Interested in dropshipping, but unsure as to whether it is legal? Dropshipping is perfectly legal. These are the exact steps successful dropshippers have taken to legally start a dropshipping business.
It is perfectly reasonable for people to be sceptical of dropshipping. It is, after all, still a relatively new business model which is often misunderstood. This article will explore whether dropshipping is legal and state the steps any entrepreneur should take to start dropshipping.
However, before answering these questions, to ensure we start on common ground, it is important to understand what dropshipping is, as a business model.
Dropshipping is a model of e-commerce, which allows a retailer to sell a product to a customer without holding any of it as inventory. In this model, the dropshipper does not handle or even see the products sold to the customer.
Dropshipping is easier to understand if we break it down into a series of stages:
First, the customer purchases a product from the seller online at the retail price
The seller (the 'dropshipper') then places an order for this product from a third-party supplier paying the wholesale price (which is lower than the retail price)
The third-party supplier ships the product directly to the customer
The dropshipper keeps the difference between the retail and wholesale price, which becomes the dropshipper’s profit margin.
What attracts many to the dropshipping model is the minimal investment to start-up and the low overheads. Unlike traditional brick and mortar retail stores, dropshippers do not need to make massive outlays on large containers of product or pay large sums in rent for warehouses to store inventory.
These features – the low start-up capital and low overheads - have led dropshipping to gain a reputation for being an ‘easy money’ ‘get rich quick’ scheme. Naturally, as with most ‘get rich quick schemes’, people have been sceptical and distrustful of dropshipping. More specifically, many wonder: Is dropshipping legal?
Yes, dropshipping is perfectly legal. There is no law stating it is illegal or banned. Of course, using the dropshipping model, you may do illegal things (which we will cover below) – but the model on its own is legal. It is a perfectly legitimate and recognised model of business.
To start a dropshipping business, follow these four steps:
Find a niche to create your store in
Find a product within that niche to sell
Find a supplier for your product
Create your online dropshipping store
Obtain a business license
Most successful dropshippers target a small and specific section of a market, a 'niche' market, rather than the large mass market. Focusing on a smaller niche market allows dropshippers to tailor their message and branding very directly towards this smaller group of people. This is often more effective at generating sales for dropshippers than trying to create a message and brand to suit a large mass market and the varied tastes and preferences of people in such a market. Hence, we recommend that the first step you should take is to identify a niche you would like to target and create your store in.
Finding the right niche and selecting a suitable product will often make or break your chances of success at dropshipping. When selecting a niche, we recommend you do two things:
Picking a niche, you are passionate about will likely mean you will have a more in-depth knowledge of it, which will allow you to easily identify which products will and will not sell. Your in-depth knowledge will hopefully reflect in your successful marketing of the product, which will be more informed and effective compared to your competitors.
Dropshipping is ultimately a business. As such, to give yourself the chance to create a sustainable, profitable business, you should ensure there is sufficient demand for products in the niche you have selected.
A useful indicator to determine whether a niche is profitable is to type in the name of your niche into Google Trends. Google Trends measures the volume of people who search for a particular query over a period of time. If people consistently search for your niche, products within it are likely in ‘high demand’.
Some popular niches in which stores consistently perform well include fitness, pets, beauty, fishing, furniture, electronics.
Next, you will need to pick a product to sell within the niche you have selected. To select a product, we recommend creating a list of products within your niche that fulfil the following criteria:
Let’s go into some more depth for each element of this criteria.
As mentioned above with respect to determining whether a niche is profitable, a useful indicator to determine whether a product is in demand is to type in your product name into Google Trends. If people consistently search for your product, it is likely ‘in demand’.
Other ways to determine whether a product is in demand is to look at industry reports and to look at what products your competitors, who are dropshipping within your niche, are selling.
Products that are not readily available at traditional brick-and-mortar stores suit the dropshipping model better than those that are readily available at physical stores. This is because customers are less likely to buy such products online if readily available at a physical store.
You should ensure the product is profitable. Here we mean ‘profitable’ in a slightly different sense. We mean ‘profitable’ in the sense that you should ensure that your product has a high perceived value. Ensure your product has a high enough perceived value such that you feel comfortable being able to sell it after adding a large enough profit margin to cover your costs. This is critical to ensure your business can become profitable.
