Drop shipping refers broadly to supply models where you outsource your warehousing needs. This is especially convenient for starting an online business, as there’s no commitment to warehousing or supply costs, only ordering and shipping.
This article outlines how drop shipping works, the different types you can choose from as well as legal considerations to keep in mind.
Understanding Drop Shipping
Typically, you’d expect an online store to manufacture and warehouse their products, but e-retailers operates in one of two ways: direct shipping and drop shipping.
A direct shipping business buys products from a manufacturer or wholesaler and then stores it in their own warehouse. Once a customer places an order, they receive their product directly from the business.
The benefit of direct shipping is that you have control over your products, which means you can ensure everything sent out is up to your standards.
As a drop shipping business, you’re an intermediary between your customers and a manufacturer or wholesaler. Once a customer orders a product from you, that order is sent to a third-party who stores and delivers the product to the customer.
This hands-off model means you can outsource your inventory management costs and purchase products as orders come in, therefore reducing the risk of unsold inventory.
The cost reduction of drop shipping makes it highly accessible, but the saved cost doesn’t generally translate to profit. Because you lack ownership over the products, it can be difficult to show you offer enough value for higher margins.
Types of Drop Shipping
Drop shipping has several forms, meaning you can choose a type based on your preferences. The first two types are hybrid models that give you differing degrees of control over your supply, while the latter two are exclusively hands-off drop shipping.
Businesses can partner with each other to handle separate functions of a business. This results in a relationship where another business can store and deliver your products, but your involvement in the process is dependent on your agreement.
2. Third-Party Fulfilment
You can outsource the supply side of your business while retaining oversight in a fulfilment model. Third-parties store and ship your products, but you’re able to sync inventories and have a level of collaboration with them.
Print-on-Demand means you design your product and another company then manufactures and supplies it. This model is common in retail and merchandise, involving creating a design that gets ‘printed’ onto a manufacturers clothing before they supply it
Limited Time Offer
A variation of print-on-demand, a limited time offer sells an exclusive product for a certain time, putting pressure on a customer to purchase a product before it’s no longer sold and they lose out on their chance to buy it.
When the offer ends, the number of products sold is sent to a third-party who manufactures and delivers the exact amount of products. This can be very effective and prevents unsold inventory, but has long delivery times. A customer has to wait for the offer to end and the product to be made and delivered before they get it.
4. Product Reselling
Typically, reselling involves purchasing already existing products to sell to a customer, possibly with your logo or brand on the product. You simply provide the platform for a customer to purchase a product and then the order is sent to a supplier who handles the rest.
In this model, you’re essentially an intermediary for a customer to purchase someone else’s products. However, there is some room for customisation in this area.
One one hand, you can form your add your own unique value to resold products by bundling them as a collection or value-pack, which allows you to take advantage of bulk purchasing. On the other hand, you can offer value in the form of curation, where you resell ‘hand-picked’ or recommended products.
Which Should I Pick?
This is dependent on your business needs and your priority. Some considerations you should take into account are:
- if it’s feasible to manage your own supply;
- whether the details, such as the design of the packaging or the quality of the product, are of high importance; and
- how much you trust your third-party supplier.
Essential Legal Knowledge
You need to register before commencing any business activities. Lawpath makes registration simple and easy.
Once you’ve registered your business and applied for an ABN – as well as a license depending on your business’ product or service – you’ll need to factor in how certain issues may impact a drop shipping business’ legality.
GST Registration Requirements
Drop shipping sales will count towards determining your GST in Australia.
Our article – Importing Low Value Goods: How Will New GST Rules Affect You? – discusses this in more detail.
Ultimately, you are responsible for your products even in a drop shipping model. In the case of ACCC v Ozdirect, Ozdirect had a contract with their supplier that would stop shipments if Ozdirect exceeded their credit limit.
Ozdirect contravened the Trade Practices Act (shortly afterwards becoming the Competition and Consumer Act). Thus, you need to be aware of potential laws drop shipping can violate.
- the product must not be different from what consumers see on your website;
- products must be delivered to customers within a reasonable time;
- showing a product as ‘in stock’ can have ramifications if the supplier runs out;
- if your supplier is outside of Australia, consumers will need to know which laws might apply to their purchase;
- suppliers can have restrictions in place, such as what products can or can’t be returned. Consumers need to be aware of these restrictions.
Knowing your rights and risks in a contract agreement can prevent these issues. Seek a lawyer for advice.
The Commerce (Trade Descriptions) Act requires labelling of certain imported goods. These are generally:
- kitchenware or utensils;
- textiles and clothing;
- electrical appliances;
- tobacco products;
- sanitary goods; and
- certain prepacked goods.
Drop shipping should be looked at when starting an online business since it offers cost-reducing and low maintenance potential. A drop shipping model has negatives too, such as lower margins or a lack of control.
That doesn’t mean you lose total control, drop shipping can be used in hybrid models and adapted to different businesses and industries. However, you need to be aware of the potential legal issues that may arise.
Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.