How Much It Costs To Start An Online Store And Should I Dropship Or Carry Inventory

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If your goal is to start the next Facebook or the next Google, you’ll need a large amount of upfront cash to jumpstart your business.

If you want to start the next Amazon.com, you’ll need to invest a significant amount of money to hire engineers and web developers.

How Much It Costs To Start An Online Store And Should I Dropship Or Carry Inventory

But if all you want to do is make enough money to quit your job and start a “lifestyle” business, you don’t need much money at all!

In fact, depending on what your end goal is, you can get started with an online business for less than $6 a month.

The other day, a reader who signed up for my free 6 day mini course asked me the following question.

Your free course is pretty extensive and exhausting to read through. Can you give me some kind of idea in one simple sentence how much this would cost me to start up?

It seems there’s a lot of money to put into this before you even start earning anything! Frankly, I don’t have any money to start this up, that’s why I need to begin earning the money first!

Unfortunately, not everything can be summed up neatly into a single sentence!

The Amount Of Upfront Investment Depends On Your Goal

goals

When it comes to starting an online business, your startup costs will depend on several factors! Here’s a list of some of the other things you need to consider as well.

  • Revenue Velocity – How long after launch do you expect to make significant money?
  • Barriers To Entry – How hard do you want it to be for someone to copy your business?
  • Portability – Do you want to be able to run your business from anywhere?
  • Scalability – Do you want the business to scale easily once it grows?

Today, I’m going to provide you with an assessment of 3 of the most popular online store business models along with the startup costs involved.

Starting A Dropshipped Online Store

dropship

Dropshipping is by far the cheapest and easiest way to start selling goods online which is why it tends to be the business model that most new entrepreneurs gravitate towards.

Without going into too much depth, dropshipping is when the online business owner sacrifices some amount of profit in order to avoid having to carry any inventory.

When a customer places an order, the shop owner then places an identical order with their vendor and the vendor ships the product to the end customer. The amount of profit made is the selling price minus the cost of goods sold and a small dropshipping fee.

Related: Dropshipping Vs Affiliate Marketing: Which Online Business Will Make You More Money?

Cost To Start

Here’s the bare minimum investment that you need in order to start a dropshipped online store on a free open source shopping cart platform.

If you tally everything up above, that comes out to between $5.45 and $76.45. $5.45 doesn’t sound like a whole lot of money does it?

With a free open source cart, your monthly costs for a bare bones site will be on the order of $5-6. This is how my wife and I started out with our online store Bumblebee Linens.

In fact, we are still on the same open source platform as when we started in 2007 except our web hosting bill is higher due to increased traffic!

However if you are tech averse and don’t want to deal with any website setup whatsoever, you can opt for a fully hosted platform like Shopify or Big Commerce.

The main advantage is that they’ll take care of all of the setup for you including payment processing, security etc…

Here’s an idea of what it costs to run a barebones site on these 2 platforms.

  • Shopify – $29/month.
  • Big Commerce – $29/month.
  • (Optional One Time Cost)Purchase a template for your website – $50-$200

While dropshipping costs much less to start than the other online store business models, there are several disadvantages which I will outline below.

Note: If you want to easily find dropship vendors, consider signing up for a service like Worldwide Brands.

Revenue Velocity

For one thing, the revenue velocity of a dropshipped online store is much lower compared to a store that purchases inventory up front. After all, not having to worry about inventory or fulfillment costs comes at a price.

When it comes to dropshipping, your wholesale price will be higher. In addition, most dropshippers also charge a small fee whenever a dropship order is processed.

All of these costs add up and the end result is that your profit margins will be much smaller.

The other thing to consider is that with dropshipping, you are selling someone else’s product. As a result, you will be competing with many other vendors who are are selling the exact same thing.

Well guess what happens when you have multiple sellers of an identical item? The price tends to spiral to the bottom.

Thanks to marketplaces like Amazon, the competition is fierce. And unless MAP(minimum advertised price) pricing is strictly enforced, you will just be another retailer trying to compete on the best bargain.

Barriers To Entry

In addition, the barriers to entry will be lower. Because of the low upfront investment involved and the ease of putting up a website, it can be relatively easy for someone else to copy and replicate your exact same shop.

