How Much Does it Cost to Start A Dropshipping Business?
I am a frequent poster in a Facebook Group that a lot of beginner dropshippers use. One thing that is continually asked is “how much does it cost to open a dropshipping business?”. I wanted to write this post about a realistic dropshipping budget for 2021. If you are interested in starting up a dropshipping business than you should love reading this blog post. So how much money does it actually take to get started? If this is your first go at it or if you’re unfamiliar with what it actually costs financially to build a dropshipping business now I wanted to do something a little bit different so I’m gonna talk about this in a couple of different ways. So one way for a realistic dropshipping budget is if you’re kind of starting slow and obviously looking to invest less. This is definitely possible and it definitely works, just know that it’s only one option. The other option is if you want to start fast and that means you’re going to have to invest a little bit more but you’re going to be able to kind of get traction faster, have some real data faster, and start making sales faster now. There is also a third tier which is the fastest way to start a dropshipping business and that would be buying an existing dropshipping store that’s already extremely profitable, but that’s going to cost you probably $25,000 to multiple millions of dollars so I don’t think anybody reading this wants to do that and even if you did want to do that I would still advise you build the store yourself.
Do you need $50 a week? Do you need $100 a week? Do you need $500 a week? Do you need $1,000 a week? There is one hidden cost that people usually don’t talk about but is directly related to your earnings goals. I’m going to give you my honest answer to this question plus I’m also going to give you some tips on how you can keep your costs low as well.
Okay, so there are three major costs when you’re starting your dropshipping business.
The first is your start-up costs to actually build your store. The second is your marketing budget. I’m going to be honest, this is probably going to make up the majority of your expenses and there is, of course, the third hidden cost in there which is very important to know which I will get to later. For now, let’s look at the first. How much does it cost to build a store? Now, while I suspect that most beginners reading this are probably going to chose Shopify to build their store with because of the fact that it is beginner-friendly and they don’t know any better. I’ll cover Shopify but then show you a different option that can be cheaper and better.
Shopify is the eCommerce platform of choice for most people since 2011 or 2012. I’ll admit I had a Shopify store once before I learned of other alternatives. Now don’t be fooled, Shopify costs money. Shopify is an eCommerce platform. With Shopify, you can build a website for your online store and take payments from customers around the world. It’s the most popular eCommerce platform around, and you can start using Shopify with a 14-day free trial. But let’s be realistic, you’re not going to make your dropshipping fortune in two weeks, so the real cost here will be the Shopify monthly charge once your two-week trial ends. Now there are different tiers to Shopify they have more advanced plans but for the majority of people starting out that go with them, you’ll be on the $29 a month plan. It’s fine it’s more than enough now.
The next expense that everybody is going to have and there’s no way from getting away from is a domain name. Do not even think of using a free domain name as they won’t convert and won’t be trusted. Spend some money and buy your own domain name. They can be as cheap as like a dollar ninety-nine on certain websites and my advice is just to buy your domain name on a site like Namecheap or GoDaddy. Shopify does allow you to buy one from them but it costs thirteen dollars a year for most domain names.
Now the next expense that I’m going to put here just because I see a lot of questions about it is suppliers. If you’re looking to start dropshipping and you search for something like dropshipping suppliers or products to dropship what you’re going find is a bunch of middlemen websites. These directories that charge you fees either monthly or yearly and they say you know you pay us and you get access to these millions of products and sell them on your store and blah blah blah, listen you don’t want to do that those it with these companies that really are middlemen and it’s almost impossible to make real profit with them but it can be an expense if you go that route. So the type of suppliers that I like to work with at my dropshipping companies is to use suppliers or go manufacturer direct. It is more work than using a large suppler and you do need to get approved but it is well worth it. Okay, now I know you are saying well what about AliExpress? Well, if you want to sell low-quality products with long shipping times, difficult returns and having to be shut down for weeks on end with Chinese holidays knock yourself out. Just be prepared for massive amounts of frustration. So why do you think a business wants to create a business relationship with you becoming an authorized retailer for them? Simple you get them sales that’s how they make money. That’s how you make money, everybody wins so if you don’t know about this model yet definitely check it out. If anyone wants to charge you a fee to get access to their products or if anybody asks you for money to sell their products that is a huge red flag, just say thanks but no thanks and move on to finding legitimate suppliers.
One cost that many people fail to do right is product research. They add products left and right to a store without understanding the product and its cycle. You need to know what shipping times actually are, you need to know about the product quality, and you need to know how receptive the supplier is to returns. So I advise ordering as many products as possible to find out these things. If you can return them you can get your money back minus shipping costs. Dropshipping is great because you don’t have to stock an inventory of products. But that also means you don’t control the quality of the products you sell, nor the delivery times, or the packaging. Ordering products gives you the chance to investigate suppliers and go on the customer journey yourself.
