In today’s post, we will be examining the pros and cons of Amazon FBA vs dropshipping.
The ecommerce model has been around for a long time now and has more than proved itself to be a hugely profitable strategy for many kitchen table entrepreneurs.
Gone are the days though when any successful ecommerce entrepreneur would find himself sometimes awkwardly standing in line at the post office for hours on end, enduring the tutting and eye-rolling from the queue building up behind him! The same queue that eventually snaked right out of the door into the street, full of huffing and puffing customers growing more irritated by the minute with the delays due to one customer taking 20 minutes to get all his parcels stamped!
For the original ecommerce brigade, this was standard. Then along came the concept of dropshipping, which was hailed as the answer to every ecommerce sellers’ prayers, closely followed by the launch of Amazon FBA.
Both Amazon FBA and dropshipping were business model game-changers, and both strategies have now become the most popular, considered options for new start-ups. But how do you know which approach is right for you and your ecommerce business? You need to be equipped with the answers to several essential questions so that you can make an informed decision and ensure your business is successful and profitable.
If you are thinking of starting an ecommerce business but are confused as to which route you should take. If you are seeking to expand your current enterprise, when it comes to Amazon FBA vs dropshipping, you’ll find all the answers here to make an informed decision as you take the next step.
What is Dropshipping?
First, let’s talk about the dropshipping concept. This is basically a storage and fulfilment service which allows small businesses to start up quickly and easily. Importantly, the dropshipping model doesn’t require you to invest massive amounts of money upfront.
You’ll simply advertise products through your Shopify store, the Amazon marketplace, eBay or other suitable sales platform and sell specific products which are stored with separate suppliers in locations elsewhere. When you sell a product and take an order from a customer, you’ll contact your dropship supplier, and they will ship the order to your customer for you. The customer will think the order was dispatched directly from you and so will be none the wiser. You’ll only ever place orders with your dropshipper to meet the requests from your customers, so you only pay for the product once you get paid. It really is that simple.
Unfortunately, dropshipping has had some bad press in the past, but this is because it has been touted by some as a ‘quick way to make easy money’ and you can understand why when you consider how it works. Like any business model, there is, of course, work involved. Appropriately implemented and with the right suppliers on board though, dropshipping is a perfectly viable option.
Related: Dropshipping on Amazon
What is Amazon FBA?
Amazon is an ecommerce platform where you can list and sell your products, and either dispatch them yourself or use the highly popular FBA service. FBA stands for Fulfilment By Amazon, and it is a straightforward process.
As a seller, you send your inventory to one of Amazon’s warehouses, list your products on the main Amazon site and then for every sale you make, the order is picked, packed and shipped by Amazon directly from their warehouse. They will also deal with your customer service and returns, so like dropshipping, it’s a hands-off approach when it comes to the storage and dispatch of your orders.
Related: How Does FBA Work
Amazon FBA vs Dropshipping: What’s the Difference?
Judging by these descriptions, the two concepts of Amazon FBA and dropshipping sound very similar, don’t they? And they are to a point as they are both remote ways of ensuring an efficient and reliable service for your customers.
When you use a dropshipper, they are essentially the middleman between you (the retailer) and your customers. It is your responsibility to process the orders, handle the payments, answer related queries from customers and deal with any refunds and returns.
You will have nothing to do with the storage of your products or the packing and shipping of your orders. This means though that you will never own your products as such because they belong to your dropshipper until the order is placed and then they belong to your customer once dispatched! You will never actually handle the product yourself – unless, of course, you need to deal with a return.
You’ll get all these benefits with Amazon FBA too, but in addition, they will deal with your returns, refunds and all your customer service. Although you won’t handle the products when it comes to orders and dispatch, you will be responsible for sourcing and initially shipping the product to one of Amazon’s fulfilment warehouses.
So far it appears that there are very few differences between dropshipping and Amazon FBA, so let’s look at the pros and cons of Amazon FBA vs dropshipping as this is where some significant differences come into play.
The Pros and Cons of Amazon FBA vs Dropshipping
Amazon FBA Pros
- It’s a time-saving service so you can focus on growing your business
- There are no administration tasks for you to do
- It’s easy to establish a brand
- You’ll get instant access to Amazon’s global audience
- Customer service is built-in
- You’ll have access to an easy refund and returns service
- Far more significant profits are possible
- There is no customer contact required
- You won’t need to build a website
In a nutshell: Amazon FBA will allow you to focus on growing your business and brand while targeting a worldwide audience which is right at your fingertips. You won’t need to build a website as you can piggy-back off Amazon’s platform and positive reputation.