While they still have to discover who your vendors are, sometimes finding out can be as easy as making a purchase from your store and looking at where the package came from.

Portability/Scalability

But the beauty of running a dropshipped store is that your business will be truly portable and scalable. Since you don’t have to worry about inventory, you can run your business from anywhere there’s an Internet connection.

This means that you could be at a coffee shop or in a foreign country and it wouldn’t matter.

Because you don’t have to worry about inventory, your business is also extremely scalable. With a computer server taking and managing orders, you will only have to hire additional help as your customer support volume rises.

Starting An Online Store With Upfront Inventory

warehouse

Starting an online store the traditional way with inventory carries all of the same costs as starting a dropshipped store except that you also need to set aside money for your initial cost of goods.

Depending on what you plan on selling, this could range from hundreds of dollars to thousands of dollars depending on the minimum order quantity (MOQ) that your vendor requires.

There are many ways to mitigate the risk and be more intelligent about your inventory management which I may discuss in a future article but the bottom line is that you will have to put out more money upfront if you want to carry inventory.

Cost To Start

Once again, here are the costs associated with starting on a free open source shopping cart platform.

Here are the costs if you go with a fully hosted platform like Shopify or Big Commerce.

  • Shopify – $29/month.
  • Big Commerce – $29/month.
  • (Optional One Time Cost)Purchase a template for your website – $50-$200

In terms of initial inventory, I typically recommend that you be prepared to invest at least $1000. But this dollar amount depends on your sourcing strategy.

If you are using domestic vendors, this can be as low as $100. But if you are importing from China, I recommend around $1k.

Revenue Velocity

The main advantage of carrying inventory over dropshipping is that you will make a significant amount of money much faster. As with everything in life, more risk carries more reward which is why my wife and I decided to carry our own inventory when we first started out.

Despite having to risk more money(about $630), we were able to make over $100,000 in profit after only a year of being in business. And unlike dropshipping, the profit margins are much higher and you are in more control over your shipping costs and delivery times.

Barriers To Entry

Carrying your own inventory has other advantages as well. Because you have to secure vendors in order to source your goods and you have to purchase in bulk, the barriers to entry are much higher than dropshipping.

Since you are in control over your shipping and branding, it’s much harder to copy your online store idea.

Not only would they have to copy your website but they would also have to find your vendors (much harder since you are shipping products yourself) and be willing to shell out more money upfront.

I’m not saying that it would be impossible to copy your business idea, but in general it’s much less likely due to the increased upfront risk involved.

Scalability/Portability

Of course the downside is that you have to find a place to store your goods and you have to take care of shipping your product. However there many ways to get around storing physical inventory.

For example, you can use a 3PL(3rd party logistics firm). A 3PL is basically a warehouse that will store and ship your goods for you on your behalf for a small fee.

In addition, many store owners who sell on both Amazon and their own online store are using Amazon multi channel fulfillment to ship orders as well.

But bottom line when it comes to managing inventory, there are going to be increased headaches as opposed to dropshipping and you’ll have to weigh the downsides compared to the increase in profit.

There are also cash flow issues associated with paying for upfront inventory that you need to consider as well. For example, we routinely invest hundreds of thousands of dollars on inventory every year and don’t see the returns until months later.

Related: 3 Ways To Sell Products Online Without Inventory, Shipping Or Fulfillment

Selling On Amazon With FBA

Selling On Amazon

Selling your goods on Amazon is probably the fastest way to make money selling physical products online. Compared to starting your own online store, Amazon has an ENORMOUS built in marketplace of customers that are ready to purchase your products immediately.

In fact when I first started selling on Amazon, I just threw up a few products and made $3k in the first month doing practically zero work. Yes. The marketplace is that huge!

Now there are many different ways to sell on Amazon that are beyond the scope of this post. But bottom line, Amazon is going to charge you a lot of money for the privilege of selling on their platform.

Cost To Start

Here are the costs to sell on Amazon as a professional seller.

  • Amazon Professional Sellers Account – $39/month. This is required to list your own private label goods online
  • Amazon Sellers Fee – 15% of your revenues
  • Amazon FBA Fee – The cost to have Amazon store and fulfill depends on your product. But as a rough guideline, I would tack on an additional 10-15%

One thing you’ll notice is that the Amazon fees are extremely high. And if you take into account FBA fees, you could be paying Amazon 25-30% of your revenues just to sell on their platform.

