Dropshipping is a business model where an online shop doesn’t keep the products it sells in stock. Instead, the shop purchases the item from a third-party supplier and has it shipped directly to the customer.

Not having to stock or own inventory is the most significant difference between dropshipping and the standard retail model. The seller doesn’t have to handle the goods directly, which can be an advantage. 

Instead, third parties like wholesalers or manufacturers fulfil the orders and ship the goods directly to the buyer. 

Dropshipping can be a relatively easy business to start, but there are a few things to consider when you’re considering starting a dropshipping business. 

We’ve covered the following topics to help you start a dropshipping business:

  • Pros of dropshipping business model
  • Cons of dropshipping business
  • Registering your company
  • Organising your finances and paying tax
  • Marketing your dropshipping business 

Pros of dropshipping business model

  1. It doesn’t require a significant investment

It’s possible to launch an ecommerce shop without a significant upfront investment. In a traditional retail model, retailers would have to commit vast amounts of capital to purchase inventory. Learn more about how to start a business here.

Inventory management is expensive. With the dropshipping model, you don’t have to buy a product unless you’ve already made the sale and have been paid by the customer. You can begin sourcing products and launch a dropshipping business with a minimal budget. 

There’s less risk involved in starting a dropshipping shop or testing new products because you’re not committed to selling any inventory purchased upfront. 

  1. Getting started is easy

When you don’t have to deal with physical products, running an ecommerce business is much easier. Dropshipping liberates you from the following concerns:

  • Running or paying for a warehouse
  • Packing and shipping the orders
  • Tracking inventory for accounting purposes
  • Handling returns and inbound shipments
  • Regularly buying goods and maintaining stock levels
  1. Operating expenses are low

Your overhead business expenses can be pretty low when you don’t have to deal with buying inventory or managing a warehouse.

You can even run a successful dropshipping business from home, which requires a laptop and a few recurring expenses to operate. These costs could increase when you grow but will still be moderate compared to traditional brick-and-mortar shops. Find out how to successfully run your business from home here.

  1. You can be located almost  anywhere 

You can run your dropshipping business from pretty much anywhere with an internet connection. As long as you can reach suppliers and customers easily, you can manage your business.

See which expenses you can claim when running a business from home here.

  1. A variety of products to sell

Since you don’t have to buy the items you sell upfront, you can offer various popular products to potential customers. In addition, you can list a new item from your supplier for sale on your online store at no extra cost.

  1. Easy to test products

The main benefit of dropshipping is listing and potentially selling new products before you commit to buy them. This makes dropshipping a valuable method for launching new product categories. You can see if customers are interested in them without having to buy or store a large amount of inventory.

  1. Easy to grow and scale

Sales growth will always bring extra work. For example, your customer support volumes may rise. But businesses that utilise dropshipping can scale particularly well compared to traditional ecommerce businesses. 

Leveraging dropshipping suppliers could allow you to grow without putting in a large amount of extra work as most of the work to process additional orders will be done by the suppliers. Learn more about how to grow a small business here.

Cons of dropshipping business model

  1. Profit margins can be low

Low margins are the biggest downside to running a dropshipping shop. Dropshipping is a highly competitive market because of how easy to get started and the minimal operating costs. 

Many competing shops will set their business up and sell goods at very low to grow revenue. Since they’ve invested so little in getting the company started, they can afford to operate on minuscule margins. Learn more about the difference between revenue and profit here.

  1. Inventory problems

If you stock your own products, it’s relatively simple to keep track of which items you have in stock. But when you’re sourcing products from multiple suppliers who fulfil orders for other merchants, inventory can change quickly. As a result, you can end up selling products that are out of stock. 

  1. Issues with shipping

If you work with multiple suppliers, it can complicate your shipping costs.

For example, suppose a customer places an order for four different items available only from separate suppliers. In that case, you’ll get charged for shipping four times to send each item to the customer.

You probably don’t want your customer to pay four separate shipping charges. But even if you did, automating that process would be tricky.

  1. Supplier mistakes

Dropshipping suppliers can make mistakes in fulfilling orders. And when they do, the customers are likely to blame you, not them. So you will have to take responsibility and apologise for something that wasn’t your fault.

Mediocre and low-quality suppliers can damage your business reputation by causing endless frustration with missing items, botched shipments, and low-quality packing.

  1. Limited control over product quality customisation and branding

Dropshipping doesn’t give you much control over the product itself because the supplier designs it.

