The eCommerce landscape is constantly evolving, with new business models and fulfillment options coming up every now and then. Taking into account these continuously changing dynamics, finding which route to take with your online Amazon store can be a big challenge, and sometimes even nerve racking.
But alas, it must be done!
There are many different eCommerce models, from print on demand and dropshipping to FBM to FBA and more. That being said, currently, the most successful ones are i) Amazon FBA, which involves sourcing a product under your brand name and handing the shipment over to Amazon, and ii) Dropshipping, where you ask the supplier to ship the product to your customer on your behalf.
So how do you know which one is the best option for you? What should you consider?
In this blog, we’ll do an in depth analysis of FBA and dropshipping, covering their pros and cons and what makes them different.
What is Amazon FBA?
Amazon FBA, also known as Fulfillment by Amazon, is a done for you fulfillment service offered by Amazon. The service includes the complete pick-pack-ship deal – from storing products in the warehouse to packing, labeling and shipping them off to the customer. Even the customer support operations are handled by Amazon. All you have to do is send your items to Amazon’s fulfillment centers.
FBA is by far the most attractive choice for most Amazon sellers as it not only reduces the fulfillment hassles but also gives you benefits like getting a Prime tag on your listing. When a listing has the Prime tag, you can access exclusive shipping promotions and a large base of Amazon’s Prime members, who are known to spend big.
While Amazon FBA is a fulfillment service, it is often used synonymously with different business models on Amazon, including private label and reselling.
Introduction to Amazon Private Label
Amazon Private Label (PL) is a popular e-commerce model. It involves researching a winning product, finding a third party manufacturer that can manufacture the product for you, and then selling the product under your brand name.
Introduction to Reselling
Next, we have reselling or wholesaling. It is the act of buying products in bulk from an existing brand, supplier, distributor, or manufacturer (where the brand has complete rights to the product) at a wholesale price, and then reselling it to Amazon consumers for a profit.
What is Dropshipping?
Simply put, dropshipping is a business model where sellers forward the order they receive to the vendor (in most cases, a wholesaler or a manufacturer), and the vendor then ships the product directly to the customer. You don’t have to hold the inventory when running a dropshipping business.
Dropshipping on Amazon is done using Fulfillment by Merchant (FBM). It’s a pretty popular model for Amazon sellers mainly because of the simplified process and low overhead costs.
All you have to do is list your product on Amazon, answer customer inquiries, notify the third party when an order is placed, and the vendor handles the rest.
Is Dropshipping allowed on Amazon?
Yes, Amazon allows the practice of dropshipping, but on the condition that you follow the guidelines. Working within the guidelines is important because you might get penalized if you don’t.
Check out the complete Amazon dropshipping policies on this link. However, here are a few to help you get started:
- You should have an agreement with the manufacturer that they identify you (and no one else) as a seller of their products on all customer-facing invoices, packing slips, and external packaging
- Prior to shipping the order to the customer, the supplier must remove any packing slips, invoices, external packaging, or other information identifying them as the main seller.
- You must accept and process customer returns and not your supplier
Pros and Cons of Amazon FBA
Now that we’ve discussed the basics of both business models in detail, it’s time to look into their pros and cons. We’ll start off with Amazon FBA first.
The biggest advantage of using FBA is you don’t have to worry about the fulfillment process.
Amazon manages everything, from storing the product to packaging and shipping it. This not only takes off a significant burden from your shoulder, but it also allows you to focus on the bigger picture, that is, growing your Amazon store and bringing more sales.
Access To Prime
Another great thing about using FBA is that your listing is eligible for Prime shipping. With Prime, your customers get free one day shipping.
This option prompts customers to give you more preference when they are shopping online. They choose your listing over your competitors, you get more sales, your rankings improve, and your listing gets more traffic.
More Growth Opportunities
FBA gives you many opportunities to grow as a seller. Sellers can run paid advertising, create a brand identity through storefronts, content, etc. and get a boost in their traffic. Scaling the business becomes easy.
When done right, selling via FBA can give you massive profits.
Large Capital Required
There are a lot of overhead costs sellers face when starting up an Amazon FBA business. From registering a trademark to sourcing, manufacturing, listing, copywriting, images, and shipping your product to Amazon’s warehouse.
It can all get very costly and may require solid capital, which can be hard to manage, especially when you are just starting off.
Amazon’s biggest cost is their logistics operations, and they charge a hefty fee for it. When going on the fulfillment by Amazon route, you have to pay fees for inventory handling, storage, and shipping.
The number of shoppers on Amazon have increased in recent years, and so has the competition in the FBA space.
High competition can decrease your chances of getting sales and possibly hamper your visibility, meaning that getting noticed as an FBA seller can be hard.
Pros and Cons of Dropshipping
Now that we’ve got the details of Amazon FBA down. Let’s move on to dropshipping and its pros and cons.
Less Investment Required
Dropshipping doesn’t require much investment to begin with, as you don’t need to go all in and build a substantial presence.
You simply need to negotiate with your supplier and handle the referral fee. So if you’re short on budget or just starting small, dropshipping is a pocket friendly way to make profits.
Less Damaged Inventory
With dropshipping, you have a healthy amount of control over your customer experience. The chances of your buyers receiving damaged or mishandled inventory are less as the products pass through very few hands on their way to their destination.
You can also save yourself the hassle of slow sales during the holiday and peak sales months as you’re directly sending the inventory instead of fighting for space in Amazon’s fulfillment centers.
Another reason to love dropshipping is the little to no effort you have to put into getting it up and running.
You don’t need to manage listings, worry about shipping the inventory; your third party vendor does it all for you. So if you’re looking for a time saving business model, this can be a good pick.
Low Profit Margin
Let’s face it, drop shipping may require less work and a smaller capital, but compared to Amazon FBA, it doesn’t carry high returns.
When you’re dropshipping, most times, your supplier will not tell you every single detail of their product, leaving behind information gaps.This can make it very hard to answer queries, which can leave a negative impression on your potential customers.
Very few people can make dropshipping work long term as there is little to no room for growth or brand building. Sure, you can make a few profits, but your business always lacks the growth that you can otherwise get with FBA.
Amazon FBA vs. Dropshipping – A Head-to-Head Comparison
So which business model is the better one?
The answer is…*drum roll*
They both have their advantages and disadvantages, and it all depends on your goals for your business. If you’re not interested in taking a risk or don’t have enough capital to start with, then dropshipping can be a good option.
If you’re looking for a steady business with long term profits and have a significant investment, then you should go for Amazon FBA. You can build your store, grow your brand, and make a good income.
Here is a table comparing both Amazon FBA and dropshipping:
|Has a higher risk factor||Has a relatively lower risk factor (if done right)|
|Seller must purchase the inventory||Seller don’t need to have the inventory|
|Amazon controls and manages the inventory||Inventory is in seller’s control but managed by the supplier|
|Higher Profits||Lower Profits|
|Larger capital required||Smaller capital required|
|Extreme Competition||High Competition|
|Good for long term||Good for short term|
To Sum It Up
We discussed the good and bad sides of the Amazon FBA and dropshipping business models and the differences entailing them.
We hope you now have a much better understanding of how the two work and can figure out what suits you better. It’s now time for us to part and you to venture out and start your Amazon journey!