As a result, you need to sell high margin goods. If you want to sell private label goods, I would be prepared to invest at least $1000 on initial inventory. You can get by with less, but it’ll be a much slower ramp up.

Revenue Velocity

The main advantage of selling on Amazon is that you will make a significant amount of money much faster than any other ecommerce business model.

They have a large built in audience and especially over the holidays, it seems like whatever you throw up there will sell. In fact, I’ve had several students in my class make 6 figures in less than a year on the platform. Here are a few examples.

Barriers To Entry

The main downside to selling on Amazon is that all sales are transparent to all other sellers.

For example if you use a tool like Jungle Scout, you can find out roughly how much money a certain product made in the last 30 days.

As a result if you sell a popular product on Amazon, it’s only a matter of time until copycats come in and flood the marketplace with similar or identical items.

Amazon is a cut throat platform and you have to be constantly on your toes and monitor your listings.

In addition because you don’t own the channel, Amazon could ban you, change the rules or raise the selling fees at any time.

Here are a few posts that I’ve written on the topic.

Scalability/Portability

Thanks to FBA, Amazon takes care of storing your goods, shipping them to the end customer and handling returns. As a result, selling on Amazon is highly scalable.

You also end up spending less on customer support because Amazon handles the majority of it for you. In fact, the only thing limiting you is your cash flow and your ability to keep Amazon’s warehouses full of goods.

Once you have your product sourcing flow nailed down, the sky is the limit.

Decisions, Decisions

When it comes to starting an online store, there’s more to consider than just how much it costs to start. You also have to consider your end goals and how much you are willing to risk in order make money sooner rather than later.

After running my own online store, selling on Amazon, and helping many others start their own dropshipping stores, I can honestly say that there are pros and cons to each option.

What’s important is understanding what you want out of it, your tolerance for risk, and what you want your end game to be especially if your goal is to improve your lifestyle.

Want To Learn More?

Create  A Profitable Online StoreDid you enjoy this article? If so, there’s more where that came from if you sign up for my full blown course on how to create a profitable online store.

My course offers over 100+ hours of video and includes live office hours where you can ask me questions directly.

If you want to learn everything there is to know about ecommerce, be sure to check it out!

The price goes up on June 30, 2017.

Click here to join my class

photo credit: Anders V GOAL

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38 thoughts on “How Much It Costs To Start An Online Store And Should I Dropship Or Carry Inventory”

  1. Mark says:

    I hate to sound bad but this question kind of bugged me. I mean what do you expect, something for nothing? No wait, some people do expect this.

    You have to invest a little bit to get started, that’s just being realistic. If you don’t have money to put into it, get a job, or a second job and quit buying a few “wants” and put the money into your business to get it going.

    I wouldn’t spend money willy-nilly without any thought of course but with wise spending it wouldn’t cost much to get going as this article points out. If you’re not even willing to go this far, then maybe you really don’t want to work hard enough to make this happen in the first place.

    On the dropship/stock inventory topic, we have always done both. We started with a very small inventory and have built this up over the years with our own branded products, and we continue to dropship where it works for us.

    1. Hey Mark
      These questions sometimes bug me as well but I’ve found that people who are new to starting businesses all tend to have similar fears. And a lot of times, it’s just a matter of providing a little reassurance to nudge them over the edge. Most people have enough money, they just want a sure thing which is never the case.

      BTW, completely agree with your strategy of combining dropshipping with inventory. In a way, it provides the best of both worlds. Stock up on what makes you the most profit and use dropshipping to fill out your shop. THanks for the comment.

      1. Mark says:

        Hi Steve,

        Well you’re a patient and understanding person:) You’re right though, if we all waited for the full guarantee or sure thing, nothing much would get accomplished. Sometimes you just have to take the leap of faith and see where it leads. Ideally without spending a lot of money to find out.

  2. I didn’t know really that much about drop shipping before. Thank you for the comparisons. I like the above idea of using both especially at the start.

    1. Ah, but what kind of inventory? That is the rub. I’ve had a detailed description of how to select a nitch and still don’t have the foggiest of what will get me money fast and long.

