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An Amazon drop shipping business is essentially a middleman between customers who want to purchase products and businesses that sell them. A drop shipper will receive orders from customers, purchase those products from a separate retailer, and then ship those products directly to customers. This helps eliminate some of the costs and time associated with traditional distribution channels.
Who is this business right for?
Success in this business model is dependent on your ability to establish fruitful relationships with drop selling wholesalers. You must also have a knack for finding products that will sell and marketing them in ways that will appeal to customers.
What happens during a typical day at an amazon drop shipping business?
Your typical workday could consist of a range of activities that include the following.
- Generating relationships with an ever-expanding list of wholesalers who’ll serve as your drop shippers
- Writing product descriptions and displaying your merchandise items for sale
- Conducting sales with customers, including answering questions, resolving complaints and soliciting reviews
- Communicating with your wholesale partners to check on and resolve product availability, shipping dates and other potential issues and roadblocks
What is the target market?
You’ll have two “customers” in this business, and serve as the critical intermediary between both. Your end customers are the buyers of your products. Their profile will depend on what you’re selling. Your other critical parties are the wholesalers who will serve your needs and those of your customers. Your wholesalers must be reputable, dependable, and easy to work with. Before doing business with them, check online for customer complaints or any other feedback that would trigger a warning.
How does an amazon drop shipping business make money?
You won’t hold inventory or ship purchased items. Your only means of making money is by selling products held by the wholesalers at enough of a markup to generate a profit. To illustrate, if you can find a wholesale product for $15 that Amazon shoppers want at a $25 price point, you’ll make a $10 margin on the sale, minus your selling fees.
What is the growth potential for an amazon drop shipping business?
Here are a couple interesting statistics from this 2017 survey by ecommerce service provider BigCommerce. Sixty-seven percent of millennials and 56 percent of Gen-X shoppers prefer online to in-store shopping. And 80 percent of all Americans made at least one Internet purchase over the last month.
As for Amazon, the company reported a sales gain of 23 percent in 2016 and forecast an additional 24 percent increase in the first quarter of 2017, according to Bloomberg Technology. Going back just a little farther in time, Amazon accounted for 60 percent of the total online sales growth in the United States in 2015, according to Market Watch.
In other words, ecommerce is skyrocketing, and Amazon is the rocket engine.
What are some skills and experiences that will help you build a successful amazon drop shipping business?
Your twin keys to success are finding products Amazon shoppers want, at wholesale prices that net profits, and finding drop shippers that can be trusted to provide merchandise at the quality you expect. Your drop shippers must accurately, quickly, and efficiently ship your sales. Your reputation depends on it. Your customers won’t blame -- or even know -- your wholesalers. It’s your reputation at stake. Even one bad review could kill sales and shut your business down.
Check out this list of reputable drop shippers, or use your search engine to find your own prospective wholesalers.
What are the costs involved in opening an amazon drop shipping business?
One of the main advantages of the drop shipping business model is the lack of needed startup capital. You don’t buy the merchandise unless you have a sale. You also don’t need packing and shipping supplies or to directly pay for shipping.
As long as you have a computer with Internet access, you only need a few hundred dollars set aside against failure on the part of your wholesaler. (If your wholesaler doesn’t come through you’ll need to find the product wherever you can and at whatever price you must pay to try to preserve the customer relationship and avoid a negative review.)
If you keep your day job and start your business part-time, only selling a few products initially to test the market, you won’t even need to make enough to survive at first. You don’t need your own store online, but if you do, you should spend a few hundred dollars for logo development. Here’s an interesting article on the benefits of having your own ecommerce store even if you’re solely selling on Amazon.
At worst, you should be able to start your business with $1,800 for a computer, Internet access, logo development, and emergency funds.
What are the steps to start an amazon drop shipping business?
Once you're ready to start your amazon drop shipping business, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:
- Plan your business. A clear plan is essential for success as an entrepreneur. A few important topics to consider are your initial costs, your target market, and how long it will take you to break even.
- Form a legal entity. Establishing a legal business entity prevents you from being personally liable if your amazon drop shipping business is sued.
- Register for taxes. You will need to register for a variety of state and federal taxes before you can open for business.
- Open a business bank account. A dedicated checking account for your amazon drop shipping business keeps your finances organized and makes your business appear more professional to your customers.
- Set up business accounting. Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
- Obtain necessary permits and licenses. Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
- Get business insurance. Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
- Define your brand. Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
- Establish a web presence. A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.
Select your state below for an in-depth guide on completing each of these steps in your home state.
Where can I find a business mentor?
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
What are some insider tips for jump starting an amazon drop shipping business?
Find a relatively unexplored niche. If you’re trying to market mass-audience merchandise, you’ll have so much competition that it will drive the selling price down. If that happens, your margins will be so narrow it will be difficult to make a profit once all selling fees are paid. When you’ve found a prospective niche, start by selling a lower-cost item or two to see if you can turn a profit. Even if you just break even on those beginner sales, it will teach you the process and build your confidence.
Also, keep in mind the importance of good Amazon reviews. If you have poor reviews or none at all, you won’t get the buy box on the item -- the prime selling position on the results page. Without the buy box, customers will have a tough time finding your item. If you have few reviews, start by selling -- or giving away -- products to friends and family in exchange for reviews.
How to promote & market an amazon drop shipping business
Once you’ve gotten your feet wet, consider opening your own ecommerce store. Use the name and logo to brand your company and encourage repeat business.This is important since most of your customers won’t know your business exists. They’ll think of you as being Amazon, which is no way to encourage repeat business.
Recommended: Get started with local advertising for your business with a $300 credit from Yelp.
How to keep customers coming back
As you brand your business, adopt such social media sites as Facebook, Instagram and Twitter. Use social media to promote good deals and showcase the line of products you represent.
How and when to build a team
Until your business gets very large, you’ll have no need for building a team. That’s the advantage of this form of business in a bottom-line way. However, by the time you’re perhaps making tens of thousands of dollars a month, you might see a need to add staff to process orders and answer emails. When that happens, it will give you more opportunity to build your brand and continue to develop productive wholesaler relationships.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate an Amazon drop shipping business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Maintain Personal Asset Protection
Don’t think that just forming an LLC, or any other type of business, will save your personal assets in case of a lawsuit or other matter by itself.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.
Two of the simplest steps that will protect your business, and yourself, are to:
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
How much can you charge customers?
Try to make a 30-50 percent markup on most merchandise. This will pay for your time and all selling fees, and return a decent profit.
What are the ongoing expenses for an amazon drop shipping business?
Your only expenses might be the cost of salvaging relationships if your wholesalers don’t deliver as expected. You can build an online store for free or a few hundred dollars at most.
How much profit can an amazon drop shipping business make?
Some drop ship sellers have become millionaires. There are no ceilings. But here’s an interesting article about the realistic prospects of making $1,900 a month on a part-time basis.
How can you make your business more profitable?
At some point you’ll feel comfortable with the drop shipping business model and figure out how to turn a profit. When that happens, consider expanding beyond the Amazon platform. Ebay, Shopify, Etsy and many other ecommerce platforms accept drop shipping sales. If you conduct business from your own ecommerce store, you can work with a variety of platforms, or even deal platform-free to avoid all selling fees.