A Real Business, Not a Get-Rich-Quick Scheme

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You’re probably curious about dropshipping if you’ve clicked on this article.

Maybe you’ve heard stories of people making lots of money from their living rooms, or perhaps you’re wondering if it’s too good to be true.

So, let’s get one thing straight first: dropshipping is real and can make you money.

But here’s the catch.

Like any other business model, dropshipping isn’t a magic ticket to fast wealth.

Yes, there are success stories, but behind each one is a period of hard work, dedication, and learning from mistakes.

In this article, we’ll dive into what dropshipping is, why it’s a real business, and how you can get started on the right foot.

Let’s start!

What is a dropshipping business?

Before we continue, let’s break down the concept of dropshipping.

Imagine you want to start selling products online but don’t have a warehouse to store all those products or don’t want to take on the risk of buying the inventory upfront.

Sounds like a problem, right?

Well, this is where dropshipping comes to the rescue!

Dropshipping is a fulfillment method where you, as a store owner, don’t keep the products you’re selling in stock. Instead, when a customer makes a purchase from your online store, you forward the order to a third-party supplier. This supplier then ships the product directly to the customer.

What is dropshipping? - Infographic of the dropship model

Here’s how it works:

  1. Customer orders from you. A customer visits your online store and decides to buy a product.
  2. You order from your supplier. Instead of sending the product from your stock (because you don’t keep stock), you order it from a third-party supplier.
  3. Supplier ships directly to your customer. This supplier then packs the product and ships it directly to the customer.
How does dropshipping work - Infographic

The beauty of this model is that you only buy a product when you’ve already made a sale and been paid. So, there’s no need to spend money upfront on inventory.

But, as with everything, there’s more beneath the surface.

Let’s go more in-depth and discuss the challenges of this unique business model.

Why dropshipping is a real business

If you’ve heard the dropshipping gurus talk about dropshipping, you might be tempted to think that it’s an easy way to earn money.

However, in reality, it’s far from that.

Dropshipping is a real business, and here’s why:

1. It requires hard work and dedication

Firstly, there’s a ton of hard work and commitment involved.

Before even launching your dropshipping store, you have to do market research.

Which products will you sell? Who are the reliable suppliers? What about pricing?

And once your store is up and running, it doesn’t stop there.

You’ll have to start marketing.

Someone holding an Ad

And this isn’t a set-and-forget thing. You must continuously create new ads, analyze their performance, and manage your ad campaigns to ensure you’re not running them at a negative return on investment.

Then, there’s the matter of customer service.

Every customer query, concern, or return will find its way to your inbox. Sure, you might not be shipping the products yourself, but you’re the face of your business.

Customers might not know about your supplier working behind the scenes, but they’ll remember the service they got from your store!

2. There are risks and challenges

Not everything will go smoothly.

Imagine a situation where your supplier unexpectedly runs out of stock or, worse, sends out a defective product. How do you handle that? Your reputation is on the line.

Person on a hourglass

Furthermore, because starting a dropshipping business is relatively easy, a lot of people give it a try.

This means the competition can be high. Ensuring your store stands out from the rest is a real challenge!

3. Profits are not guaranteed

Profits with dropshipping? In reality, they’re far from guaranteed.

In dropshipping, you’re often working with slim profit margins.

You’re not buying products in bulk, nor are you manufacturing them. This means you must price strategically, ensuring you cover your costs while still making a reasonable profit.

Also, like any retail business, sales can fluctuate.

There’ll be amazing times, and there’ll be times when you will make losses. Dealing with these highs and lows requires careful planning.

A woman losing money

4. It involves making mistakes and learning from them

Whether it’s selecting a product that doesn’t resonate, partnering with an unreliable supplier, or setting a price point that’s off-target, mistakes are bound to happen.

On the positive side, each mistake offers a lesson.

The essential thing with running a business, including dropshipping, is the continuous learning curve.

Adapting and getting better with every mistake is part of the journey.

Older man behind a laptop

Now, we know what you’re thinking: ‘This sounds like any other business!’

