Dropshipping Operating Expenses: Everything You Need to Know

Dropshipping is undoubtedly a low-cost eCommerce business idea — you don’t have to maintain an inventory or invest in logistics. While that’s true, even low-cost businesses have their share of expenses. It may not be apparent, but remember there are recurring costs, like dropshipping operating expenses.

Have you ever considered how much money it takes to run a dropshipping business? Let’s find out more about it in this article.

On this page

• What are the operational expenses of a dropshipping business?
• How much does it cost to set up a dropshipping business?
• How to budget your dropshipping operational expenses?
• How to cut costs if you exceed your budget
• How to set up a dropshipping business free of cost
• Key takeaway

What are the operational expenses of a dropshipping business?

Some claim that you can start a dropshipping business for as little as $100 but the reality is different. Even by conservative estimates, your operating expenses could amount to double or more than that.

Why’s that so?

Because dropshipping operating expenses include multiple one-time and recurring costs. These include:

Business registration and license filing fees

Many states in the USA require dropshippers to have a valid business license and sales tax permit. Although not mandatory at the onset, you may have to opt for documentation depending on the eCommerce platform and sales you make.

Registering your business has many perks:

• You can avail of aid (subsidies, tax benefits, etc.) from your local government
• You can enjoy enhanced legal protection
• You can inspire trust in your customers

Business licenses and permits can cost you anywhere between $50 to $400. So, choose a license that suits your requirements the best.

You will need an Employer Identification Number (EIN) to apply for licenses. Do it for free with the Internal Revenue Service (IRS).

Non-USA-based entrepreneurs also have the freedom to register their business in any state of their choice. You don’t require a social security number for it.

Pro tip: Register your dropshipping business in an SMB-friendly state like Delaware, Wyoming, or Nevada. Alaska, Montana, New Hampshire, and Oregon are good options too because these are no sales tax states.

eCommerce platform/marketplace fees

Up next, you need to budget for where and how you’re going to sell. You could create a customized online store on eCommerce platforms like Shopify, BigCommerce, etc. Or, you could choose to go for an existing marketplace for online sellers, such as Amazon, AliExpress, and others.

Both are good options but none come for free. You have to pay an annual or monthly subscription or membership and transaction fees.

For example, you need to pay 2.9% plus 30 cents per transaction as credit card processing fees if you opt for the basic $29 Shopify subscription. Amazon also charges the same payment processing fee from its sellers for online purchases.

These costs vary widely depending on the eCommerce platforms, marketplaces and plans you choose.

Product research tool fees

Dropshipping has a low barrier to entry and is a highly competitive niche. You will notice that multiple sellers offer the same products at different prices. So you need to do extensive product research before finalizing the goods you want to sell.

Product research solutions are helpful, but the benefits come at a cost. The prices can vary from less than $10 to nearly $100 per month, and so will the features.

Any successful dropshipping business needs a supportive product research tool. So that adds to your operational expenses.

SaleHoo boasts a library of more than 2.5 million trending products and gives you access to a winning market research tool at an affordable price. Known as SaleHoo Labs, it’s the ultimate selling companion that can set you up for success.

You can use this state-of-the-art market research tool to:

• discover products trending on Amazon and eBay in as many as 29 categories
• compare product ideas with predefined filters to find something suitable for your dropshipping business
• find low-cost suppliers for these products 
• identify product trends

You get to do extensive market, competitor, and product research using just one tool. SaleHoo Labs is a value-for-money feature created to empower SMBs.

It’s also rather easy to use and you can easily find profitable products with the right filters. Here’s a stepwise guide to finding products for your eCommerce business:

1. Click on the “Labs” tab in the header
2. Click on “Discover Products”
3. On the left side, you can either select a product category of your choice or search “All Products”
4. Now add filters according to your preferences. Set the “Sell Rate” to “50%”, the “Average Price” to “$40 - $100”, and “Competition” to “Low - Medium”.
5. You will get to see a list of products that match these criteria. Click on each product to get more details.

That’s all it takes to get started on SaleHoo.

Domain and hosting costs

These are optional costs and only apply if you’re creating a dropshipping website from scratch. You need to purchase a unique domain and pay hosting fees to your service provider of choice. What you pay depends on the kind of hosting option you go for.

Shared hosting costs are on the lower end because you’re dutching the resources with other businesses. Pricing can vary from $3 to $20 per month.

More sophisticated options, like dedicated hosting, can cost you as much as $360 per month!

Pro tip: Web hosting is a recurring cost that you have to pay monthly or annually.  Do a price comparison and weigh your options before making your choice. All hosting options have pros and cons. There is no one-size-fits-all approach that works out for everyone.

So blindly following in the footsteps of other dropshippers is a bad idea. Do what suits your budget and meets your requirements.

Sales and marketing expenses

As a dropshipper, your primary job is to market and sell your products. You need to focus your energy, budget, and time on a marketing strategy that results in sales.

Most eCommerce marketing platforms and marketplaces charge additional fees for ads and promotions. But if you’re an independent dropshipper running your ads, you may need to hire experts or buy marketing automation solutions that will add to your costs.

