When people find out about the dropshipping business model, one of the first questions they ask is: How much does it cost to start?
And the answer, as with most things in life, is that it depends.
It depends on the type of products you’re planning to sell, the amount of experience you have in websites and marketing, and many other factors.
To help you wade through the various factors, you can download a budget template spreadsheet, and this post will walk you through how to determine your inputs.
Table of Contents
The Costs of Dropshipping
A lot of people who answer the “what does a dropshipping store cost” question often respond with optimistic and unrealistic numbers.
Sure, technically you can get a dropshipping site popped up for between $50 and $500, but that doesn’t mean you can build a thriving store for that investment.
Here are the costs, some often forgotten, when planning a dropshipping business:
Product Costs – What you pay for the product plus related shipping costs.
Payment Processing Fees – No matter what tool you use to process online payments, you’ll incur processing fees. Usually around 3% of the charge amount.
Software Tools – Shopify itself costs $29/month, and there will be additional software platforms you need (like Shopify apps and email marketing tools) that will have monthly fees.
Advertising Costs – When you start a new dropshipping store, if you don’t invest in advertising, you likely won’t see sales. This category is often overlooked or underestimated.
All told, these items can certainly add up to less than $500, but they can also end up in the $5,000 range. Here are some of the factors that can impact what your startup costs end up being:
- Whether you’re selling high-ticket items or not
- How fast you can start generating orders
- Whether and how much you invest in marketing and advertising
- Which Shopify apps you pay for
- How much it costs to get a new customer
Dropshipping Revenue
When we’re considering the costs of starting a dropshipping store, we also have to look at revenue forecasts and how they align with costs.
A few factors that affect revenue forecasts include:
- Price and margin
- How you charge shipping
- Number of expected orders
- Average order value
A lot of people simply think about the outgoing costs they have to consider in starting a dropshipping store and completely forget to think about revenue. Money coming in is assumed by a lot of newbies (I call it “if you build it they will come” syndrome).
But your startup costs are drastically different if you see sales in month 1 vs. if you don’t see sales until 4 months down the road. So we always consider revenue and costs together when planning to ramp up a dropshipping site.
Using the Dropshipping Budget Spreadsheet
Fill in your info here, and you’ll get the budget spreadsheet by email. It’s a Google Drive spreadsheet that you can make a copy of and manipulate based on your own numbers and the instructions below.
Download the Budget Template and you’ll get the budget spreadsheet by email. It’s a Google Drive spreadsheet that you can make a copy of and manipulate based on your own numbers and the instructions below.
Inputs
The inputs in the spreadsheet are the variables you can change based on your estimates and situation. In the spreadsheet, these are indicated in light gray. These are the only cells you need to edit.
Product Margin
Your product margin is basically your markup. In dropshipping, the recommended markup is 4X, which means you price the product at four times what you can source it for. With that markup, you get the following breakdown: 25% of the price for the product costs; 25% for marketing; and 50% for other expenses, re-investing, or keeping.
In the spreadsheet, the default is set at 4X for those reasons. But you can play with that number to see how it impacts costs and revenue. If you’re in a competitive niche where price is a big factor in a customer’s decision to buy, you might want to plan for a lower margin. If you’re focused on building a brand and differentiating your products, you could possibly go higher. But 4X is a good default.
Average Order Value (AOV)
This is an input that will be hard to know if you’re not experienced. And it can completely depend on your on-site marketing/upsell techniques and of course your product prices.
If you’re selling low-ticket items and offering free shipping on all orders, you can expect to have an order value in the $10 – $30 range.
If you implement a “free shipping on orders over” offer, you can use the order threshold as your AOV. So if customers get free shipping on orders over $60, use $60 as your AOV.
If you’re selling high ticket items, your average order value is going to be much higher than if you’re selling $10 items. Use an AOV input that aligns with the products you’ll be selling.
As you change your average order value input, you’ll see outputs in both the revenue and cost sections adjust.
Orders Per Month
The number of orders you’ll get each month is another number that’s hard to predict. Use this input as more of a goal. Play with this input quite a bit to see how it impacts your bottom line. Adjusting this number will also impact the costs you need to start your dropshipping store. The way the spreadsheet is set up, the number of orders impacts the recommended advertising budget—lower number of orders = lower ad budget…and vice versa.