And you’ve hit the nail on the head.

Just because dropshipping operates on a unique model doesn’t mean it’s easy or a quick path to become rich.

It’s a real business with all the complexities, rewards, and risks that come with it!

How do you treat your dropshipping store as a real business?

You’re now familiar with the fact that dropshipping is as real as it gets in the business world.

But how do you move beyond just ‘knowing’ and start ‘doing’?

How do you ensure your dropshipping store isn’t just another online project but a genuine business built for the long term?

Well, it comes down to treating your dropshipping store with the professionalism it deserves:

1. Learn about business structures

Types of business structures
Source

Before starting a dropshipping business, you must understand the various business structures available to you.

Think of these structures as the foundation for starting a real business.

They provide a framework for determining how your business operates, how you report income, pay your taxes, and even how much personal liability you might have if things go wrong.

Let’s break down some of the most common ones for the US:

Sole proprietorship

  • What is it? This is the simplest form of business structure where you and your business are essentially the same entity.
  • Pros: Easy to set up and minimal paperwork.
  • Cons: You and the business are treated as one. If your business owes money or faces legal issues, your personal assets (like your car or house) could be at risk.

Limited Liability Company (LLC)

  • What is it? An LLC is a more formal business structure that combines some of the advantages of a sole proprietorship and a corporation.
  • Pros: Provides liability protection. If the business faces debts or lawsuits, your personal assets are typically safe.
  • Cons: More paperwork than a sole proprietorship and might involve additional fees.

C Corporation

  • What is it? This is a full-fledged corporation. While it might sound big and scary, even solo entrepreneurs can set up a C Corp.
  • Pros: Offers the best personal liability protection and can sell shares to raise capital.
  • Cons: More complex to set up and maintain. Potential double taxation, where the corporation pays taxes on its profits, and then shareholders pay taxes on their dividends.

Choosing the right structure isn’t just about today; it’s about where you see your business in the future.

Do you want to keep it small and manageable? Or do you have big visions of scaling up and bringing in partners?

As you can see, each structure has its pros and cons, so it’s worth spending some time (and maybe talking with a professional) to get this foundation right.

2. Request an EIN Number

If you’ve experience in business, you might have come across the acronym ‘EIN’ before. But if it’s new to you, let’s break it down.

EIN stands for Employer Identification Number. Think of it as a social security number but for your business. It’s a unique nine-digit number assigned by the U.S. Internal Revenue Service (IRS) to businesses operating within the United States.

An EIN number is important for your dropshipping business for the following reasons:

  • Tax reporting. The EIN helps the IRS track your business’s tax reporting. Even if you don’t have employees, having an EIN can be beneficial.
  • Banking. Want to open a business bank account? Many banks will ask for your EIN. It helps separate your personal finances from your business operations, making things clearer and more professional.
  • Identity protection. Using an EIN instead of your personal social security number in business can offer an extra layer of identity protection.
Requesting an EIN Number - IRS

The good news, getting an EIN is pretty straightforward!

First, you must ensure you’re eligible. The EIN number is only for businesses located in the US, but other countries may have a similar process.

Next, you can apply for an EIN online. Just visit the official IRS website and follow the prompts.

You’ll often receive your EIN immediately after completing the application.

The best part? An EIN is free to obtain directly from the IRS. So, beware of third-party services that charge fees to provide you with an EIN.

3. Take care of your business license

Already feeling like you’re starting a real business? Great!

Let’s continue with the next thing, the business license.

In simple terms, a business license is like a permit. It gives you the official approval to operate your business in a specific jurisdiction, city, county, or state. Without it, you might face penalties, fines, or even be told to shut down.

Besides avoiding the penalties, another benefit of having a business license is showing that you’re committed to your business to customers, suppliers, and potential partners.

However, before getting a business license, you must find out if you actually need one.

In the US, you have business licenses at the federal, state, and local levels.

If you’re dropshipping, you probably won’t need one at the federal level since it’s only required for a few highly regulated industries, such as alcohol and tobacco.

