How dropshipping works and how to set up a dropshipping business

Dropshipping is not a new concept. However, it is a flourishing concept. In 2023, there are hundreds of dropshipping businesses and whilst it is a competitive market it is still possible to make a great income from dropshipping. In this post, we’re going to take a quick look at what exactly dropshipping is, how dropshipping works and how you can go about successfully setting up a profitable dropshipping business.

What is dropshipping?

Traditionally: a business sources raw materials or a manufacturer > makes and/or stocks the product > markets the product > sells the product > ships the product to the customer.

However, with dropshipping: a business markets the product > sells the products > sources the product > buys the product > has it shipped directly to the customer. Essentially, you outsource the handling and shipping to a third party.  

In short, it’s all about stock and storage. Dropshipping cuts out the need to build and buy the stock, making it an extremely quick and easy way to set up a business. The three main benefits to using a dropshipping model are: lower overheads, low start up cots and less risk. Essentially you can start a dropshipping business with very little effort. Unlike a traditional e-commerce business, you are not buying and storing masses of stock which may sit unsold. 

While dropshipping may sound like an easy ‘get rich quick’ scheme, in the current climate there are a lot of dropshipping businesses, meaning competition is high. Therefore, it is essential to pick the right products and sell them at the right price. When done right, it is possible to get big returns for a low cost. 

Before starting your dropshipping business you’ll need to do some research on the right product, the right supplier and the right e-commerce platform to sell on. We’ll give you a quick rundown on how to tackle each step. 

How to pick the right products for dropshipping 

The conventional wisdom is that you go niche, due to dropshipping being a highly competitive market.  According to Shopify, the top trends for 2023 are:

• Health and personal care
• Wardrobe and accessories
• Kitchen and grocery
• Home and bedroom
• Office products
• Tools and home improvement
• Camera and cellphone accessories
• Gaming
• Car Accessories

Secondly,  you can also use online tools such as Facebook Audience Insights, Google Keyword Planner or Google Trends to see what people are searching for. By seeing trending searches or keywords you can curate your storefront to sell popular items or find a niche. 

For example, if you search ‘fishing equipment’ in Google’s Keyword planner. The planner will pull a bunch of related keywords such as kayak fishing accessories, ice fishing rod etc. and their popularity (how many searches it gets a month). You can use this data to find a niche for your products. 

You might want to consider going for products which aren’t easily accessible everywhere. For example, if you need a notebook you can visit any stationery store or bookstore or even supermarket. However, what if you needed a special set of art pens? You’d probably look online. 

Once you’ve found your niche and a product, it’s time to secure a supplier. 

How to find a good supplier for dropshipping 

There are companies that predominantly work as dropshipping suppliers. A lot of them integrate into popular storefront software like Wix or Shopify. By using one of these suppliers you have a higher rate of reliability and you can lower your costs even more. It also lessens the risk of sending the wrong or damaged item to your customers. Secondly, a lot of these suppliers/marketplaces have their own customer service for you to manage your orders or any issues. 

Here are a few popular suppliers to consider: 

• AliExpress 
• Alibaba 
• DHgate

Once you find a supplier, it’s unlikely you’ll need to find another unless you choose to sell a product they don’t supply. 

Another option you may want to consider is print-on-demand. You can find a print-on-demand supplier, such as Go Custom Clothing, who will put custom graphics onto items (mugs, t-shirts, etc.) and will then ship it directly to your customer. This could be a great dropshipping idea for graphic designers or artists.

How to choose the right platform for dropshipping 

So far we’ve mentioned sites like Shopify or Wix, but what are they? In essence, they are online commerce platforms. Both softwares function by creating a storefront website for you and allow you to fully customise the look and feel of your shop. 

Both sites are very cost effective, their basic packages are at an accessible cost for beginners and their premium packages work for larger companies. Essentially, as your business grows you may not need to switch platforms, as your e-commerce site can grow with you!

Of course, you can build your own platform from scratch, but utilising digital software like Shopify, Wix or even WordPress means a lot of your processes become automated. For example, you want to make sure your website/platform tracks your sales and informs your supplier automatically- in other words, your supplier can be integrated into your website. Otherwise, you have to do this manually yourself which can cause issues due to human error. 

A few things to consider when choosing the platform are:

• How much do you want to spend – each e-commerce platform has its own pricing strategy and variation in plans, and you may want to set a budget for monthly website costs. 
• How much time do you want to put in? You may want to consider also using sites like Etsy, FB marketplace, or even social media shops like TikTok shop. This is a bigger time commitment but can increase your profits. 

Take your time researching the right platform for you as your website is your business. A well-automated website can save you a lot of trouble, and a good-looking website will bring you a lot of clients. Luckily, a lot of e-commerce sites allow you to have a free trial, so you can test them out! 