Customer Acquisition Costs (CAC)
The CAC is how much you spend, on average, to get a new customer. You won’t know this number until you get into it, but in general, you can expect your CAC to be 25% of your average order value. However, that number changes based on the types of prices you have in your store. Higher prices can mean a smaller percentage for CAC, whereas lower prices can mean you have to spend a higher percentage to acquire customers.
In general, your CAC is going to be highest right when you start your store. So when in doubt, go high to be on the safe side.
Software Costs
Most people remember to consider Shopify ($29/month) in their startup costs planning. But most stop there. You’ll need and want additional tools to make your dropshipping store run smoothly and effectively.
Other costs you’ll want to consider include:
Shopify Apps – Out of the box, Shopify is a great e-commerce platform. But they focus heavily on customization by allowing you to install apps. Some are free and some have subscription costs. Here are our recommended Shopify apps for Dropshipping stores. I’ve seen sites spend as little as $14.99/month on apps, but you could get close to $100/month with no problem.
Email Marketing Platform – Shopify has order email notifications built right into their platform, but you’ll want an outside tool for cart abandonment emails, product promotion emails, and other broadcast messages. You can use a free (up to 2,000 subscribers) tool like MailChimp, but it’s not as effective as a tool like ConvertKit for e-commerce email marketing. When you’re getting started, you can cheap out and go with a free platform, but you’ll want to upgrade at some point and it’s important to consider the migration costs of moving from one platform to another.
Social Media Management Tool – If social media is an important part of your marketing plan, you’ll want a tool to manage it. Logging in and posting and managing each different platform gets overwhelming really fast. Again, you can cheap out here if you’re willing to spend extra time posting manually. You can also start with a free plan on a tool like Hootsuite and upgrade to a paid plan when it’s time.
Dropshipping Supplier Marketplaces – If you’re starting off dropshipping from a free platform like AliExpress, you won’t have to consider this cost (which is why it’s not in the spreadsheet). But you’ll eventually want to get on a paid marketplace, ideally one with US dropshipping suppliers. You may want to include it in your budget from the start, just to cover all your bases.
Business Tools – In additional to the items directly related to your dropshipping store, you’ll incur some costs for the business in general. The most common are legal fees (you should set up a legal entity for you store) and accounting software (like Freshbooks). These line items are costs of doing business and will apply to any business model, dropshipping or not.
This is by no means an exhaustive list of tools you’ll need for your dropshipping store, but it covers most of the software platforms you’ll want starting out.
Outputs
Once you have your inputs set, you’ll see various outputs that help you plan and understand what you should budget for your dropshipping business. and you can adjust and play with the inputs to see the impact on the outputs.
Revenue
Forecasting revenue for a dropshipping store—or any new business—is tough. So instead of guessing a random number, the budget spreadsheet uses your inputs (AOV, orders per month) to calculate revenue. Which means revenue and costs are always looking at the same inputs and are shown in related to each other.
To see different revenue levels, adjust the average order value and orders per month inputs to see how they change things.
Product Costs
Product costs are a variable costs—the more orders you get, the more your costs will be. Your product costs are also impacted by the price point of your products—if you’re selling low-ticket items, your product costs are relatively lower than if you’re selling high-ticket items.
Ideally, your product costs remain a fairly consistent percentage of your end price. Look back at the margin input. If you use a factor of 4, then your product costs should average around 25% of your end price. Keeping a consistent markup range can help make costs more predictable.
Advertising Costs
Your recommended advertising costs are calculated in the spreadsheet template by considering customer acquisition costs (CAC) and orders per month. For simplification, the calculations assume all orders are by new customers (and therefore experience the full CAC). Orders placed by existing customers will inevitably lower CAC for that order, which means the calculations in this spreadsheet are conservative, posing worst case scenarios.
Profit / Loss
The most important output: what does the end number look like? Based on your inputs, will you make money or lose money? How much?