However, you might need a business license for your state or local level.

Different places have different rules. So, check with your local city or county’s business department. They’ll provide details on the type of license you need.

Business licensing in the city of Portland
Example: Business licensing in the city of Portland (Source)

Once you know the requirements, fill out the necessary paperwork and pay any fees.

Essentially, a business license ensures you can operate confidently and legally. (Like an actual business!)

4. Open a business checking account

With your business structure in place and your license in hand, it’s time to take another significant step: setting up a business checking account.

While it may sound like a basic step, it’s more important than you might think.

It will make tracking profits, losses, and expenses way easier. (Especially when it’s time to file your taxes.) Also, it’s simply more professional for everyone you work with!

A women throwing money in the air

Here are the steps to opening your business checking account:

  1. Research banks. Some banks might offer perks for small businesses, like lower fees or introductory offers.
  2. Gather the necessary documents. Banks will typically need proof of your business’s existence. This can include your business license, EIN, and possibly some form of your business structure documentation, like an LLC agreement.
  3. Understand the fees. Many business accounts come with fees, such as monthly maintenance fees, transaction fees, or minimum balance fees. Read the fine print and ensure you know of any potential charges.
  4. Additional features. Some business bank accounts offer added perks like business credit cards, merchant services, or integrations with accounting software.

Your business checking account is a great tool that helps you manage your dropshipping business while maintaining professionalism!

5. File your taxes

Taxes might not be the most thrilling topic, but they’re fundamental to running any legitimate business.

And let’s be honest, the sooner you take of them; the smoother your journey will be.

Filing taxes is required by the law and also gives you a clearer picture of your business’s financial health.

Someone doing taxes

Here are some important things to understand when it comes to dropshipping taxes:

  • Maintain clear records. This can’t be stressed enough. Keep track of all your transactions – both income and expenses. You can use accounting apps designed for small businesses, like QuickBooks, to make this task easier.
  • Understand deductibles. As a business owner, many expenses can be deducted from your taxable income – things like advertising costs, website fees, or even some home office expenses. Make sure to maximize these benefits.
  • Set money aside. Unlike a salaried job where taxes are often deducted upfront, as a business owner, you’ll be responsible for setting aside money to cover your tax bill. A good practice is to set aside a percentage of your earnings regularly.
  • Know the deadlines. Mark your calendar with all the essential tax dates. You might need to file quarterly or annually, depending on your business structure.
  • Seek professional help. If taxes feel overwhelming, consider hiring an accountant or tax professional, at least for the first year. They can guide you through the process and help with deductions.

While taxes might seem daunting initially, they’re just another part of running a successful dropshipping business!

6. Manage your reputation

In ecommerce and dropshipping, reputation isn’t just about looking good; it’s like a currency.

Customers trust businesses with positive reputations, leading to more sales, better partnerships, and long-term success.

Studies have shown that over 99.9% of customers read reviews when they shop online.

Moreover, 49% of consumers trust online reviews almost as much as personal recommendations.

So, for them, a solid reputation can decide between choosing your store or going to a competitor.

Someone writing a good review

So, how do you ensure a fantastic reputation? Here are our tips:

  • Prioritize customer service. Quick responses, helpful solutions, and a friendly tone can turn a frustrated customer into a loyal fan.
  • Encourage feedback. Actively encourage customer reviews. They may provide valuable insights and boost your online reputation. You can consider offering incentives or discounts for honest reviews.
  • Address negative feedback head-on. Got a bad review? Don’t hide. Address it publicly, apologize when necessary, and offer solutions. This shows you’re committed to rectifying issues and value customer feedback.
  • Engage on social media. Active engagement on platforms like Instagram, Facebook, or Twitter can help form your brand. Share behind-the-scenes looks and try to create a community around your brand.

By proactively managing your reputation, you not only put out fires before they spread but also make customers feel heard.

In dropshipping, where a personal touch can sometimes be lacking, your reputation is where you can genuinely stand out!

Is a dropshipping business good for beginners?

