How to Turn Dropship Business Ideas Into a Profit: A Step-by-Step Guide

Welcome to the second and final part of our dropshipping series. Now that we’ve covered the pros and cons of dropshipping, we’re diving into how to get started.

1. Start with a business plan.

A business plan can serve as a roadmap, with important milestones so you can measure how well your business is doing. It also can be beneficial if you’re applying for a business loan or looking for investors.

Best of all, creating a business plan doesn’t have to be complicated. We have an easy-to-use template designed specifically for small business owners. 

2. Determine your business structure. 

The business structure you choose can affect important issues, such as taxes, asset protection, and liability. You’ll likely cover this when creating your business plan. 

When deciding on any business structure, we recommend consulting with an attorney, tax professional, or business advisor about your particular business plan and circumstances.

Here’s a brief breakdown of the most common structures for small businesses.

Sole proprietorship — If you want to get started quickly and easily, a sole proprietorship may be the way to go. It’s typically owned and run by one person (although you may have employees), and there is generally less paperwork involved and lower startup fees. 

However, there’s no legal distinction between the owners and the business. Anyone dropshipping risks losing personal assets if the business can’t cover its debts, losses, or liabilities. 

Partnership — A partnership is a business that’s owned and sometimes run by two or more people or entities. Each partner gets a share of any profits, but they’re also responsible for any losses.

Limited liability corporation (LLC) —  Do you need an LLC for dropshipping? It depends on what business model you choose. Unlike a sole proprietorship or partnership, an LLC is a separate business entity. That means it can provide more protection for your personal assets. At the same time, an LLC can often be more expensive to set up and operate.

Corporation —  A corporation is a close cousin of the LLC. The big difference is that it offers stronger protection from personal liability. Another difference is that corporations often cost more to set up than other structures. You also will have to keep and maintain more extensive records, operational processes, and reports.

3. Get an EIN and open a business bank account.

An EIN is an employer identification number. It’s free and relatively easy to get from the IRS once you’ve registered your business. This will make tax reporting easier and is helpful if you’re bringing on employees or independent contractors.

You’ll also need it to open a business bank account. Depending on the business structure you choose, a business account may be required. Even if it’s not, it can still be a good idea. 

A business bank account allows you to accept credit card payments, which a dropshipping business will need. It also can make tax reporting easier and help build a credit history for your business.

4. Make sure you have the right licenses and permits.

There are a number of licenses and permits you may need to sell online. These can often vary by the state you’re operating in, so it’s a good idea to check with your local government agencies and offices. Your lawyer or business advisor may also be able to help.

When you do some research into licenses and permits, you’re likely to run into a wide variety of them. Here are some of the most common types and a brief overview of what they typically cover.

Business license.

Do you need a business license for dropshipping? Most likely. What type (federal, state, local) often depends on where you’re operating your business and what types of products you’re selling.

Federal business licenses — If you sell products that are heavily regulated, such as animal products, alcoholic beverages, and explosives, you’ll need a federal business license.

State business licenses — License requirements vary among states, based on your type of business and what you sell. We break down some of the business license requirements for each state here, but you also should check with your local business agency or department of commerce.

Seller’s permit.

If you sell products that are subject to sales tax (and many are), most states require you to obtain a seller’s permit. 

Some seller’s permits also allow you to buy products from suppliers without requiring sales tax. Each state has its own rules around sellers’ permits and taxes, so that’s another one to definitely check out in your area.

If you operate in multiple states or jurisdictions, you also may need seller’s permits for those locations. Also, if your business is in one state and your inventory is located in another state, you may need licenses and permits for both states.

Home occupation permit. 

You may be required to have a permit if you’re running a business out of your home. This can apply to a dropshipping business, especially If you’re shipping products from your home. Again, the rules can vary by location, so it’s best to check with your local and state government agencies. 

Doing Business As (DBA) license.

If you’re operating as a sole proprietorship or a general partnership you’ll most likely use your legal name (and your partners’, if there are any) as the business name. 

If you want to operate under a different name, you’ll likely need a DBA license so that you can legally open bank accounts and conduct other business activities using that name. 

5. Get e-commerce and cyber insurance.

Once you have your business covered in terms of licenses and permits, it’s time to think about how to financially protect it from dropshipping risks. 

You may be thinking, “I don’t have a storefront. I don’t manufacture anything. I don’t even have inventory. How much risk is there if I’m just connecting buyers with suppliers?” 

Your dropshipping business ideas might seem safe, but nothing is without risk. Here are a few examples of common risks that online business owners may face:

Having little quality control. Since someone is likely making and shipping the products you sell directly to your customer, it can be hard to spot defective items ahead of time. 