Here, we feel it is worth covering two categories of product which you should not Dropship:
Dropshippers, like physical retail stores, must comply with laws governing controlled and prohibited products.
Controlled products are products which can be legally sold but require a license to do so. Governments require businesses selling these products to have a license to not only ensure such products are safe to use or consume, but also to promote a safe, healthy environment for their communities in general. Common examples of ‘controlled products’ include alcohol, tobacco and pharmaceutical products.
Prohibited products are products the sale of which is completely forbidden. Common examples of prohibited products include drugs and weapons.
Products that are prohibited or controlled vary by country. Therefore, as a dropshipper you should thoroughly research any products you intend to sell to ensure you can legally sell them.
Dropshippers should also ensure their products do not breach the intellectual property rights of other businesses. The most common intellectual property rights that dropshippers sell products in breach of are copyright and trademarks.
Both copyright and trademarks are very similar in protecting businesses from having their intellectual property copied by others. They differ in what intellectual property they protect. They primarily differ based on what they protect: Copyright generally protects creative work that is artistic or literary. Trademarks specifically protect against distinctive symbols, words and designs which denote that a product comes from a particular source from being copied.
Products that are often sold by dropshippers that breach copyright or trademarks are products which feature logos of sports teams, pictures of celebrities or pictures of famous cartoon characters.
After finding a product you would like to sell, you should find a supplier for this product. Most dropshippers find a supplier online using a supplier directory. Popular supplier directories include:
As the model suggests, dropshippers are heavily reliant on their suppliers. They rely upon suppliers to keep the product being sold in stock, to maintain product quality, and most importantly to ensure products are duly shipped to customers. Therefore, dropshippers who wants to give themselves a realistic chance at creating a successful dropshipping business should conduct rigorous due diligence on their potential suppliers.
These are some of the sorts of things you should know about your supplier before you decide whether they are worth partnering with:
This is important because some suppliers only sell their products in bulk and will not sell products individually, the latter of which dropshipping relies on.
The longer a supplier has been operating, the greater the level of quality and professionalism you can expect, generally speaking.
You should use any reviews or ratings to assess whether they are adequately reliable for your dropshipping business.
This is probably the most important part of the due diligence process. Ordering a sample is important because you can witness the customer experience first-hand. Make sure to assess every aspect of the experience – How long did delivery take? Is the product quality good? Is the product packaging strong and does it match your branding?
Unfortunately, even after conducting thorough due diligence, dropshippers remain exposed to numerous risks in dealing with their suppliers. Some of the most common issues include:
Suppliers delivering faulty goods to your customers
Suppliers, recognising the success of your brand, copying and selling the products with your branding to other people
Suppliers shipping products to the wrong address
These problems not only have the potential to result in additional costs to re-ship products to customers but can leave customers feeling frustrated causing long term damage to your brand.
Dropshippers can, however, mitigate these risks by entering into a Dropshipping Agreement with their suppliers. A Dropshipping Agreement is a written repository outlining the dropshipper’s (your) relationship with their supplier.
It protects the dropshipper as it outlines the responsibilities of the supplier if they make a mistake or do something wrong. For example, if they send a faulty product to a customer or send the product to the wrong address, the Dropshipping Agreement may require the supplier to send a replacement product.
A Dropshipping Agreement is an important source of protection for suppliers too. Amongst other things it outlines when payment is due and what rights the supplier has if the dropshipper decides not to pay the supplier for amounts due.
By clearly establishing what obligations you have as the dropshipper or supplier and what rights you are entitled to should things go wrong, the likelihood of amicably resolving any dispute is increased dramatically. This is because, should any dispute arise, having a drop shipping agreement, will allow you both refer to it and allow you to meet on common ground.
DocPro offers three different templates of Dropshipping Agreements which we recommend you use to adequately protect yourself.
