Originally, resellers bought goods, displayed them in their shops and sold them directly to consumers at a markup. Today, this process has moved online. As a result, there is a gap between manufacturers or suppliers and consumers. As a result, third parties are bridging this gap and making the process more efficient. One example is drop shipping. This article explores drop shipping agreements and evaluates their risk and other key considerations for small businesses.
What is Drop Shipping?
A drop shipping arrangement is between a seller, such as an e-commerce store owner, and a supplier. Under a drop shipping agreement, the seller and supplier enter into a contract where the supplier, as a third party, actually fulfils the customer’s order. Each time a consumer places an order with the seller, the seller places a mirror order with the supplier, who then fulfils and ships the order directly to the consumer. This reduces the stress on the seller of having to store the stock and arrange for its delivery.
Drop shipping agreements are distinct from marketplace arrangements, where a business acts as a broker between a retailer and a customer. Under a drop shipping arrangement, your business builds customer relationships directly. Generally, the customer is unaware that a third party ships the goods. For this reason, you must have a written agreement that clearly divides obligations and liabilities between yourself and the supplier in case something goes wrong.
Benefits of Drop Shipping
Drop shipping will reduce your storage and warehousing requirements, allowing you to redirect resources to other areas of the business. This may also allow you to increase your product range, as you are not constrained by warehouse limitations.
Drop shipping arrangements will also save you time. This is because you will not wait to receive stock, store it, and then deliver it when you receive an order. Instead, the supplier looks after this.
However, you must ensure the agreement obligates the supplier to inform you of any stock issues. This ensures you are not in a position where you make a sale to a customer only to discover the supplier no longer has the product in stock.
Continue reading this article below the formRisks of Drop Shipping
Drop shipping means you rely on a third party to deliver goods you committed to supplying under a separate contract with your customer. While you can include terms that mitigate your legal and financial liability, a fundamental degree of risks remains using drop agreement. At the very least, your business reputation is on the line.
As a seller, you will be responsible for managing the relationship with the customer. The sale contract is between you and the consumer. This means you owe the customer important obligations under the Australian Consumer Law. If a customer makes a complaint, you must respond and seek to resolve the situation. This includes circumstances that are beyond your control, such as a faulty product or delays in shipping.
You are also responsible for keeping your website and product listings up to date. You must ensure your supplier dispatches the products as they are described on your website. If a customer receives a product that isn’t as described, they will claim against your business rather than the supplier.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Important Considerations
You should record your drop shipping agreement in writing. The agreement should clearly set out the terms of the agreement. Your obligations and rights should be commercially sensible.
Specific key terms to consider include:
- Orders – how will orders be taken and passed onto the supplier?
- Product – as you will not be able to quality check every product before it is delivered, the supplier must provide a warranty that the goods will be as described to you for listing on your website and are free from defects. You may also want to consider having the supplier send you samples before listing a product on your website.
- Packaging – how will your supplier package the products? For example, will they include their own branding with the package? Or will they package the products with your branding or perhaps plain packaging?
- Pricing – consider all the costs involved, including delivery, and how these will be apportioned. Ensure the wholesale price the supplier is offering you is low enough for you to be able to generate a profit and consider who will bear the cost of the customer sending goods back.
- Payment Terms – how and when payment is made – i.e. do you make payment after an order is placed but before the order is shipped?
- Delivery Standards – as you will have limited control over the supply chain process, it is important to include stringent terms around shipping, handling and delivery to ensure customer satisfaction. Discuss any additional fees your supplier may seek to charge you for shipping and handling.
- Returns – discuss whether your supplier will accept returns. You don’t want to be stuck replacing defective products if your supplier does not accept returns!
Key Takeaways
A drop shipping arrangement allows an e-commerce business to deliver products to their customer without having to arrange for storage or picking, packing or shipping of the product on receipt of an order. Having your supplier ship the product directly to the customer when an order is received may make your life easier, but it does pose a number of risks to your business. By having a formal written agreement in place, you can minimise and appropriately apportion your risks and put in place safeguards to protect your reputation.
If you have questions about drop shipping agreements, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A drop shipping agreement is where you enter into a contract with a third party to supply and deliver the product to your customers. However, the customer deals directly with you, allowing you to form customer relationships.
The main benefit is that you are not involved in warehousing the products the third party delivers. This frees up space and saves you money, ensuring you are not stocking less-sellable products.
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