvership, well worth it to ensure you choose only profitable items to sell!

2.    Otherwise, use our old favorite and take a close look through eBay's completed listings. If you haven't used this method before, follow these simple steps:

• Go to eBay.com (or your local eBay site)
• Click 'advanced search' (located right next to eBay's search bar)
• Check the 'completed listings' box
• Enter your keywords and category and hit the search button
• Now scroll through around 5 pages of listings and count the number of successful listings (listed in green), compared to the unsuccessful ones (listed in red). When you find an item which sells 60% (or more) of the time you can be pretty certain that you will be successful in selling them. The easiest way to do this is to scroll right down to the bottom of the page and check that 50 items show per page, then go through and count the number of green listings. When you get to the bottom and have counted at least 30 (60%) green listings out of the 50 listed, you might be onto something so keep looking through a few more pages to make sure.

If none of your products match up, go back and find something else to research or try searching the same product under different key words and categories.

Step 3: Get a tax ID

Not all eBay sellers need a tax ID but some wholesale suppliers require you to have one before they will do business with you. You do need a sales tax ID (also known as retail or resellers license, tax ID, resale number resale certificate or vendor's license) if you are inside the US or Canada and running a business (not just selling items from around the home). Note that some states including Alaska, Delaware, Montana, New Hampshire and Oregon do not require sales tax ID's. so let your wholesaler know if that’s the case, as they may have  another form for you to fill out.  Applying for a tax ID is easy and inexpensive; you can do it by visiting your local county clerk’s office or online – just Google “[your state] + sales tax ID”.

To get a sales tax ID, you may need to be a business entity; a company or a sole proprietor (which applies to a lot of at-home online businesses), and to have a Federal Tax ID number.

Step 4: Choose a selling platform

The obvious one is eBay but there are plenty of other online auction sites out there which are growing rapidly and getting a lot of traffic (and some are even fee-free or much cheaper to use than eBay!) Check out sites like Bonanzle.com, Ubid.com and Amazon.com and see if there is a market there for your product range. It's a good idea to diversify when it comes to selling on online auction sites as each site has its own unique visitors (not everyone checks eBay first, yah know!) and with most sites being free to join, there is no reason not to give others a try.

For sellers who are really looking to diversify, consider setting up your own ecommerce site.

Step 5: Manage your listings

When drop shipping, you will list your items in the same way you would if you had the stock on hand, but when selling on eBay (and some other sites, you must check individual policies), you must disclose in your listing to all potential buyers the location of your item. 

For example, if your supplier is based in Hong Kong, you must display this in your listing so that buyers are aware that there may be longer than expected shipping times. Check out the details of the policy here.Drop shipping orders work a little differently than regular wholesale orders.

Here's what a typical drop ship order will look like:

1. After you have chosen your items from your supplier,  you will list them on eBay or on your  ecommerce site
2. Once the item is sold, you will collect the money from the buyer and pay your supplier (keeping the profit you make, of course!) by ordering the item you have just sold from their website
3. The supplier will then send out the item you have sold directly to your buyerYou will soon work out which products have a great sell-through rate and which don't and can begin adjusting which products you list accordingly.
   

Good luck with your drop shipping business! For more information check out our free drop shipping advice.