Packages falling on the US

Starting a new business adventure is always a mix of excitement, uncertainty, and a ton of questions.

One of the common ones: ‘Is dropshipping the right fit for beginners like me?’

Well, the answer is a ‘Yes!’ combined with ‘But, be mindful of a few things.’

Here are some reasons why dropshipping is great for beginners:

  • Low start-up costs. With dropshipping, you don’t need to invest lots of money in inventory upfront.
  • Learning by doing. As a beginner, hands-on experience is invaluable. Dropshipping lets you experience and learn about ecommerce without high barriers to entry!
  • Flexibility. Dream of working from a beach in Bali? Or maybe just your home office? Dropshipping can be managed virtually anywhere with a decent internet connection.

However, here are a few things to note before you start:

  • High competition. It’s no secret that dropshipping is popular. This means there’s plenty of competition out there.
  • Limited control. Since you won’t handle the products directly, you’re relying heavily on suppliers. This means their mistakes could reflect on your business.
  • Lower profit margins. Generally, the profit margins in dropshipping can be slimmer than other retail models.
  • Limited branding options. Since your supplier also sells to other people, they usually can’t add any product labels customized to your brand. (At least not for a cost-effective price.)

Ultimately, dropshipping is a relatively low-risk and flexible option for beginners to start a business. It offers a fantastic opportunity to learn, grow, and potentially earn as you go.

Remember, every big business owner started somewhere!

Is dropshipping profitable?

In online business, dropshipping frequently pops up as a buzzword. But behind the success stories, there’s a very valid question: ‘Can you genuinely make a profitable living with dropshipping?’

The short answer: Yes, dropshipping can be profitable. However, like any business model, profitability isn’t guaranteed, and it’s not a get-rich-quick scheme.

It’s all about finding the right products, setting the right price, and reaching the right audience. And remember, low overhead costs mean even small margins can add up.

Curious about potential profit margins? If so, check out our profit margin calculator to get an idea of how profitable your dropshipping store could be!

Calculate your profit margin here

How do you start a dropshipping business?

Excited to start your own dropshipping business? Perfect!

Let’s walk through the first steps:

  1. Choose your niche and products. First, find a niche you love! (Here are some great examples.) Then, pick products that match the criteria for a winning product. A tool like Sell The Trend can help with this.
  2. Look for good suppliers. Next, find a reliable supplier who can deliver your chosen product. Take your time, read reviews, and even order a product sample to check the quality.
  3. Set up your online store. Now it’s time to build your dropshipping store. The most popular ecommerce platform for dropshipping is Shopify.
  4. Market your dropshipping store. Once your store is ready, you’ll have to ensure your customers get to know it exists! And no, they won’t find your online store by themselves.

Remember: This is just an overview of the first steps to starting a dropshipping store. To learn more, read our dropshipping guide here!

Summary

Before we go to the conclusion, we’ve created a quick summary of this article for you, so you can easily remember it:

  • Dropshipping is a fulfillment model where products are shipped directly from the supplier to the customer.
  • Dropshipping requires genuine effort and dedication. (It’s not an ‘easy money’ model.)
  • To operate as a real business, you must understand business structures, EIN numbers, and business licenses.
  • Properly filing taxes is essential.
  • Managing and maintaining a positive reputation will help your business succeed.
  • For beginners, dropshipping is attractive due to its low initial costs and flexibility, though competition and reliance on suppliers create challenges.
  • Profitability in dropshipping isn’t guaranteed and requires consistent effort.

Conclusion

The conclusion of this article?

Dropshipping is a real business filled with possibilities, challenges and a whole lot of learning opportunities.

It’s not just about setting up a store and waiting for the profits to come; it’s about creating relationships, understanding your audience, and consistently adapting.

So, if you’re considering starting your dropshipping journey, prepare yourself with some knowledge, but don’t wait too long to get started.

After all, you learn the most by experience.

Good luck with your dropshipping business!

Want to learn more about dropshipping?

Ready to move your dropshipping store to the next level? Check out the articles below:

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