  3. Awesome article and site Mark. I have been making money from blogs and ppc traffic for awhile now and am now expanding into an ecommerce store. Your articles have helped me big time! For me Drop-shipping is definitely the way to go.

    1. Mark says:

      I think you mean Steve, he’s written most of what’s here…for me, just few comments but they were no doubt, inspiring:)

  4. Mandy says:

    Thanks for sharing your experiences – I’m in the process of setting up my online business. Some costs I’m facing weren’t addressed in your article – registering my business ($500 + 250 yearly in Illinois), quickbooks accounting software, accountant advising, etc. I guess some of the more legal/dry costs caught me off guard, and I wondered why I don’t see them mentioned often when it comes to starting an online business. Did you just start as a sole proprietorship and use free accounting software? Thanks again for sharing!

    1. Manny says:

      Too many people focus too much on the accounting, logo and legalities of a business upfront then after all that effort they find no one wants their product they have no sales and they give up. They wasted too much time and enrgy on the wrong things at he start.

      Your best to start lean & focus your energies on what matters early on ie the market, competitors, potential traffic, marketing etc Set the company up as basic as you can and forget accounting its not an issue until you actually sell something ! You can get the best accounting package in the world but without sales its a waste of money.

      The hardest part of starting an online store is not the legals and accounting its choosing the right products, knowing how to market, knowing how to structure your website for sales, doing social media, writing for your blog if you plan on doing this.These will make or break your business not accounting or legal.

      1. Oh, Manny, I couldn’t agree with you MORE! I fell into the trap Mandy is obviously in…I wanted to make sure I did things RIGHT and that cost me a lot more money and I’m still not generating revenue.

        I even paid to have my company name trademarked through a fancy-schmancy law firm. Grrr, it makes me crazy to think about it. I did most of the work and found errors they made that cost me additional time and money.

        Great advice I wish I would have had/followed when I started!

    2. @Mandy wow, that is really, really high at $500 + $250 yearly. The thing is you have to have at very least a Tax Resale number to even be considered by real dropshippers and suppliers.

      Don’t give up, have a read below:

      This is the most important thing you need to deal with a Dropshipper and/or Wholesaler to source your products to sale and that is the Resale Tax ID here:
      “Register for applicable business taxes with the Illinois Department of Revenue. All business owners are required to register at tax.illinois.gov/Businesses/register. After registering your business and filling out tax schedules, you will receive a tax ID and a certificate of registration.” – source: http://www.wikihow.com/Set-up-a-Sole-Proprietorship-in-Illinois

      That link is broken an you need to go here: https://mytax.illinois.gov/_/#2
      Click the link to Individuals then Register my business (Form REG-1 for Sole Proprietorship)

      I could not find the cost(s) however which is odd they aren’t showing that up front.

      And agreed with the rest to keep costs down to bare minimum even as you make profit.

  5. Steve, good basic article to get started. That is the main point -Get Started!
    Don’t get bogged down with making it all perfect -all the details. You can
    work on that after you are up and running making some money. Just get going -quit making excuses.

  6. Steve,

    Which drop ship company would you recommend. I am thinking of going with Dropship Design.

  7. Christiane says:

    I have found that carrying inventory is way more expensive on the back end of my business than using a drop shipper. With inventory, I have shipping expenses that include supplies, time and have to do additional inventory accounting at the end of the year, which also takes time and money. With drop shipping, I don’t to worry about shipping costs or supplies. Drop ship fees are expensed on the back end at tax time, making account a lot easier. If something doesn’t sell, I just delete that item from my product mix. I am also able to add newer products quicker to my product mix since my money is not tied up in inventory. So for my jewelry and accessory business, drop shipping works very well. The idea is, you have to find drop ship suppliers that you can trust and quality made products.

    Best Regards,

    Christiane

    1. IntermediateExpert says:

      thank you so much for your input, Christiane. I think I’d go with finding a means to drop ship. I’m in the process of registering a domain for a potential jewelry/accessory website (choosing a name is the hardest I swear). How long was it until you saw any significant or even non-significant revenue from your site?

    2. Angel says:

      Any suggestions on how to find these?