Technically, you can make this number say whatever you want. If you use realistic inputs—what you think you can actually accomplish—the profit/loss output will be realistic. However, if you adjust inputs to make the profit you want, just use the resulting inputs as your goals. For example, if you need 200 orders per month to make the profit you want, then use 200 orders as your goal.
Costs to Start
How must should you budget to start your dropshipping store? Again, it depends. But this budget will give you an idea of how to plan that number.
Based on how cash flow works in dropshipping and when you have to pay for products vs when you get the funds in your account, you’ll want to plan to have at least a few months of expenses liquid to cover advertising, product, and software costs.
The spreadsheet will calculate your estimated costs based on inputs.
Be warned…the spreadsheet will give you a higher “cost to start” than other so-called “gurus” because it accounts for so much more than just starting a dropshipping store. It accounts for starting a dropshipping business.
If you’re going to buy-in to this business model, do it right.
The Most Forgotten Cost: Advertising
Pretty much anyone can spin up a dropshipping store for a low cost. But the failure rate on dropshipping stores is incredibly high for one main reason: lack of marketing.
A lot of training and “gurus” will talk about how easy setting up a dropshipping store is. But they forget to talk about how hard it is to get sales. Without a solid advertising strategy, stores fail.
Unfortunately, just because you build it, doesn’t mean customers will come.
This is the number one mistake I see with dropshipping newbies. They assume customers will just find them and roll in. But it’s just not that easy.
If you start a store without a big enough advertising budget, you won’t see success. Even though dropshipping is a relatively low-cost business model to start, it still takes money to make money.
The budget template spreadsheet will give you an idea of how much to invest in advertising based on your margins, customer acquisition costs, and other factors.
Once you have that budgeted advertising number, where you spend it depends on who you’re targeting and the types of products you’re selling.
- Google Ads
- Facebook Ads
- Solo ads
- Influencer marketing
- Affiliate incentives
As you’re planning your dropshipping business, make sure to set aside enough budget for marketing. Do this business model right, or don’t do it at all.
Ways to Lower the Costs of Dropshipping
If the startup cost number you see in the spreadsheet scares you, there are a few ways you can go.
Option 1: You can ignore the advice and start the store without investing much (you’ll likely cut advertising investment). You’ll learn a lot, and you’ll close down your store in a few months. And, frankly, that’s OK because you will learn a lot and be much better positioned for your next venture.
Option 2: Decide that dropshipping isn’t for you. That’s OK, too. It’s not for everyone. If you were looking for a get-rich-quick scheme, this isn’t it, and you just saved yourself a big headache.
Option 3: Save up until you have the proper investment and start your dropshipping store the right way.
Option 4: You go full-in on the investment but look for ways to keep your costs down, or lower costs as you grow.
Here are some of the ways you can lower the costs of a dropshipping business:
- Lower Your CAC – The lower your customer acquisition costs, the higher your margin. Lowering this factor usually doesn’t happen until well into a dropshipping business, but you can work to keep it low from the beginning (i.e., don’t pay above your sale price to get a customer).
- Increase Margin Factor – If you’re in a niche where you can increase your margin factor to 5X, you can afford to spend less on advertising and still see the same return. 4X is the dropshipping sweet spot, but it’s certainly not the rule.
- Sell Low Ticket Items – By selling low-ticket items on your store, you don’t have to invest as much in advertising, customer acquisition, and initial product costs. This might seem nice in the short term, but over the long term, it’s exhausting selling solely low-ticket products because you have to do a high volume of sales.
- Trade Time for Money – If you absolutely can’t invest the recommended amount in advertising, you can trade paid advertising for more time-intensive marketing strategies like SEO, public relations, organic social media, and other “free” tactics. This might sound appealing in the short term, but if you don’t start generating sales quickly (which is likely with this approach), you’re incurring monthly costs with no revenue coming in.
If you’re thinking about starting a dropshipping store and want to know what it might cost and how much do budget, click below to download the budget spreadsheet. Play with the numbers and discover if you like what you see.
The numbers in this post and the spreadsheet are for example and illustration, and based on experience running a dropshipping business. They’re no guarantee of results or accuracy for your particular situation. It’s a guide for planning and should be used as such.