Register your business 

Dropshipping can come with risks, particularly when your supplier is unreliable. It’s good business sense to incorporate your company so you and the company are separate legal entities. 

Not only will this protect you, but it could also help you look more professional, and credible. Down below we take you through the process of incorporating your company. 

But before let’s answer any FAQs about dropshipping. 

Frequently asked questions about dropshipping: 

Should I buy the stock before I sell it

No. This incurs instant costs that you’re not certain can be covered. One of, if not the main benefits of dropshipping is that it’s relatively risk-free as you know you have a buyer before you spend money on the product.

Do I need to tell the supplier that I am dropshipping?

There’s no legal requirement to tell the person/company that you’re buying from that you are operating as a dropshipper, however, it is good practice and may be beneficial to you in the long run. For example, the supplier may offer you special deals or exclusive products.

Are there products that I can’t sell as a dropshipper?

This is murky territory. Some brands will outright not allow you to sell their product/s, think large sportswear and technology companies. This is primarily because some dropshippers do have a reputation for selling counterfeit goods, something brands are obviously going to combat. If you are interested in selling these goods we recommend contacting the brands directly. This takes us nicely to the next question…

What if my supplier lets me down? 

If goods are out of stock, undelivered or delivered in poor condition, it’s up to you as the seller to ensure that the buyer is refunded for their purchase. You can then take it up with the supplier to ensure that you are duly compensated. By UK law you have to follow consumer protection rules, at the end of the day, it is your responsibility to make things good with your customer. Of course, we’d suggest looking for an alternative supplier if you’re continually having to issue refunds. It is essential that you have a reliable supplier, as it can end up costing you a lot of money if your goods are not up to standard. 

Is dropshipping legal?

Yes. By UK law it is completely legal to be a dropshipper. However, you do have a few legal requirements to follow. 

First, the UK has strict consumer rights. If you supply a faulty product or do not deliver in time the consumer can sue you if no solution is provided. You are fully responsible for ensuring your customers are happy, even if their product is wrong or late due to a supplier issue. 

Secondly, due to distance selling regulations, when you sell online or through a TV etc., every consumer is entitled to a 14-day return period and they do not have to provide you with a reason.

By incorporating as an LTD, you can protect your personal assets from being on the line if a customer does believe you have broken the Consumer Protection or Distance Selling Law.  

Do I need a specific licence to dropship?

You don’t need a licence to dropship but you will need a business structure to operate as. This is where we come in.

How to incorporate your dropshipping business

There are a number of limited company types, including companies limited by guarantee, limited liability partnerships and public limited companies. We can help you decide and create your business in less than 3 trading hours! 

Dropshipping really is a quick and simple way to get yourself into business and one that can be easily managed as a side-hustle or hobby. We hope this post answers all your dropshipping questions.

Ready to start your own dropshipping business? Take a look at our limited company registration packages here: Dropshipping company formation options

Before we look at how to register a limited company, let’s first blast through some of the jargon associated with the structure.

Companies House – the official government body who oversee the registration of UK limited companies

Company Formation Agent – a business (such as us here at Companies Made Simple) that specialises in helping prospective business owners register their company with Companies House

Director – the person who runs the company

Shareholder – the person who owns the company

Person with Significant Control (PSC) – the person who ultimately controls the company

Shares – these define ownership of the company and are allocated to shareholders

Memorandum and Articles of Association – the documents that set out how the company will be managed

Registered Office – the official address for the company 

Director Service Address – the official address for the company director/s (sometimes referred to as the Correspondence Address)

Now that the jargon is out of the way, here’s how to actually register your dropshipping business

As company formation agents, we offer a number of different packages designed to get your dropshipping business up and running as quickly as possible – in the majority of cases you’ll be ready to start trading in as little as 3 working hours. All you need to do is:

• Check the availability of your company name (this must be unique)

• Pick your company registration package

• Make payment

• Input your Registered Office address – residential addresses are allowed, however, we recommend using our Privacy package (upwards) as this allows you to protect your address from the public register by using our address

• Choose your company’s SIC code (standard industry classification code) – this lets Companies House know what industry, or industries, you’re planning to operate in

• Add your director information

• Add your shareholder information and the number of share to be held by the shareholder/s

• Add your PSC information

• Select from the various partner offers available to you

• Check over all the information that you’ve provided (and make the necessary updates if you spot any mistakes), then select ‘Submit’ – we’ll then email you once the company has been formed

Then you’re ready to start trading! 

Dropshipping really is a quick and simple way to get yourself into business and one that can be easily managed as a side-hustle / hobby. We hope this post answers all your dropshipping questions.

Ready to start your own dropshipping business? Take a look at our limited company registration packages here: Dropshipping company formation options