Dropshipping is an ideal sales model for small, emerging online stores, but it has its uses for others too. It allows you to extend the assortment of a shop which already has its own goods, or to open your own marketplace with multi-brand products. The versatility of dropshipping allows you to achieve significant benefits: You don’t need big warehouses or large numbers of employees to manage the distribution of goods to customers. What you need is just an idea, a website and some well-written agreements.
What is dropshipping?
Dropshipping is a form of selling goods through an online store or other marketplace. The store doesn’t have the goods at its disposal, so it doesn’t store them. In the presented model, the online store cooperates with a so-called “big shop” (a distributor, a wholesaler) which delivers the offered products to the final customer. Dropshipping can be qualified as a business in the field of e-commerce, which is one of the most dynamically developing trade sectors in the world.
One of the biggest advantages of dropshipping is that it minimizes the costs of logistics and delivery to you, and shifts the burden (although usually not the responsibility) to the distributor. It also saves time, and customers have a wider choice of assortment than in a standard online store. Additionally, you do not need to freeze financial capital by buying a large quantity of goods.
Two specific types of dropshipping can be distinguished based on how the agreement between the online store and the distributor or supplier is drawn up:
- direct sales;
- and sales agency.
As these two types of agreements are quite different, it is worth considering which one is best suited to your situation.
Dropshipping – quick sales
The first model is based on so-called fast sales directly through the store.
The model includes different stages of sales:
- the online store receives information about the customer’s intention to purchase goods or to conclude an agreement obliging to sell the goods;
- the online store then purchases goods from the distributor;
- the goods are sold to the customer via the online store;
- finally, the distributor organises the delivery of goods to the customer.
In short, the whole logistics procedure related to the packaging and shipment of goods or services is not your responsibility. Your role is to accept the order and the payment and to settle with the distributor.
In this model of dropshipping, it is necessary to precisely regulate the issue of cooperation with the distributor. You, as the online store, will be held liable for matters like the warranty, compensation for damages or defects in the goods. Therefore, any agreement between you and the distributor should include provisions dividing this responsibility between the two of you. It is also worth protecting yourself in case of possible returns: remember that the customer has 14 days to withdraw from an agreement concluded remotely.
It should be kept in mind that the distributor only acts as a subcontractor in this model, and the online store cannot contractually exclude liability for the actions of subcontractors – therefore, you cannot avoid liability to the consumer for the correctness of the delivery.
In this case, you may be liable, for example, for non-performance or improper performance of the agreement.
Dropshipping – sales agency
The second model is that of a sales agency. The main difference between this model and the one described above is that you do not buy the product from the distributor – your online store is exclusively used here as an agent.
The presented model consists of several stages:
- the online store collects customer orders;
- it informs the customer about the terms regarding the delivery of goods (e.g. through Terms and Conditions);
- the order is finally executed by the distributor (with the possible help of an online store).
The scope of duties, liability and mutual obligations between the online store and the distributor in this model must result from an agreement concluded between them.
The method of communication, shipment of goods, rules of the distributor’s participation in the return of goods or withdrawal from the agreement must be precisely defined. The pictures or descriptions of goods from the distributor used on the store’s website are also an important issue. These matters also need to be clarified in the agreement.
Transfer of the customer’s personal data is another crucial aspect. When establishing the procedures for the processing of personal data, the applicable data protection provisions (the General Data Protection Regulation (GDPR)) must be taken into account.
As the online store, you only offer the service of a sales agency –it is the distributor who is responsible for warranty issues or liability for defects.
According to the guidelines of the Office of Competition and Consumer Protection, the sales agent (you) must clearly inform the customer with whom the agreement is concluded, as well as the cost of the service and the sales agency. The obligation for providing this information is derived directly from the Consumer Rights Act.
This model can only be used if the online store does not purchase goods and does not invoice them. It is prohibited to mislead the customer as to the form of the agreement and the entity selling the goods.
It is worth noting that although the agreement you conclude with the customer is not regulated in the Civil Code, it contains features of many named contracts, i.e. those included in the Code. It is important to keep in mind the exclusions of certain provisions in the agreement with consumers.
As it is specified in the Civil Code and the Consumer Rights Act, it is not possible exclude or limit the liability for defects in goods or liability under warranty. As the seller, you are also responsible for non-conformity of the goods with the agreement.
In consumer contracts, the price shown on the website cannot be suddenly increased. It can only be lowered, e.g. with a promotional code.
It is also worth noting that practices violating the collective interests of consumers are punishable by up to 10% of the store’s revenues for the previous financial year.
Terms and Conditions for the consumer and a contract for the supplier
As mentioned above, you must draw up and conclude appropriate terms and conditions for customers who buy products in your store. You also have to draw up an agreement with the supplier, which will regulate the entire scope of cooperation with the entity with which you act as a sales agent.
Among other things, the Terms and Conditions should take into account the following provisions:
- those of the Civil Code and those regarding prohibited clauses;
- those of the Act on the Provision of Services by Electronic Means;
- those of the Consumer Rights Act;
- those of the Personal Data Protection Act and the General Data Protection Regulation (GDPR).
On the other hand, a cooperation agreement with the supplier should regulate issues such as:
- principles of cooperation, rights and obligations of the supplier and the store;
- principles of cooperation regarding logistics and deliveries;
- principles concerning the supplier’s performance of obligations arising from consumer rights;
- issues of recovery and implementation of the agreement against other parties;
- maintaining confidentiality regarding the principles of cooperation.
As you can see, these documents regulate only basic issues. However, due to the expectations of the two parties to the agreement, they are nevertheless required. Keep in mind that the agreement is drawn up for time of war, not peace.
Although dropshipping has many advantages, like any other business, it also has its drawbacks. For example, when ordering a distributor to send the shipment, you add another point on the route of the goods ordered by the customer; this can significantly extend the waiting period, and can cause other potential issues along the way. It is worth thinking about including appropriate contractual regulations that will reduce this risk and protect you from customer dissatisfaction and any ensuing crisis on social media.
Generally speaking, dropshipping seems to be a very simple solution, similar to that employed by typical shops buying from wholesalers. However, in certain situations, it is advisable to find a lawyer with whom to consult the planned business model and conclude any agreement – particularly with regard to the provisions of the Civil Code, the Consumer Rights Act and the GDPR.
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