If a product causes damage or injury, you could be sued. For instance, if an electrical item you sold had faulty wiring and caught on fire, you could be liable if there was damage to the customer’s home. 

It’s also possible you could be on the hook if another product, such as skin cream, caused a customer’s allergic reaction.

Limited protection with homeowner’s insurance. While you may be running a dropshipping empire from a suburban ranch house, your homeowner’s insurance likely won’t cover any business-related accidents that occur in your home. 

Advertising injury. Your marketing channels can expose your business to risks you may not have considered. Those risks can include claims of stolen ideas, invasion of privacy, libel, slander, and copyright infringement.

Say you claim a competitor’s product is made with an inferior ingredient. You later find out that it’s not true, and your competitor claims they lost sales and sues you for libel.

Even a seemingly harmless action could result in a legal claim. For instance, you use a customer’s glowing review of your product without their permission. They then sue you for violating their privacy. Even if you win the lawsuit, the legal fees alone will still be high and will likely impact your bottom line.

E-commerce insurance has your back.

Having e-commerce business liability insurance that includes general liability (GL) coverage can help protect you from the financial impact of dropshipping risks. For example:

• It can help cover claims resulting from defective products, advertising injury, or business-related accidents in your home.
• It may help cover the legal fees if you have to defend yourself against a claim.
• It can meet legal requirements if you want to rent or lease a space for your business.
• It also may be required if you’re selling through a marketplace.

Spend 10 minutes online and we can find a business insurance quote for dropshipping for you from some of the nation’s leading insurers. 

If you have questions, our licensed insurance agents are available Monday through Friday, 8 a.m. to 8 p.m. ET. Just call 844-654-7272.

Cyber insurance.

Dropshipping risks are one thing — online threats to your business are another. While firewalls and anti-virus software are good, they’re not perfect. If just one cyberattack is successful, the financial damage could cost thousands.

That’s why we recommend adding cyber insurance to your business coverage, if available. Just like general liability, we make it fast, easy, and affordable for you  to get protected.

You can start right now and get a quote in minutes.

Workers’ compensation insurance

If you have employees working for your dropshipping business — even if they’re working part-time out of your home — you may need to get workers’ compensation insurance, depending on your state.

This coverage can cover an employee’s medical bills as well as lost wages if they get sick or injured on the job. It can even potentially pay for death benefits.

In most states, employers are required to carry workers’ compensation insurance when they hire their first employee.

6. Get ready to open.

It’s time to turn your dropshipping business ideas into a dropshipping business. 

Now that you’ve done the planning, you need three more things to set yourself up for success:

• A reliable source for supplying and shipping
• Customers who want to buy your products
• A user-friendly website that brings the two together 

Getting the goods.

Two options for sourcing and shipping your products are dropshipping marketplaces or direct-source suppliers. 

1. Dropshipping marketplaces.

If you’re looking for a plug-and-play solution to help get your business started faster, marketplaces like Shopify.com’s Oberlo, AliExpress.com, and Doba.com may be a good option. 

A marketplace can: 

• Help you find and source your products, and make it easy to add them to your online store.
• Handle inventory functions like displaying product availability, forwarding orders to suppliers, and taking care of customer shipping confirmations.
• Help with paying suppliers once you receive customer payments.

All of this convenience comes with a price, but it may be worth it in terms of saving you time and effort.  

2. Direct-source suppliers.

If you’ve been working with a marketplace supplier for a while, consider cutting out the middleman. 

Along with potentially larger profit margins — no marketplace taking a cut from your sales — working directly with suppliers can give you more control over branding.

This concept is known as “white label.” Your supplier still makes or sources the product, but they ship it to your customer with packaging that can include your branding.

With so much competition, anything you can do to stand out can be an advantage.

While it’s possible to start your business working directly with suppliers, sales volume requirements can vary, so it can pay to do some research. 

7. Build your online store.

What is a dropshipping business without an online store? Whether you’re dropshipping yoga mats, rice cookers, or laser acupuncture pens, you need a place to sell them. That means an e-commerce website that’s easy to access, easy to use, and can attract customers.

There are options when it comes to “building” your online store. You can work with an e-commerce marketplace or an e-commerce platform. Here’s a brief breakdown of each to help you decide that may be better for your business.

E-commerce marketplaces.

E-commerce marketplaces — like Amazon and Ebay — feature many products from different sellers all in one place. It’s similar to the online version of a shopping mall. 

Much like the mall, an e-commerce marketplace does a lot of the heavy lifting in terms of attracting customers. They also take care of processing transactions and many technical aspects of running your store, which can reduce dropshipping risks. In return, they usually charge a fee on each sale you make.

That leaves just the sourcing and shipping to you and your supplier. Some sites, such as Amazon, can even take more off your plate by warehousing and shipping products for you. 

