The popularity of eBay has inspired many people to start a business. And for those entrepreneurs who don't want to invest in a ton of inventory but still want to set up shop, drop-shipping is a logical solution.

Before you get started, consider these seven steps involved in starting a drop-ship e-business:

Step 1: Choose a product to sell. The very first step in any sales process is deciding what product to sell. Many factors should be considered before you make the decision, but for now, let's say that you've decided to sell CD players on eBay.

Step 2: Locate a supplier who will drop-ship for you. Using a research tool like Google, ThomasRegister.com or an industry-specific resource like The Ultimate eBay Dropship Power Pak, you can search for and find a company that will drop-ship CD players for you. If the company offers you a 35 percent markup over cost, which means that itu will supply the CD players to you for $100 each, then you should be able to retail them for $135 apiece. Make sure the drop-shipper has a good stock of CD players on hand so you don't end up selling a product that must be back-ordered.

Step 3: Set up an account with the drop-shipper. Now it's time to set up a reseller account with the company that will supply the CD players. This can often be done online or by phone, but some companies will require that you complete and return a reseller application to open an account. Some may also require a tax ID and a business license.

Step 4: Advertise the product for sale on eBay. Now that you have your supplier lined up and you know that the product is in stock, it's time to make a sale. That means it's time to advertise the product using an eBay auction. Since you know what you must pay the drop-shipper for the product, you also know what minimum amount you will take for the product. In this case, you could start your auction at $100, since that is your cost. If you are confident that you can get more than $100 for the product, you can start with a lower price, but remember that if the product goes for less than what it costs you to fill the order, you will lose money. Also remember that the drop-shipper will charge shipping, so make sure to figure that into your sale.

Step 5: The product sells. Great news-your CD player has sold for $135, and your customer pays you with a PayPal instant payment. I highly recommend that entrepreneurs use PayPal or some other online processor to accept instant payments. This allows the customer to pay you faster, which lets you place the order with the drop-shipper faster, which gets the product to your customer faster.

Step 6: Place the order with the drop-shipper. Once your customer pays you, you should contact the drop-shipper immediately to order the product on your customer's behalf. The drop-shipper then ships the order to your customer under your company name and address.

Step 7: Follow up after the sale. This is where many new e-business entrepreneurs drop the ball. Just because your customer has paid you and you've placed the order with the drop-shipper, does not mean that you are out of the loop. Quite the contrary: If there are problems with the order, you are the one that will be held responsible in the eyes of your customer.

It's best to be proactive in your customer relations. Follow up with customers to let them know when a specific item has been shipped. Offer yourself as the personal contact for any issues that may arise. This is also a great way to sell customers more products. Invite them to check out your eBay store or Web site, if you have one.

Many people are afraid to use drop-shipping as a method of sales due to the horror stories that fill the Internet about unscrupulous drop-shippers who take the money and don't fill the orders, merchandise that is eternally back-ordered, unscrupulous middlemen posing as drop-shippers and so on. Make no mistake, the drop-shipping industry-like most other industries-does have its share of shady characters who would rob you blind given the chance, but there are also hundreds of honest drop-shippers who can help you build a profitable eBay drop-ship business.

Drop-shipping is a complex topic that can't be completely addressed here. For that reason, I have written a detailed report on drop-shipping called SPECIAL REPORT: eBay Dropship Profitsthat is available to Entrepreneur.com readers as a free download.

Tim W. Knox is the founder and CEO of three successful technology companies: B2Secure Inc., a Web-based hiring management software company; Digital Graphiti Inc., a software development company; and DropshipWholesale.net, an online organization dedicated to helping entrepreneurs launch and prosper from their eBay or online sales business.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.