What to Consider Before Starting a Dropshipping eCommerce Business

When you start an eCommerce business, you will need to think about the type of online business model you want. One aspect of this is to think about how you source your product for your customer orders and who supplies it to you. You must have a source of products for your sale process and have room to stock these. One potentially effective online business model is a dropshipping business model. This article will explain the key considerations you should bear in mind to determine if the dropshipping model suits your online site.

What is Dropshipping?

Dropshipping is a legal way to run your eCommerce store. It is a way to sell products online without keeping stock for these products. When your online business makes a sale, you then pass it to another company, which is a third party. They are either a supplier or manufacturer that stock the product and sometimes ship it to the purchaser. Therefore, your online business is in charge of:

• sales;
• marketing; and 
• customer service.

The supplier or manufacturer you use manages the fulfilment of the sale. 

There are various advantages and disadvantages of a dropshipping eCommerce business model. We will explain some of these below. 

Advantages of the Dropshipping Business Model

1. Low Start Up Costs 

As an eCommerce business owner, you must consider the costs of running your business. It is essential that you stick to your commitments, particularly where you have signed a contract for regular costs. It is also crucial for you that you make a good profit. An advantage of dropshipping is that with this type of online business, your startup costs are low. For example, there is no need for:

• retail space; or
• the cost of building up an inventory.

Dropshipping also helps keep your overhead so low that you do not have to worry about the cost of storage space. 

2. Less Personal Liability

A further advantage of dropshipping is that this type of eCommerce business model is low-risk in terms of your personal liability as a business owner. However, you must clarify with the suppliers you use who are legally liable for various stages in the sale. 

These include:

• sales;
• shipping; and
• whilst the customer uses the product.

Therefore, it is a good idea to ask an eCommerce lawyer to create an ironclad contract for you.  

3. Customer Shipping is Not Your Concern

With a dropshipping model, you do not have to worry about arranging customer shipping. This is a further advantage of a dropshipping eCommerce business. It saves you creating more business-to-business contracts and time for disputes where your shipper lets you down. 

4. Low Product Development Costs

A significant advantage of dropshipping for your eCommerce business is that you can develop products for your brand without such huge costs. This can occur if you sign a private label dropshipping agreement with a third party. This company will make a product for your eCommerce brand for you.

Disadvantages of the Dropshipping Business Model

1. Quality Control Concerns

If your online business uses a dropshipping model, you likely will never see the product before you send it. Therefore, you may not have the same confidence in the quality and safety of your goods as other eCommerce models do. However, as an online brand, even if you use a dropshipping model, you still have legal obligations under consumer law for quality and safety. Therefore, you must take out product liability insurance for your drop-shipped products.

2. Possible Illegitimacy of Your Dropshipping Supplier 

In addition, if the dropshipping supplier is not legitimate, they may, for example, sell you fake stock. This could raise intellectual property (IP) issues for you, such as copyright infringement if products are copies of real brands. It would help if you had a robust partnership agreement contract with the supplier.

3. Possibility of Low-Profit Margins

A future potential downside for your dropshipping business is that you may have low-profit margins even though you purchase your dropshipping products at just over the wholesale price and resale at the market value. This is because most of the money coming in goes to the supplier. Although your overheads are relatively low as a dropshipping company, you still need to cover the following:

• marketing;
• advertising;
• website maintenance;
• search engine optimisation (SEO); and
• managing sales.

4. Lack of Control Over the Order Process

Your dropshipping business may experience a lack of control over the order process. If there is a problem with a customer receiving their order, they will approach your online brand. However, you have no control over the shipping, so you must liaise with the dropshipping supplier. This can all take time, and if things go badly, it creates negative publicity for your online brand. 

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Key Takeaways

Dropshipping is one type of eCommerce business model you may decide to choose for your online brand. It includes you using a third-party business to supply the product and arrange shipping to your customer after you make a sale. There are pros and cons to the dropshipping business. This article has explained some of these. For example, with a dropshipping online store, your overhead costs are relatively low, and you do not need to arrange shipping for your sales. However, some cons of dropshipping are the lack of control over the entire purchase process. Also, if the dropshipping supplier is not legitimate, you could face intellectual property issues such as copyright infringement. 

If you need help determining whether the dropshipping business model will suit your eCommerce business, contact our experienced eCommerce lawyers 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 0808 196 8584 or visit our membership page.