Using a marketplace site can make it easier to set up your website, but you’ll likely have to sacrifice some control over your branding for the convenience, and you’ll also need to adhere to their terms of service.

E-commerce platforms.

If you’re looking for more hands-on involvement in your online store, consider working with an e-commerce platform. 

While using a platform may not be as easy as using a marketplace, it shouldn’t require any coding skills on your part. Many platforms offer tutorials, articles, and other customer support that can get you on the right track.

Product-focused or content-focused site.

The structure of your site will likely be influenced by your type of business. You may find some e-commerce platforms better for product-focused business, while others cater more toward content-based businesses. 

Product-focused — Think of these like a supermarket. Customers want to see product images and descriptions. Like a good brick-and-mortar store, products are logically grouped together, and it’s easy to navigate through categories.

These sites can work well for products that may appeal to a wide range of customers, such as shoes, phone accessories, or pet supplies.

Content-focused — If your dropship business ideas have a particular niche — like skincare or model railroading — you may want to create a content-focused site. 

This type of online business usually has a narrower but also more engaged audience. They’re not only looking for products and services — they also may be interested in news, advice, and insights.

Content can add value. Visitors coming to your site for information also may buy products from you.

8. Bring in the buyers. 

As we’ve mentioned, you may have a lot of company in the dropshipping world. If you want more customers to buy products from your store, you should think about ways to stand out from all of the other sites selling similar products.

Start with your website.

To bring your dropship business ideas to life, you’ll need a website. An easy way to put one together is by using a website builder template. They provide a layout and you can add images, videos, and text. We have a guide to help here. 

This method saves time, but you may find your site looks similar to others using the same template.

If you’re at the supermarket buying canned peaches and every brand uses the same packaging, lists the same ingredients, and describes their peaches the same way, which would you choose? 

Probably the one with the lowest price. 

If you try to compete only on price, you’ll likely see lower profit margins with your dropshipping store. If a competitor can operate with lower margins than you, it could mean trouble.

Dropshippers can start with a templated theme from a website builder. They’re easy to use and some are even free. But there are some simple ways to enhance a theme to help your site stand out.

1. Write your own product descriptions. While many suppliers provide descriptions for their products, they often focus on features, not benefits. Consider explaining what a feature can do for a customer. Don’t just say your socks are “100% cotton” —  add that this means “all-day comfort.” The material is the feature; the comfort is the benefit.
2. Add your logo. You can think of a logo as a brand fingerprint for your store. It’s an easy way to start differentiating your business from all the other ones. And you don’t have to be an artist to create one, either. Online resources like Canva can help you build a logo for your store without spending a lot of cash.
3. Create your own product images. This can be tricky, especially for new business owners. However, there are some applications you can find online that can help. 

Another option to keep in mind is to ask your customers to take photos of your products, especially ones where they’re using them. Just make sure you get their permission before adding them to your site.

Optimize and market.

Now that you’ve built your store, let’s get customers to flock there. Here are a few basic ways to help you boost traffic to your store:

• Social media: Much like you’d use your social channels to share other news in your life, you also can use them to promote your online business.  
• Facebook and Google ads: In addition to posts on your social channels, these platforms let you buy and place ads for your business. Unlike traditional advertising, you can target your ad around specific keywords and audiences. 
• Search engine optimization: When someone searches for a product that you sell, you want your website to show up near the top of the search results. There are a few steps you can take to boost your ranking, and many e-commerce platforms offer tools to help, as we do with this article.
• You’ve got email: Email can be an effective way to let customers know about new products, special offers, or content on your site. A good e-commerce platform will have a plug-in for email marketing tools and should allow your customers to opt in to receiving emails from you. 

We’re here to help, offering a broad range of marketing tips in our Resource Center. Here are a few articles about online marketing to get you started:

• How to Win New Business with Digital Marketing
• 8 Budget-Friendly Small Business Marketing Tips
• How to Use Facebook Advertising for Your Business

Drop and Roll

So what’s the verdict? Is dropshipping easy? Is dropshipping a good idea for you? Only you can choose what’s right for you, and researching dropshipping risks and benefits is a good first step.

Whether you’re dropshipping yoga mats, power tools, or T-shirts, it can be highly competitive. But competition can motivate some people to tap into their creativity. With a myriad of dropshippers selling similar products as you, your creativity and ability to add value to your online store can play a big role in your success.

Looking for more information about starting and running an ecommerce business? Check out these helpful guides:

The Complete Guide for Building an Online E-commerce Business

How to Sell Products Online: Just Follow Our Easy Step-by-Step Guide

6 Biggest Benefits of Ecommerce Business Insurance