Drop shipping is the process where a third-party supplier handles the packaging and shipping of a product to a customer when they order from a retailer. This means retailer does not have to keep a physical inventory of the goods they sell. With this model, they only have to process purchases from customers. The retailer hands off their orders to a supplier who packages and directly ships the products to the customers.
In this guide, I want to take a closer look at how drop shipping works, why it suits some businesses and how to get started.
Why choose drop shipping?
The biggest material obstacles to starting a retail business are the upfront costs of manufacturing products, maintaining stock, and having a physical space to store products.
It is a significant financial risk to manufacture goods and maintain them securely and in the right conditions in a large enough space (this risk is greatly increased if the product in question has a shelf life). If the products don’t sell, that is a lot of money down the drain with physical items taking up space and going to waste.
Drop shipping then, comes with the following advantages:
- Less startup capital — Starting a drop shipping business requires much less capital because there is no need to invest in a big initial inventory. You only have to spend on ordering a product when a customer has already paid for it.
- No need for storage — Not having to invest in storage solutions like a warehouse also lowers the barrier to entry for would-be entrepreneurs. Overhead is kept to a minimum with no additional investment in staff, space, and equipment. It is also a much lower financial risk because you don’t have to worry about product sell-through.
- Simpler logistics — Logistics is another important factor that a drop shipping business does not have to give as much attention to as a traditional business. Packaging and shipping are all taken care of by the suppliers.
- Flexibility in product offering — Because a drop shipping business is always run online it isn’t locked to a specific location, so you have all the flexibility to choose whatever kind of products you want to sell, including perishables that have different storage requirements. You can even work with multiple suppliers to sell as many different products you think your targeted audience would be interested in.
What products should I sell?
Figuring out what kinds of products you want to sell for your drop shipping business starts with the same first step that any retailer ought to take: conducting market research.
You can begin your market research with Google Keyword Planner. It’s a tool that lets you see the popular search terms people are using to look for things in the world’s most popular search engine.
Pair Google Keyword Planner with Google Trends to see what’s currently popular and what is gaining popularity.
There are a lot of guides online that provide a much more in-depth look into how to use these tools to maximum effect, but there are a couple of key things to keep in mind when you’re starting out: Focus on who your target customers are and the specific “long-tail” search terms they may use when searching for products or product types. Trying to go as broad as possible is a losing prospect because you will end up competing with industry giants like Amazon and eBay.
Choosing Products That Aligned with the Drop Shipping Model
Drop shipping’s unique set of strengths and limits figure heavily into the kinds of products that you can sell successfully:
- Catering to an Enthusiast Audience
A drop shipping business has the flexibility to sell niche products, as it can partner with all manner of suppliers. Since you don’t want to go up against the familiarity of large online retailers or the proximity of local general stores, it makes sense to specialise with what you’re selling and market to enthusiasts.
Enthusiasts or hobbyists will pay exorbitant prices to get exactly what they are looking for, especially items that they can’t find anywhere close to where they live, so you can make a tidy profit in much less competitive markets.
- Selling High-Maintenance Products
When you don’t have to worry about storage or shipping costs, you have the option to sell in-demand products that can be expensive to store and ship through your own business. This includes large, heavy objects and fragile valuables that have special storing and packaging requirements.
- Selling Smaller Products
While it is true that initial costs are lower when you offload shipping to a third party, free shipping has become a basic expectation from customers when it comes to certain products, and you can’t always eat the cost of shipping large, heavy products for free. It will be up to you to calculate whether going big or small will be more profitable for you.
- Selling MAP-Enforced Products
There is a temptation for small drop shipping businesses to start a race to the bottom with product prices because of how cheap it is to start. Some manufacturers enforce a minimum advertised price (MAP) for their products to avoid the destructive practice.
When you choose to sell such products, you can focus on having better marketing and a more presentable storefront, instead of trying to outprice the competition.
Which suppliers should I partner with?
There are three simple ways to look for legitimate suppliers for your drop shipping business:
1. Directly Contact Manufacturers
Look up the contact info of manufacturers of products you are interested in selling. Ask these companies for their list of wholesale distributors, which you contact next. Ask if they provide drop shipping services.
If they do, all you’ll have to do next is to provide credentials that you have a legitimate business that is already set up so they can set up a drop shipping account for you.
2. Google for Suppliers
For the best results, be very specific with your search terms, as some traditional suppliers aren’t too tech-savvy so their websites don’t show up as the top results. Include the products you’re thinking of selling and suffix them with synonyms like “distributor,” “wholesaler,” or “reseller.”
3. Check Supplier Directories
Directories categorise suppliers for easy navigation. You can search by product or market, among many other filters to simplify your search. However, there is a cost to having a neatly ordered list of legitimate suppliers and that is typically a membership fee you have to pay for access.
What are the financial and legal requirements?
You have to register your drop shipping business with the UK government. You can choose to start it as a sole trader or a limited company.
The simplest way is to operate as a sole trader. All you have to do is register and file your Self Assessment tax return and pay Income Tax on your profits. The biggest drawback is that your business’ finances are tied to your personal finances, so if you get into legal or financial trouble with your business, your personal assets are at risk (including your home).
Registering as a limited company, on the other hand, is a little more complicated, but your business will be recognised as a separate legal entity. Your personal finances won’t be at stake if your business gets sued.
Paying Taxes
There are two taxes you need to pay when running your drop shipping business:
1. Income Tax
Your total income is divided into four “bands,” with the tax getting progressively higher the more you make.
- The first £12,500 you make is considered your Personal Allowance and therefore isn’t taxed
- Income from £12,501 to £50,000 has a 20% tax
- Income from £50,001 to £150,000 has a 40% tax
- Income over £150,000 has a 45% tax
Use the government’s Income Tax estimate tool to get an idea of how much you will have to pay.
2. Value Added Tax (VAT)
It’s also worth noting that if your business is turning over £85k or more in a given one year period, which is quite likely if you’re running a successful ecommerce business, then you’ll need to be VAT registered (note this is turnover not profit.)
VAT is the tax you add to your product prices which the government collects. The tax rate is 20% in the UK. You need to collect VAT for the government in every country you sell your products to, and the rate is different for each one. You need to do some research if you want to sell internationally.
Start Drop Shipping
With such a small investment to get started that you can do it at home, drop shipping is a great opportunity to set up a small business that you can keep small or scale up to your level of success.
If you think vaping and CBD products are a good fit for your drop shipping business, please feel free to call us at 07932 553 113 or email us at dropshipping@jm-wholesale.co.uk, so we can help you out.
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