What is a Dropshipping Agreement?

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What is a Dropshipping Agreement?

August 18, 2021         openlegal

With the ever growing world of eCommerce there is an increasing number of methods of creating online stores. Dropshipping is a more recent method and is being used by many business owners who are seeking entry into the eCommerce world, but lack the ability to hold stock for potential customers. 

What is Dropshipping?

Dropshipping involves a business model where three main parties are involved:

  1. The seller 
  2. The manufacturer 
  3. The customer

Dropshipping differs from an ordinary eCommerce store as the seller does not have physical possession or interaction with the goods that are purchased by the customers through the online store. 

Rather, the seller and manufacturer come to an agreement whereby the manufacturer ships the products to the customer one an order is made through the seller’s store. 

Prior to starting a dropshipping business, it is essential that you have a dropshipping agreement in place. 

What Should be Included in a Dropshipping Agreement?

There are a number of factors that should be considered when drafting a dropshipping agreement. These are core areas of the agreement and include:

  • Prices
  • Delivery standards 
  • Damaged goods

Prices 

The price of the goods being sold in your store is an important consideration and can be determinative of whether your business succeeds or not. 

The price at which you purchase the goods from your manufacturer must be low enough so as to allow your business to sell it at a premium and make sufficient profit. 

Delivery Standards 

Businesses who engage in selling through the dropshipping method have little control over the supply chain. This is due to the lack of physical possession on behalf of the seller.

Accordingly, it is important that your business includes a term in the dropshipping agreement in relation to shipping, handling and delivery standards. This will ensure that products are shipped to customers in the most efficient manner, with the least possible inconveniences. Doing so will in turn reduce customer grievances and increase customer satisfaction, while also providing a level of protection for your business in the case delivery standards are not met. 

Damaged Goods 

If there is no agreement in place between your business and the manufacturer, dropshipping can be risky. This is especially relevant if the manufacturer does not have a return policy, as it means your business will be liable for replacing defective or damaged products. 

Here, the seller must make sure to use a manufacturer who provides warranty on their goods or has an established returns or exchange policy. Failing to do so may lead to legal issues with customers who have defective products. 

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