If you’re happy with the shipping times, the packaging, and the quality of the product, then chances are your customers will be too. Ordering products also gives you a chance to take your own high-quality pictures of the product, or to create an unboxing video that you can post on YouTube for free in order to get some free marketing and potential sales.
Now there is a cost that many people don’t consider, and that is business entity creation. Most people form an LLC. If you are in the USA just form one in your state since you are already going to have to pay taxes there anyway. If you are in a no-tax state or from outside the country you need to look at which State to form an LLC in but I would advise taking a look at Wyoming. You should form an LLC for multiple reasons, one is to protect your personal assets from a lawsuit. The second is that many companies and payment providers want to do business with legitimate companies. The cost of setting up an LLC varies but most prices I have seen are in the $250-$350 range.
The free Shopify themes are absolutely fine for starting a beginner website, you do not need to pay for a premier theme at all. However, there are two optional expenses that are well worth it if you can afford it. Extra # one, a logo from Fiverr. You will need to have a logo for your store. You can make one for free using a free logo maker on Canva or Namecheap but the truth is that you will get a nicer one if you get one professionally designed, and you can get them professionally designed on Fiverr for super cheap, for just $5 plus a 50c transaction fee. Extra # two, a Shopify up sale plugin. Now there are multiple different types of premium plugins that in the future you will want to invest in for your store but in the beginning, the most important one to make sure you have money for is an upsell plugin in. A beginner-friendly one is the SMAR7 bundle up sale and it costs $47 a month.
As you may have noticed that costs more than Shopify. The thing about upsells is that they make so much money that it’s well worth it but in the beginning, if you are strapped for cash then you can get away with not getting it just yet. In that case what I would recommend is that you set up your store with Shopify, you add your products to your store and then you run ads for those products and you don’t purchase the plugin. When you find a product and an ad that connects really well with your audience and you start making lots of sales that is when you buy the plugin. Use that plugin to add an upsell to the product that is selling very well and you will very quickly make your money back plus a lot more. In the beginning, you don’t need to purchase the plugin, you can purchase it later if you are successfully selling items in your store.
Now, what would you say if there is a newer alternative that is not only better but free? It is Groove Digital. Groove Digital has an eCommerce platform called GrooveKart. Groove Digital allows everyone to create 3 free Websites which include free hosting with GrooveKart. GrooveKart also includes free upsells integration and an autoresponder. Yes, it is absolutely free. How can they do this, well they do also have paid plans. Currently, at the time of this writing, they do have a lifetime offer of $1395 for unlimited websites and a whole host of other features that are either beefed up or not available for the free accounts. The lifetime offer is supposed to go away in 2021. You can click here to get a Groove Account for free. Check it out. You have nothing to lose since they don’t even ask for a credit card. They will even do something that Shopify doesn’t do. They will put together a beautiful looking store with a template and you simply just have to swap out your products, change the text, and add your payment provider details. They also have Groovepay. The free accounts get charged about 5% per transaction, similar to what Shopify charges, the paid accounts pay about half of that. So if you are planning on making a lot of money definitely upgrade because the fee savings can really add up.
How much money do you need for marketing? Here’s the reality, for most of you reading this, at least 50% of your start-up budget is going to go towards your marketing. Most of you will start with Facebook ads. I will say though if you simply don’t have the money for this then you can utilize free traffic methods, free traffic is slow. Is it possible to make money with free traffic? Absolutely but is it the best? No. You’re going to make money a whole lot faster if you use paid traffic with Facebook ads and Instagram shout outs being the most beginner-friendly. That doesn’t make it the best way though. IMHO Google Ads are a much better option. Why? Because on Google they are showing your ads to those who are looking for your product so you have a buyer looking to make a purchase. (They also give you $100 in free ad credits to begin with). With Facebook or Instagram, you are praying that your ad somehow gets shown to someone who just happens to want what you are selling. You are literally just trying to catch a specific type of fish in a huge ocean of fish.
Now to explain how much it’s going to cost you to run a Facebook ad it’s very important that I, first of all, explain what it means when we say to test a product on Facebook. What we mean in this industry when we say that we test products is that we add a product to our store and then we run low-cost Facebook ads for it. Generally, when you’re doing this, I recommend that you set your ad budget to about $15-$25 a day to start. You then run that ad for a few days, I normally recommend running it for four days. Over those four days, you see if you make any money from advertising that product and if you do that’s fantastic. The sale is actually a bonus. What you are really paying for is data. Most products are going to end up sadly being losers. Unfortunately, it can be very difficult to pick what’s going to be a winning product. You normally have to just add a lot of products to your store and test them each to find out which ones connect and which ones don’t with the audience you are targeting. Generally, I like to say it takes about 10 product tests to find one winning item and that is a really high success rate. It’s been studied a lot and it’s generally found that for most people it’s going to take about 20 products to find one winning item but there are no guarantees, it might take you even longer to find a winning item which is why Google can speed up those sales.
