How to start your own Dropshipping Business: Costs, Benefits, and VAT Compliance

Please check our latest article on dropshipping.

With a look at the innovative shipping model behind dropshipping, this article explores how it offers online entrepreneurs a gateway into the e-commerce landscape with minimal upfront costs. We will explore the workings, types, costs, and strategic considerations of dropshipping. In addition to examining fulfillment options and addressing VAT obligations, we analyze the advantages and challenges of dropshipping, as well as practical steps for getting started and growing your business.

What is dropshipping and how does it work?

Dropshipping is a modern shipping method that enables aspiring online entrepreneurs to initiate their own businesses with minimal initial investment. In this model, products are shipped directly from wholesalers to end customers, and the dropshipper functions as an intermediary responsible for marketing the online store. While the concept of dropshipping is not new, its increasing popularity stems from its remarkable scalability, making it particularly well-suited for startups and individuals entering the e-commerce realm without substantial upfront expenses.

The process of dropshipping involves three primary parties: the customer, the online store owner (dropshipper), and the dropshipping provider or wholesaler. When a customer makes a purchase, they assume the product will be shipped by the shop owner. Unbeknownst to the customer, the shop owner manages the store, engages in marketing and customer service, and coordinates with the wholesaler. The wholesaler, responsible for manufacturing and shipping the products, ensures the end customer receives the product directly, with no visible indication of the wholesale trade. Payments from the end customer are ideally designed to cover the product costs, and any shortfall requires the seller to maintain funds for settling payments with the wholesaler. The seller’s profit is derived from the sale price, minus the purchase price and any shipping costs incurred. It’s important to note that dropshipping is distinct from Dropservicing, where the seller appears as a service provider while third parties perform the actual services.

What types of dropshipping are there?

Dropshipping encompasses two main fulfillment options: via a wholesale warehouse and through a consignment warehouse. 

In the former, the dropshipper bears purchase and shipping costs, providing access to the entire supplier range. 

Consignment stock, on the other hand, involves a dedicated storage area in the provider’s central warehouse, ensuring a secure supply of goods with additional costs. 

As dropshipping has evolved, various fulfillment models have emerged, including those involving product agents in China who handle sourcing, storage, and shipping. Some opt to order products in bulk and store them in European fulfillment centers, like Amazon warehouses. The possibilities for dropshipping fulfillment are diverse, allowing businesses to choose an approach that aligns seamlessly with their needs.

What does dropshipping cost?

Of course, the dropshipping fees you have to expect differ from dropshipping fulfillment method to method. However, there are a few cost items that are usually always associated with the sale and delivery – no matter how the delivery to the end customer works. This includes:

• shipping fees
• handling fees
• minimum quantity surcharges

Shipping fees are usually relatively transparent. As a dropshipper, you will be charged the standard shipping costs. However, these can often be high when shipping across continental borders.

In addition, handling fees apply to dropshipping. These “pick and pack fees” cover the cost of packing individual shipments and are usually charged additionally per item. With these fees, there are often big differences between fulfillment providers.

Finally, most wholesalers still insist on small-volume surcharges. These fees apply if you order supplies that fall under the minimum quantity limits.

Benefits and Disadvantages of Dropshipping

Dropshipping has become a buzzworthy business model in e-commerce with its unique advantages and challenges. It allows entrepreneurs to establish online stores with little or no upfront investment, revolutionizing traditional retail.

Advantages of Dropshipping

At first glance, dropshipping dazzles with its low financial barriers, sparing entrepreneurs from purchasing inventory or managing storage spaces. The model’s risk mitigation factor, tied to its low capital commitment, makes it an attractive proposition. Profit margins are flexible, product portfolios are expansive, and the scalability of the business opens doors to international trade, presenting an enticing landscape for newcomers and seasoned online entrepreneurs alike.

Challenges in the Dropshipping Landscape

Yet, for all its appeal, dropshipping is not without its complexities. The lack of product controllability poses a significant challenge, as dropshippers entrust product quality to wholesalers. Shipment uncertainties, inventory management issues, and lengthy delivery times, particularly from Asia, where many source their products, present hurdles. Navigating return complexities and grappling with the costs of marketing amid fierce competition further underscore the nuanced nature of the dropshipping business. The journey through this e-commerce terrain requires strategic navigation to strike a delicate balance between its advantages and disadvantages.

Where can dropshipping be used?

Despite its drawbacks, dropshipping proves to be a lucrative distribution method applicable across various retail settings. Entrepreneurs can leverage this model for their own online shops, making the most of its streamlined processes and cost-effectiveness. With minimal start-up capital required and the elimination of the need for warehousing, online retailers can efficiently synchronize their shops with dropshipping providers, focusing on the structure of their online platforms. Additionally, dropshipping extends to e-commerce marketplaces like Amazon and Ebay, catering to millions of buyers but demanding adherence to marketplace rules and the navigation of associated fees. Even in traditional brick-and-mortar stores, this method finds utility, allowing businesses to avoid storage costs by ordering and displaying exhibition items, a particularly beneficial approach for bulky products like furniture and lamps.

How to Start a Dropshipping Business: Essential Steps

1. Business Setup: Acquire a trade license, decide on a legal form, handle taxes and accounting, set up a business account, and obtain public liability insurance.

2. Product Selection: Find a dropshipping provider willing to partner, agree on conditions, and obtain necessary product data, ensuring products don’t infringe on copyrights.

3. Online Shop Setup: Upload dropshipping products to an online shop or platform, determining prices to cover purchase and shipping costs while ensuring profitability.

4. Order Fulfillment: When customers place orders, send order data to the supplier, pay the purchase price and shipping costs, and receive the sales price from the customer.

VAT and E-commerce: Crucial Considerations

Establishing and growing a dropshipping business requires careful attention to legal and financial aspects. In the realm of e-commerce, understanding VAT obligations is paramount. Depending on the countries where your end customers are based, you may be obligated to pay VAT. Platforms like hellotax specialize in managing VAT tasks for e-commerce retailers, providing support in VAT registration, return preparation, and transaction control. By addressing these obligations, you ensure that your dropshipping business operates in a VAT-compliant manner throughout the EU. Contact hellotax today to streamline your VAT compliance and learn more about VAT obligations in the dropshipping landscape.

Conclusion

Dropshipping can be an extremely lucrative business model. Even if you have to put in some work at the beginning, in the long-term this shipping method can help your business grow quickly and you can run it location-independent. But there are also alternatives, such as Amazon FBA programs or other fulfillment service providers.

But no matter which logistics network you use, VAT is always due. hellotax can help you with this topic. We specialize in VAT tasks for E-commerce retailers, Amazon FBA sellers, and dropshippers. With the help of our proprietary software and an international team of tax accountants, we ensure that you trade and sell in a VAT-compliant manner all across the EU. Contact us today and find out more.