Although some dropshipping suppliers can accommodate your business’s product changes, they still retain the most control over the actual product. In addition, the manufacturer usually requires a minimum order quantity for any changes to the product itself to make it affordable and viable.

Registering your company

If you’re new to running a business, you’re probably wondering if you need to register your dropshipping business in the UK.

The answer is yes. If you want to avoid any legal and tax-related consequences, you should register your business.

It’s pretty easy to do. There are three types of business structures in the UK that might work for you:

Be sure to check out every alternative for yourself and weigh in on the best suitable option for you. If you’re running a business on your own, the best options for you are probably Sole Trader or a Limited company. Learn more about the differences between Sole Traders and Limited companies here.

Organising your finances and paying tax 

The most common mistake business owners make when starting a business is mixing their personal and business finances. Unfortunately, blending your personal and business finances makes accounting more difficult, causes confusion with your tax returns and can lead to a tax audit

The easiest way to organise your finances is to keep your business and personal finances separate by opening a business bank account. 

You should run all of your business finances through one primary bank account. All business revenue should be deposited into it, and all expenses should be withdrawn from it. Separate business and personal accounts will make accounting much clearer. 

What about taxes?

The United Kingdom has a complex tax system. Basically, there are two types of taxes a dropshipping company in the UK is expected to face.

Value Added Tax (VAT)

The Value Added Tax (VAT), is in essence a business tax that is levied by the government on sales of goods and services. It is additionally placed on the product’s price, which is collected and passed to the government. In the UK, the VAT rate is 20%.

Every country in the EU has its own VAT rate and its own threshold you need to reach before it can charge VAT. In the UK if your store’s taxable turnover is over £85,000, you need to register for VAT and pay it.

Income tax

This is the tax the government requires you to pay for your earnings. The tax system in the United Kingdom is progressive, which means the more you earn the more the tax rate is. It can be divided into 4 bands, and each one has its own tax rate.

  • Personal allowance: 0% for your income up to £12,500
  • Basic rate: 20% – £12,501 to £50,000
  • Higher rate: 40% – £50,001 to £150,000
  • Additional rate: 45% for the income over £150,000

If your dropshipping store takes off and starts bringing you an increasing income, be mindful of your earnings.

Marketing your dropshipping business

It’s relatively easy to start a dropshipping business, but the real challenge could lie in standing out in the ultra-competitive market.

You may want to put extra effort into your marketing and advertising efforts when creating your dropshipping business plan

Consider the following ways to promote your business:

Social media advertising

Social media marketing provides a cost-effective way to share your business with potential customers. The knowledge the social media platforms offer about their users’ interests enables you to reach a larger and more relevant audience with your website, which boosts sales and brand awareness. 

Social media gives insights into your customer base to tailor your messaging and draw customers in more efficiently than traditional marketing methods.

Influencer marketing

When you start your dropshipping business, you may have a limited marketing budget. People tend to trust influencers more than traditional advertising, making influencer marketing an affordable way to reach your target audience. Rather than paying a flat rate, negotiate an affiliate fee with the influencer. This is a win-win scenario since they’ll gain income from each sale, and you’ll save money.

Content marketing

Consider incorporating content marketing into your dropshipping business plan if you want to drive long-term traffic to your store. For example, you could start a blog and make content that educates and entertains your dropshipping target audience. Learn more about why blogging is important for your business here.

You could also consider starting a YouTube channel, creating infographics, or starting a podcast to help raise your brand awareness.

Communities

If you get involved with groups of people who are passionate about your niche you can start conversations with potential customers. 

Consider joining groups on Reddit or Facebook, for example. Try not to be too sales-y when engaging with a community and aim to help and build relationships with potential customers instead. This will help them trust your brand more and want to buy from you.

Mobile marketing

The term mobile marketing broadly describes how businesses connect with their customers on mobile devices. Create a VIP text club, for instance, and encourage website visitors to sign up for exclusive deals and promotions. To generate sales and revenue for your dropshipping business, you can create automated campaigns for lead generation, customer retention, and cart abandonment. 

When it comes to running a successful online business, keep an eye on which channels are performing well and which aren’t. Especially if you’re investing money in them like paid ads. In order to lower costs and maximize revenue, you can always adjust your marketing strategy as your business grows and improves.

Save time and organise your finances with Countingup 

Starting and running a successful dropshipping business can involve a lot of financial admin. The Countingup app can help you keep your business finances organised and save you time on bookkeeping.

Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK.

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.

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