Drop shipping is a business structure in which a retailer acts as the middle man between a customer and supplier by transferring orders and shipment details to the latter, which then ships the goods directly to the customer. Around 27% of online retailers have adopted dropshipping due to the extra profit not storing goods themselves allows them to make.
One standard way retailers engage in this practice is buying products en masse from popular website Alibaba and selling on Amazon.
What Is Alibaba?
Alibaba is a global e-commerce platform for businesses that enables sellers to connect with manufacturers and increase their revenue in the process. Many use this as a means to create custom products for their brand, as large quantities of unbranded goods can be cheaply bought from Alibaba.
In contrast to more standardized e-commerce websites such as Amazon, which consumers use to make one-off purchases, Alibaba is an online platform enabling businesses to buy a large amount of products online, normally for individual resale later at a higher markup.
Alibaba provides a bridge between such retailers and different manufacturers of these unbranded products from around the globe so that their products can be secured at extremely low prices.
What To Sell On Amazon
Before even starting to buy from suppliers on Alibaba, the first thing a retailer needs to establish is what products to sell on Amazon. For beginner sellers, it is commonly understood to be optimal to focus on products with high demand yet low competition, as this provides the best chance of competing with incumbent firms in the industry.
When choosing which products will be optimal to focus on, product research is a necessity. This research needs to be undertaken with three caveats borne in mind: profitability, demand, and competition.
To ensure a product will be profitable enough to sell, you must find a method of sourcing it for as far below your decided selling price as possible. A good strategy for new sellers to determine a product’s profitability is to divide the revenue that would be made from its sale into thirds: one third goes towards the product’s cost, another third goes towards the fees Amazon charges and the final third is profit.
With regards to judging whether there is adequate demand for a product, there are a number of questions a new seller can ask themselves. It is important that customers are both actively searching for and buying the product you wish to sell. With confirmation of this demand in your chosen niche, you can confidently invest in the product you are hoping to sell. Alternatively, you could end up in a situation where no one wants to purchase the goods you are trying to sell.
Finally, the demand for a product is necessarily tempered by the level of competition for it. Furthermore, it is meaningless to try and sell a product for which there is evidently sufficient demand but for which the market is already far too saturated. A saturated market means you will be lost amongst the swathes of others selling your product and will be unable to gain the market authority required for profitability.
Do I Need To Be An LLC On Amazon
Limited Liability Companies (or LLCs) are a type of business structure in the US that is able to benefit from the limited liability protection of a corporation as well as the taxation advantages of a sole proprietorship.
They are a straightforward and non-costly means for a business owner to protect their personal assets and lose less on taxes. Sellers on Amazon are advised to form an LLC if there is any risk associated with their business, they could benefit from the increased taxation options, and increased business credibility.
An inherent aspect of LLCs is their limited liability protection. This extends protection to your personal assets (e.g., car, house, bank account) if your business is sued or it defaults on a debt. Amazon sellers in particular will benefit from liability protection because of the risks of personal injuries, property damage and copyright infringement they are constantly exposed to as a result of the nature of their business.
Additionally, since an Amazon business’s ability to sell is based on consumer trust, any means to improve this are directly in their interest. Credibility is the lifeline of any business, and since businesses can gain consumer trust through the mere formation of an LLC. This additional credibility also allows them more leeway when applying for small business loans and grants.
Final Thoughts
On balance, it is in the interest of most sellers to utilize Alibaba in conjunction with Amazon in order to streamline their business and increase their profits. An important question many retailers considering this dropshipping business model might be wondering is do you need an LLC to sell on Amazon.