Once you find a winning product you scale the ad budget up and up and up making more and more sales which makes you more and more money. When that happens, we refer to it as a winning product. A winning product is simply a product that when you advertise it that you make a profit. Most of the time when you’re testing products, they don’t make you money and we call those products losers.
Of course, on the other hand, you might get super lucky and find a winning item immediately, you just don’t know until you try. Of course, that one winning item can easily earn you tens of thousands of dollars to even over $100,000 a month but of course, you’ve got to find that item. I reckon with Facebook ads you need to be willing to test at least 20 products so let’s use that as a yardstick. Doing the math we want to be spending $5 a day for four days to test a product which means it’s going to cost us $20 to test one product but of course, we want to try and test 20 products so $20 times 20 means that we’re going to be spending $400 on our ads to test our products.
Along the way you are almost certainly going to make money from selling products, even ones that turn out to be losers so it’s unlikely that it’s going to actually cost you your total ad budget but plan for this anyway. In total then that usually means that I recommend being willing to spend at least $450 to $500 for your start-up costs to build your store and another $500 minimum to market it. Now for some of you out there, you might be thinking, “Oh, $1000, that’s not much money at all.” Of course, for some of you out there you might be thinking, “Oh, $1000, I don’t have $1000.” Well, I’ve got to be honest with you, if you want to start a genuine real business then you need to be willing to invest some money. I have some people that come to me and they say to me, “I have $100, how can I turn that into $10,000 really fast?” Well, quite honestly, the only way that I can think of to turn your $100 into $10,000 really fast is to go and gamble it on penny stocks or to invest it in a Ponzi scheme but please do not go do that.
The Secret Tip For Your Start-Up Dropshipping Budget
The number one thing that people don’t think about is that you have to pay for products that are sold. When you are starting out payment providers like PayPal may hold your funds for up to 3 weeks, or they may ask for proof that you have mailed a product to a customer before you get paid. So you really need to have at least 3 weeks’ worth of working capital to be able to run your business. This is because you need to pay for 3 weeks’ worth of advertising as well as products before you start seeing actual cashback in your wallet. If you end up paying $25 a day in marketing costs that is $525. If you sell $100 worth of product a week that’s $300….and those are minimum numbers. What happens if you do hit it and sell $500 a week. That’s $1500. Say you get extremely lucky and sell $1000 a week. You’ll need $3000 in money to pay for products.
Marketing doesn’t have a specific price tag. However, there are some assumptions that we can use to get a better idea of what you’ll need to spend. In eCommerce, the average global conversion rate is somewhere between 2 and 3 percent. For the sake of this calculation, let’s put it at 2.5%. This conversion rate means that if you get 200 people to your store, you can expect five of them to purchase something. And how do you get 200 people to your store? Marketing. There is no absolute answer for this next part but your Return on Ad Spend for a good product might be 4 to 1. So, for every $100 you spend on Advertising you get $400 back. You can use this figure as a guideline to figure out how much to spend on advertising to meet your financial goals. One of the biggest marketing channels for dropshippers is Facebook. So let’s look at the cost of driving 200 visitors to your store from Facebook. On average, the click-through rate for Facebook ads is 0.9%. Let’s round that up to 1% to make the math easier. That means, to get 200 people to your store, you’ll need your ad to reach 20,000 eyeballs. According to marketing software provider AdStage, the average cost per thousand impressions is $12.45. Let’s round up to $12.50. Now we have an equation we can work with. The price for reaching 20,000 people on Facebook in the USA looks like this: First, we divide the total impressions we want–20,000 eyeballs–by 1,000. That’s because the cost per thousand impressions is the industry norm. That leaves us with 20. Then we multiply 20 by the average cost per impression, which is $12.50. The result: we arrive at a total cost of $250 for Facebook advertising if we want to reach 20,000 people, drive 200 people to our store, and make five sales. If those numbers don’t work for you consider Google instead of Facebook. Now, I know what you’re thinking: If you spend $250 to make 5 sales, you won’t break even. And you’re right. But most six-figure dropshippers don’t even expect to make 5 sales the first time they invest in marketing. They expect to learn what their customers want. They expect to analyze the data to decide which products to promote, which audiences to promote them to, and which ads to use.