Using FBA enables you to take a totally hands-off approach not only with the storage and fulfilment of your products but also your customer service tasks, freeing you up to concentrate on making money. Even with FBA fees, decent profits are achievable.
Amazon FBA Cons
- You’ll need to factor in FBA storage and shipping fees, payable on every sale
- You must adhere to Amazon FBA’s strict rules and regulations
- Amazon is a highly saturated platform and FBA product competition is fierce
- A large amount of capital is required for initial start-ups
- You are reliant on just one platform for your sales
- All customers ultimately belong to Amazon
In a nutshell: Amazon’s FBA fees, while pretty reasonable bearing in mind that you reach a ready-made audience and can automate your entire storage, picking, packing and dispatch process along with your customer service, can eat into your profits quite dramatically. You’ll require a decent amount of capital to purchase stock upfront to send to Amazon FBA too. Amazon is a highly saturated platform with demand for FBA high, so if you source the wrong product, you may end up being unable to sell it or switch products easily. It will also be harder for you to build an email list as customers belong to Amazon, not you.
- No upfront investment in products is required
- There is a lower risk as no capital needs to be invested
- There are plenty of product options available
- It’s a time-saving service as your storage and shipping are dealt with
- You can run your ecommerce business from anywhere
- You’ll have the ability to build a customer list and rapport over time
In a nutshell: Dropshipping allows you to sell products without having to risk any capital upfront, which is why it’s a popular strategy. Should you pick the wrong product to sell, you can quickly discontinue your listing and switch to a different product without having to worry about unsaleable stock.
It’s a business that can be run from anywhere as your only tasks are to ensure you keep on top of your inventory and make sure orders are sent through to your dropshipper for fulfilment. What’s more, you’ll be able to start building a list of customers which you can upsell to in the future. Using a dropshipper enables you to take a hands-off approach with minimal risk.
- Profit margins will be small
- You may receive inadequate product information from suppliers
- You cannot offer deals or discounts
- You’ll be unable to negotiate on your supplier’s product pricing
- There is no option to build a brand
- You’ll encounter huge competition on products
- Direct customer contact is required
- You may meet potential restrictions on where you can sell your products
- A website will need to be built
In a nutshell: Dropshipping is a risk-free alternative to Amazon FBA if you do not have any capital. However, you will rely on product info from your supplier, which may be inadequate meaning you may need to do further research to ensure you have the correct details and can advertise the product correctly.
As your product prices are led by your dropshipper, and you will not be purchasing in bulk, you don’t have the advantage of being able to negotiate on the stock. Your profit margins are likely to be small, leaving no room for you to offer exclusive deals or discounts to your customers. Competition may be high, and you will need to have some contact with customers when it comes to returns, refunds and enquiries, so it’s not a totally ‘hands-off’ approach.
Which is Right for my Business: Amazon FBA vs Dropshipping
Well, there are distinct advantages and disadvantages, pros and cons to both options as you have seen. Dropshipping and Amazon FBA are very similar but choosing one over the other doesn’t mean it is going to be an easy path as either option will always require effort and attention from you.
You should consider your business and your individual situation. If you are just starting your ecommerce business, dropshipping offers a very low-risk model with no need for an initial investment. This is obviously highly appealing if you are lacking in available funds, and you’ll find plenty of platforms where you can promote your chosen products, including Shopify for a low-risk and low investment start-up. Setting up a dropshipping account and doing business this way is relatively simple.
So, if you are not a risk-taker and want to sample an ecommerce opportunity, then dropshipping could be the right choice for you.
If you have capital to invest and are more open to taking a risk, then Amazon FBA and the considerable leverage you’ll get through Amazon’s existing audience is a massive plus. Amazon FBA does require a decent amount of investment which of course does not guarantee success but is a suitable option if you are already running an ecommerce business and want to scale further. The nature of Amazon FBA will allow you to concentrate on marketing your business and products.
That said, neither option will give you full control over every aspect of your business venture. You will be at the mercy of Amazon FBA’s rules and regulations and with dropshipping, tiny profit margins.
It’s not an easy decision. But choosing between Amazon FBA vs dropshipping will ultimately come down to how much investment you can make and how much risk you are prepared to take. So, ask yourself this:
Do you want to invest your money in stock that may sell – or may not – but be in control of building a brand with the opportunity to achieve decent profits with the right product?
Do you want to sell someone else’s inventory with little to no risk but potentially make less profit with these highly competitive products?
Your answer to these questions will determine which route you should take when making a choice between Amazon FBA vs dropshipping. Whichever you choose, you must treat it as a serious business, because Amazon FBA and the dropshipping model both take work, not only to get started but to succeed.