Taxes

Federal taxes are only applicable to dropshippers with an EIN. Even then, your tax liabilities will vary based on your chosen business structure.

If you’re a limited liability company (LLC), you get to enjoy the flexibility of being taxed as the following:

• Sole proprietorship
• Partnership
• S Corporation
• C Corporation

For businesses registered as corporations, you have the following options:

• You can report your profit and loss on your tax returns if your business is registered as an S corporation
• You have to pay income tax on your business profits and overall income, leading to double taxation if your business is a C corporation

This is another recurring cost that’s integral to your dropshipping operating expenses. The good news is that you can avail tax deductions by accounting for:

1. Cost of Goods Sold (COGS)
2. Home office expenses
3. Technology investment costs
4. Marketing expenses
5. Insurance and payment processing fees

Pro tip: Unsure of your tax deductions? Hire a tax consultant in your area. They should be able to guide you with your expenses so that you can get tax benefits and amplify your profits.

Supplier fees

A dropshipping business is dependent on suppliers for its survival and success. So supplier fees contribute significantly to its operating costs. Suppliers charge you for every service they provide, including but not limited to inventory management, order fulfillment, etc.

They can charge you per order, it’s the most common in the business. You have to pay a pre-decided fee every time you make a sale.

Or, your supplier could charge a fixed recurring fee. The terms of payment are a matter of mutual agreement between you and the supplier.

Just ensure that your supplier is trustworthy and worth the money you’re paying them.

Instead of losing your sleep over finding suppliers, turn to SaleHoo. It offers one of the easiest ways of accessing good suppliers in any dropshipping niche.

SaleHoo is an online aggregator of suppliers. The platform empowers everyone from first-time to seasoned entrepreneurs in running a dropshipping business. You can browse the SaleHoo directory comprising more than 2.5 million products and connect with its network of 8,000 prevetted suppliers.

You can do the following things on SaleHoo:

• Research trending, profitable, and expert-approved products
• Negotiate the best deals with global suppliers
• Enjoy simple and seamless integration with your Shopify store (if that’s the eCommerce platform you use)

You can access the SaleHoo Directory for only $67 annually, which is a steal deal because you are getting multiple services at once. The best part is that you can upgrade to lifetime access for only $127 — that’s less than double the amount you pay for annual access.

Salaries (if applicable)

Dropshipping is a relatively less complicated eCommerce model and it’s possible to run the business single-handedly. That said, you can hire talents if you feel you need them. Since you save on other big expenses like inventory and logistics, you can afford to spend on employees.

It is an optional cost that you can certainly do without.

You can surely tell that even a seemingly low-cost business like dropshipping comes with significant operational expenses.

How much does it cost to set up a dropshipping business?

That’s an interesting question with an elusive answer.

No two dropshipping businesses are the same, even though they may share some similarities. Other differentiating factors like geographical location and the state of the economy add to the already diverse list of contributing factors, making it hard to predict the cost.

For tech-savvy entrepreneurs, the cost of starting a dropshipping business could be as low as $300. It could also go upwards of $1000 for some of you. That’s why you need to have a financial plan in place and budget your expenses before becoming a dropshipper.

The most practical approach is to start a small-scale dropshipping business and diversify as it grows. Dropshipping could take time to become profitable because it’s not a get-rich-quick scheme and you’ll always have unforeseen expenses.

Operating costs comprise a part of your overall business budget. You need to be cautious about this because operational expenses are one component that’s under your control.

How to budget your dropshipping operational expenses? 

Financial planning is crucial to the launch and success of any dropshipping business. Operational expense management acts as a financial blueprint for your eCommerce venture and you should pay attention to it from the get-go.

Here’s what you can do to budget for your dropshipping operating expenses:

1. Create a list of all the things that come under operations
2. Categorize them by one-time and recurring
3. Do your research and set up a cost estimate for each item on your list
4. Based on your initial cost estimate, allocate an overall budget
5. Compare and contrast your options before taking your pick. Your choices should be achievable in your budget. Additionally, every expense should be value for money, especially if it's recurring.

Once you have a budget in place, chalk out your operational expenses for the next quarter.  Your operational cost for the second and third months should be less than the first month because you’d have met your one-time expenses.

However, budgeting your operational expenses for three months is important. It tells you how much financial buffer you should have handy in case of exigencies. Having clarity over your operational costs will keep your budget in check too.

Pro tip: To ensure you’ve budgeted correctly for your operational expenses, create three sets of estimates — for the best case, worst case, and standard scenarios. It will not only help you understand if your estimates are realistic but also allow you to account for cost escalation.

How to cut costs if you exceed your budget

But what do you do if you suddenly exceed your estimated dropshipping operating expenses?

In dropshipping, even a small change could inflate your operational costs, like a sudden change in supplier fees. 

The problem arises because you face an operational cost overrun. It’s unexpected and can hurt your overall finances. You may not be prepared for it.

So it’s important to know why you exceeded estimates.