If you’re looking to go fast your first month my advice is between 500 and a thousand bucks in ad spend. I typically spend about 10% of the amount that I spend on Google on Facebook. So if you’re spending $1000 on Google ads I spend I put $50 in initial ads and $50 into remarketing ads on Facebook. Why do I do that when I like Google better. Simply because there is no one size fits all answer when it comes to marketing. You need to test different platforms and ads to see what works. The products I sell are also more search-oriented and not impulse buys for most people which is why I spend less on Facebook and zero on Instagram but your products may be different.
This is my real honest answer when it comes to dropshipping, free traffic is slow, paid traffic is fast, if you want to take advantage of it then you need to be willing to invest money but yes, I understand because funnily enough, not everybody has $1000-$5000. If that is you, here are two tips. Tip one you side hustle to save up the extra cash. Perhaps become a virtual assistant and learn from other dropshippers who pay you to help them with daily tasks. Now, do they pay amazing? No, they don’t because a lot of them hire people from foreign countries with a lower standard of living.
Tip two, you don’t need all of this money at once. Now if $1000 seems overwhelming to you then don’t worry because you don’t need to have all of this money at once. Perhaps you split this over two months. In month one you test 10 products and in month two you test the other 10 and hey, you might even get super lucky and find your winning item in the first month.
There are some other solutions to this problem but I don’t advise doing it. The first one is ‘free’, the second one is technically free but doesn’t feel free so let’s talk about the first one first. Use credit cards. Credit cards are absolutely the easiest way to take care of the cash flow issue. With a credit card you usually have about five weeks to pay off the money on it that you spent so even if you had to wait one week for Stripe to pay you the $20 that the customer paid you for this mug that’s okay because you’ve got five weeks to pay off the $9 you’ve spent on your credit card. The same goes for PayPal, even if it takes PayPal three weeks to send you the $20 that the customer paid for this mug then that’s okay because you’ve got five weeks to pay off the money that you spent on your credit card plus if you use credit cards you get awesome bonuses as well such as free air miles so you can fly around the world for free along with cashback rewards that help you offset fees.
If you don’t have access to a credit card though you will need to prepare in advance using the second solution, have $500 to $5000 saved in advance. Keep in mind though that this money isn’t being used to pay for expenses like Facebook ads, this is just money that we are using in the meantime while we are waiting for the customer’s money to clear so don’t think of this as money being used for expenses in the same way that the other money was, this is money that we are using to just help us manage our cash flow. There you go, that is my honest answer to this question, how much do you really need to start a dropshipping store? Now I do understand that $1000 to $5000 may seem like a lot of money for some of you guys out there watching this and do not mean to trivialize anybody’s position if they are having a hard time financially but I do want you guys to keep something in mind, that 20, 25 years ago if you wanted to start a store here’s what you had to do.
You’d have to go out there and rent a physical storefront and it might cost you hundreds to thousands of dollars every month and plus you’d probably be locked into a lease for six to 12 months. Then you’d have to go out there and purchase thousands of dollars of inventory so that you would have something to sell in your store with no guarantees that it would sell at all. Then you’d have the choice of either exchanging your time for money by sitting behind a counter for eight-plus hours a day serving customers or alternatively you could spend thousands of dollars a month to hire someone else to do that for you. Let’s flip the start-up costs into a positive and keep in mind that we’re actually super lucky to be living in a time where thanks to the internet if we want to start a successful store we no longer have to spend tens of thousands to do so.
So, if you want to start dropshipping, the question to ask yourself is: Are you ready to become a constant learner? If you’re able to invest these startup costs, and you’re enthusiastic about investing your time in learning how to dropship, then dropshipping could quite literally change your life. I recommend you put more money in so you can go fast right away and why wouldn’t you if you can afford it, but if you really want it to go on a shoestring budget you can but just don’t expect to make any serious money.
Frequently Asked Questions
How Profitable Is Dropshipping?
Dropshipping is still profitable in 2021 because of the number of eCommerce activities taking place around the world. Because of Covid Dropshipping is thriving as local businesses face restrictions. eCommerce and dropshipping profits have reached over $5 billion, which is a 7 percent year on year increase for the last 10 years.
Can You Get Rich By Starting A Dropshipping Business?
Of course, dropshipping can be very profitable. The cost of entry is lower compared to starting up a physical store. However, it does also have a high failure rate. It is reported that up to 97% of new dropshipping stores fail. This can be attributed to many factors however failure to plan for working capital is one of the main reasons a dropshipping business may fail.
Do You Need A Business License In Order To Dropship?
Most online sellers do not have to own a business license. However, depending on where you live and your supplier and payment provider requirements you may have to have a business license or be registered as a business entity such as a corporation, LLC or partnership. it is strongly recommended to either check with your Government entities to see if one is required by them.