Dropshipping is the concept of selling products online without owning a physical inventory. Instead, as a merchant you are the intermediate link between the (dropship) supplier and the customer. If a customer decides to buy a product from your online shop, you place an order at your supplier, who then ships the product directly to your customer. Dropshipping sounds appealing, but it comes with some misunderstandings.
How does dropshipping work?
Setting up a dropshipping business is relatively easy. You basically set up an online shop, in which you sell products. But you don't store or make those products yourself: you're an intermediary between the customer and the supplier.
The greatest advantage of owning a dropshipping business is not having to deal with a physical inventory. When you own a dropshipping business, all the products you sell in your online shop come from a (dropship) supplier, either a manufacturer or a wholesaler. This means you do not have to deal with storage costs. Other advantages of dropshipping are:
- No procurement risk. You only pay your (dropship) supplier when you have sold a product to your customer. Your selling price consists of the cost price, order processing costs and shipping costs, plus your profit margin.
- You do not need to hire staff for packing and shipping the orders. Your supplier does this for you.
- You can easily expand your assortment, since you are not bound to an expensive inventory. You also do not have to deal with overstock.
Points of attention for dropshipping
If you own a dropshipping business, you are responsible for solving problems that may occur with the shipment of the products. It could happen that, due to a fault of your supplier, the order does not end up with the customer or the order is damaged. This could harm your reputation. Therefore, always make clear agreements with your dropship supplier about the warranty, the order return, the shipping time and the availability of the stock. Be aware that dropship suppliers often have multiple agreements with other online shops. This means more competition. As a result, competing online shops may decide to offer the same products with very low selling prices in exchange for lower product margins.
Working with international dropshipping suppliers
Collaborating with international suppliers is also common. International dropshipping comes with possible obstacles, such as additional delivery time, higher shipping costs, agreements regarding order returns and customs formalities with shipments outside the EU. It is important to find out if international dropshipping is commercially viable for you and your products.
Is your dropship supplier located outside the EU? If so, the party importing the product will have to pay import duty and VAT. Most likely, your Dutch customer is not aware of having to pay customs clearance costs to the party making the delivery, having bought the product from a Dutch online shop. It is therefore important to make clear agreements with your international supplier about the transport, customs clearance costs and the attached documents. Also, shipping times vary when dealing with international suppliers. If the supplier is located in Germany, this will not be a problem, but if the supplier is located in China, it could take 2 to 3 weeks for your customer to receive their order. Transparency towards your customers about the shipping time can prevent complaints. Clarity about procedures prevents unpleasant surprises.
Make sure you know which VAT rules apply to the products you sell. There are different scenarios applicable when it comes to VAT in international dropshipping, especially if you are dealing with suppliers and/or customers outside the EU. Many suppliers outside the EU include import VAT in their selling price, so that the customer does not have to deal with unexpected costs. Usually, you have to register for VAT in the country of the costumer. VAT and import duties depend on the country of arrival, what the applicable rules are in this country (e.g. exemption of import taxes for shipments with a limited value or import prohibitions of certain products), which ICC Incoterm® is agreed on and who the actual importer of the product is: the supplier, the webshop or the consumer. You can seek advice from the Dutch Tax and Customs Administration to find out which VAT rules apply to your shipments.