Firstly, DocPro offers a neutral Dropshipping Agreement. This Agreement is drafted in neutral form, meaning it equally favours the dropshipper and supplier. You can find this version here: https://docpro.com/doc1782/dropshipping-agreement-neutral
Secondly, DocPro offers a Dropshipping Agreement favouring the dropshipper. As compared with the neutral Dropshipping Agreement, this agreement features a more favourable return policy and payment terms for the dropshipper. Amongst other things, it also gives the dropshipper greater rights should the supplier deliver products which are not good quality. You can find this version here: https://docpro.com/doc1784/dropshipping-agreement-drop-shipping-vendor
Thirdly, DocPro offers a Dropshipping Agreement favouring the supplier. This version features a stricter return policy and payment terms as compared to the neutral Dropshipping Agreement. Amongst other things, it also gives the dropshipper fewer rights should the supplier deliver faulty products. You can find this version here: https://docpro.com/doc1783/dropshipping-agreement-drop-shipping-supplier
The next step in establishing your dropshipping business is to create your online store. Common platforms used to create online stores include Shopify and Wordpress. At this stage, you can really let your creativity take charge in bringing to life the brand that you envision.
When creating your website, make sure to include these three key documents on three separate pages:
Countries worldwide have enacted laws to ensure that businesses who collect data from their customers use this data responsibly. As part of ensuring such responsible use, many countries have enacted laws imposing an obligation on businesses to clearly inform users as to what data is being collected from them and how it will be used.
Generally speaking, there is no legal requirement for dropshippers to have a refund policy on their website. Nonetheless, having a refund policy is a good idea for a couple of reasons.
Firstly, having a refund policy is a good idea for your brand as it creates a sense of security for the customer. Refund policies serve effectively as a guarantee for the customer from the dropshipper that the product they are buying will be exactly as it is portrayed to be online. If it is not as portrayed online, the customer can return it and get their money back.
Secondly, by including a refund policy on your online store, customers will be informed about their rights and entitlements should a product be faulty or otherwise not meet their expectations. Should a dissatisfied customer demand a refund, by pointing to the terms of your refund policy you will both hopefully be able to reach a mutual understanding of the customer’s entitlements from which you can likely amicably resolve the issue without it escalating any further.
If you don’t have a refund policy, you will likely be unable to reach this mutual understanding of the customer’s entitlements. Left with no other choice, in such instances customers often open disputes with payment providers - such as PayPal - complaining that the product as delivered doesn’t match how it was represented online. This is a lose-lose situation for you the dropshipper: even if the customer fails to get their money back from PayPal, your brand and its credibility will suffer.
DocPro offers a template refund policy which we recommend you use. You can find it here: https://docpro.com/doc110/refund-policy-website-app
The Terms and Conditions page is a page which outlines the rights and obligations of users of a website. It effectively serves as a contract between the user and you (the dropshipper), outlining rules for the usage of the website.
Despite not being legally required, having terms and conditions on your website is an important precaution to lessen exposure to legal risk for your business. Common terms you should include which protect your business include:
These terms limit the responsibility of the dropshipper (the site owner) if a user uses your dropshipping website and suffers some loss as a result.
These terms ensure that all content on the website, including logos, text and images are the intellectual property of dropshipper (the site owner).
These terms state that the prices for goods as stated on the website are accurate but can be changed without notifying the customer until the customer orders the product.
DocPro offers a template, including all of these terms, which you can use to draft the terms and conditions for your website. You can find it here: https://docpro.com/doc97/terms-and-conditions-of-service-website-mobile-app-user-agreement.
Whilst obtaining a business license is not necessary to start a dropshipping business, we believe it can be beneficial to your business for three reasons. Firstly, because it can reduce your personal liability if something goes wrong. Secondly, for tax reasons. Thirdly, for reasons of legitimacy.
Firstly, obtaining a business license can be beneficial as it can limit liability. Dropshippers are heavily reliant upon their suppliers to ensure products are of satisfactory quality. Unfortunately, it is very common for suppliers to send faulty products to customers. In the event that a disgruntled customer sues you for selling them faulty product, you will want to ensure that your personal assets such as your house and car are safe from being taken away from you as part of the legal dispute. Certain types of business structures – such as companies – can offer this very protection!
Secondly, registering as a business can be beneficial for tax reasons. Depending on your jurisdiction, registering as a business may allow you to benefit from more favourable tax rates.
Finally, obtaining a business license can help create a sense of legitimacy for your business. Having a business license often indicates professionalism and trustworthiness – critical if you seek to become real partners with your supplier. Furthermore, displaying your business license on your website will help you appear as trustworthy in the eyes of customers – increasing your sales.
For more information on the different types of business structures you could consider registering as, and the pros and cons of each, check out this article: https://docpro.com/blog/which-business-structure-should-i-use-for-my-company-free-templates.
Disclaimer: Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.
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