  8. Tiffany says:

    I really appreciate this post, Steve! :) As a new mother and college grad, I wanted to stay at home with my daughter, but I still wanted to work. I went to college for fashion marketing and business and honestly, I wanted to go overseas for grad school, study more, and continue my work in the fashion industry as a stylist/fashion show producer, but life took a turn when I got married and had my daughter so I went with what life gave me (and I love it).

    I currently work as an buyer for an online buying company which is really nice since I can work from home and stay with my daughter, but recently, I’ve gotten an brilliant idea to include what I’ve learned from school and from my CEO into creating my own online company. Essentially, since people know me as a person that can point you into the right direction of finding affordable fashion finds, I wanted to create a platform doing just that. I started a fashion blog for mothers, but I wanted something more straight to the point while still helping people so I went the affiliate marketing route.

    I’ve been comparing templates and I’ve already started creating the website, writing everything down and factoring costs. It’s so true, when you want to start a business you have to invest something. It doesn’t have to be thousands of dollars, but if you want something nice that looks like an legit website to come to, you have to invest something. I was able to learn how to create an website online (in my fashion department in college, we weren’t taught that surprisingly), but with dedicating time and setting some money from my work at home job aside, I was able to get everything up and going. I started with a free website template first from Wix to get my idea going, then searched, gathered several paid themes together that I really liked, and asked fellow co-workers that are moms which website was appealing to them more (since mothers in general are my target group). I would’ve stayed with Wix, but they didn’t have filtering or sorting options and it was a bit complicated than anticipated. I started my website with around $300, no inventory included (my website uses affiliate marketing though opposed to dropshipping) and also I’m able to style people virtually and chat with them when they enter the site. I’ve been coming up with tons of ideas and a lady from my job that has owned an retailer business for 20 years has also helped me learn and gather new ideas.

    I agree that some people have money, but don’t know where to look or simply want all of the answers given to them without dedicating personal time into their business. Starting a business is hard work, but having several key things down is important. Knowing who your target market is definitely important because you can start something fine, but only a handful of people come to look or buy because the products aren’t targeted to them. For me, I’ve been seeing other websites that do what I want to do, search reviews about them, and gather information that I could or shouldn’t learn from them so my site is different, but still informational and engaging.

    Woo! lol I’m done for now and I apologize for the long post, but I wanted to say this is a great article! :) If you work hard and invest some time and money, you can see your dream become an reality. :) I’m 24 years old and although I have a lot to still learn, I am willing to put in the work to see my dream become successful.

  9. Thank you all for giving such a useful handy information.I am in ecommerce industry over a decade now but I still feel I lack in many arenas and when I tumble upon a helping blog like this, I feel rejuvenated and inspired to keep moving towards my goal. I am using both Inventory and dropshipping to get faster to my sale goal…so far so good!
    Good luck to everyone:)

    1. Nga says:

      Hi Hafiz, which one you started with first. Based on experience, which model will be a better approach for starter?

  10. Aitzaz Haider says:

    Hi Steve,

    That is an excellent and helpful article. It gave me a lot of courage to take a step for starting an online store. But there is a question that comes to my mind is that “Are the vendors at (http://www.worldwidebrands.com/) are reliable?” or make it more simple “Is Worldwide Brands reliable?”
    I am a newbie to dropshipping and I would really appreciate your sincere help..
    Thanks and Regards,
    Aitzaz

  11. Oyeyemi says:

    Hi,
    Can you put me through on how to start my online business? Your advice is very important to me on how to start and grow it steady
    I am interested in Online sales Business (Drop-shipping or Hotel-booking business)

  12. I really like this article a lot. It gives me an idea for my business and my life experience. Keep it up guys.

  13. Tyrell says:

    Hi, I’ve been thinking about starting up an online clothing store for quite some time. I’ve even been to a few careers advice meetings to see if they could put me in touch with someone who would be able to give me some guidance. However they thought it was a joke, I guess it’s due to my young age (19). So my question to you is, how do I find someone who is willing to give me some guidance/ build connections?

  14. Hello! I was wondering if you ever recomend drop shipping first as you start your online business then if things go great and you learn your numbers and monitor growth and want to make sure success happens then start keeping inventory rather than spend a bunch on inventory up front in case your online store business fails?

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