You can exceed your estimated operational costs for many reasons:

1. Incorrect estimates: The simplest explanations are often correct. Cost overrun could result from an incorrect initial estimate, either in the overall budget or in individual components.
2. Hidden costs: You could also miss out on hidden charges in your subscriptions, technical purchases, etc.
3. Performance failures: Your operations may have invisible inefficiencies leading to subpar performance or failures.

Thankfully, all the underlying causes of cost overrun are fixable.

1. Put your expenses under the scanner

Before implementing cost-cutting measures you need to review your existing expenses and locate the source of the discrepancy. Analyze every component that contributes to your operational costs. Then calculate how many components are exceeding the expected budget and by how much.

Once you have the data, understand why you’re incurring these extra expenses and closely monitor the costs over the next 30-day period.

For example, if you’re exceeding your advertising budget, review the ads and reallocate the budget. Negotiate with your supplier to tackle sudden increases in their fees, you get the drift.

Reassigning the budget from other components could also help you stay within budget. If that’s feasible, go for it.

2. Streamline your operations

When something is wrong with your business, you need to fix the root cause. Cut out inefficiencies by automating routine tasks and implementing innovation in other aspects of your operations.

Technology should help you make tangible efficiency gains and increase your productivity.

3. Closely monitor your operations

 Always keep an eye on your everyday expenses — dropshipping is a dynamic eCommerce niche that changes often due to fluctuations in the market, evolving trends, etc. There’s always a risk of project creep.

Prevent that from happening by monitoring your business round the clock. An aware business owner is always better at handling unexpected problems. Be that person for the sake of your business.

Most importantly, don’t fret if you exceed your estimated dropshipping operating expenses. Keep calm and strategize your way out of the problem.

How to set up a dropshipping business free of cost

Dropshipping is one of the easiest eCommerce businesses to plan and execute. Now that you know all about dropshipping operating expenses, let’s focus on the business.

You’d be surprised to know that you can start your very own dropshipping business free of cost with these resources.

The free version of these resources offers competent features sufficient to run a small to medium business. You can upgrade to paid plans once you scale your business and require more robust features to support its operations.

Wix

Wix is a dedicated website builder that offers more than 80 free templates for creating an online dropshipping store. This AI-powered platform comes with a third-party integration that connects you with a supplier marketplace. You can shortlist and export products from the marketplace and add them to the website you have created.

Its built-in automation ensures that your order details are shared with your supplier network for seamless fulfillment.

You do not need technical expertise to build your dropshipping store using Wix. This user-friendly website builder lets you add products, write descriptions, change images, and do so much more.

All of this comes with a free subscription.

AliExpress

This is a global eCommerce marketplace operational in 200 geographical locations and has a 100-million-strong inventory of products. If you don’t want to build a website from scratch or subscribe to an eCommerce platform, this is a trustworthy marketplace to get started.

Easy to navigate with zero sign-up charges, AliExpress offers a tight-knit Buyer Protection policy, safe and fast payments, and 24/7 support.

Ideal for newbies, this e-marketplace will help you mint money, thanks to its competitive pricing policy and great accessibility features.

Zapier

Zapier is a dynamic automation tool that integrates with more than 6,000 other tools and solutions. You can streamline your dropshipping operations with the help of this innovative workflow management tool by creating ‘zaps’. Zaps act as workflow automation pathways between apps and services, making life easy for you.

It also has an intuitive user interface that’s easy to learn to use, even if you’re new to it.

Using Zapier is the most convenient and effort-efficient way of automating the everyday operations of your dropshipping business.

Google Analytics

This dynamic analytics and reporting tool from Google is a lifeline for eCommerce business owners because it has multiple uses. From real-time data capture to conversion tracking and custom reports, Google Analytics lets you keep a close eye on your operations. It seamlessly integrates with Adwords so that you can run your advertising campaigns without any glitches.

You may need to learn to use Google Analytics to make optimal use of this resource, especially if you don’t have any hands-on experience with it. But it’s nothing you can’t learn online.

In addition to the free resources discussed here, there are many other platforms, toolkits, and SaaS solutions available for dropshippers in the market. You can explore them when you’re researching and use them to build your dropshipping business.

The sky’s the limit for you, so don’t be afraid to explore the possibilities.

Key takeaway

Dropshipping is one of the most lucrative eCommerce business ideas that anyone can explore. Thanks to a low barrier to entry and stable market demand, it is easy to run a profitable business. Although it is not a get-rich-quick scheme like many like to believe, dropshipping does yield good profits in the long run, especially when executed well.

You do not need lumpsum capital to get started and can choose to self-finance your business. Seek help from investors if you have a well-defined business plan and pitch in place.

Once you start making money from your dropshipping business, you can utilize the profits to bootstrap other eCommerce ventures.

SaleHoo’s widely acclaimed supplier sourcing and product research platform lets you start your business in a few clicks and even integrates smoothly with your Shopify store. You can also utilize the SaleHoo directory to support your business, irrespective of which website builder or online marketplace you use.

So don’t sit on your plans. Get started on building your dropshipping empire with SaleHoo today.

Click here to realize your dream.