Amazon FBA vs. Amazon Dropshipping: Pros and Cons
When you’re building an Amazon business, there are several different business models to consider. You can choose to go the Fulfillment by Merchant (FBM) route, but it’s labor and capital-intensive. For this article’s purpose, we’re going to compare two other common methods: Fulfillment by Amazon (FBA) and Amazon Dropshipping.
FBA allows sellers to take a good deal of the grunt work off of their hands to focus on building their businesses, and dropshipping provides some unique advantages that can lead to massive time savings. Neither of these, however, comes without drawbacks.
- What is Amazon Dropshipping?
- What is Amazon FBA?
- The Pros and Cons to Dropship With Amazon
- The Pros and Cons of FBA on Amazon
- Frequently Asked Questions on Amazon Dropshipping and Amazon FBA
- Determining Which is Right For Your Amazon Business
What is Amazon Dropshipping?
As a dropshipper, you never touch the products you sell. Therefore, as an Amazon seller, you don’t actually own the inventory in your product line. You aren’t saddled with inventory control or warehousing costs, as that cost is passed on to third-party warehouses with whom you contract.
Dropshipping differs from Amazon FBA in a few ways.
What is Amazon FBA?
Amazon FBA sellers can store the product in Amazon’s fulfillment centers. Amazon then gets products to your customers upon sale and handles customer service issues that arise on the backside of transactions. Hence, you’re completely hands-off from that side of the business.
For people new to Amazon selling, FBA is a great way to get familiar with the business and build a brand they can stand behind without being involved in the grunt work daily.
The Pros and Cons to Dropship With Amazon
The primary advantages of deciding to dropship with Amazon relate to how attractive this business model is for people with limited experience selling online. Or those who want the experience to be a nice side hustle or extra source of income.
Here are five huge benefits of kicking off an Amazon Dropshipping business:
1. Comparatively low startup costs
2. Limited barriers to entry
3. No need for physical warehouse space
4. Low order fulfillment costs, and
5. The potential for passive income
When you start a dropshipping business, it doesn’t require a huge capital injection or investment upfront. Sure, you’ll need to buy some tools like DataHawk to monitor your business. But you don’t have to buy a ton of inventory to sit in a warehouse as with FBA on Amazon. Everything’s on-demand, so startup costs are limited.
There’s also a low barrier to entry. It’s not technically difficult or demanding to start a dropshipping business. You can build a ready-made website on a platform like BigCommerce or Shopify, find some products through Oberlo or Alibaba, stick those products on your website, and bam – you’re a dropshipper.
Things get more complicated from there to market and build your brand. The entry barriers are limited for people with a reasonable amount of business and technological skills.
Since you don’t have to pay for physical warehouse space, there’s more room to take risks trying out different types of products to find your sweet spot. And you don’t have to pay for leases, mortgages, or other types of costs associated with having a lease or ownership interest in a warehouse. This lack of fixed costs lessens the financial burden to bear each month as you work toward profitability.
Dropshippers start dropshipping businesses because they want to work toward passive income. You’ll see countless gurus selling one system or another to reach this goal – some more reputable than others. But the throughline is consistent; if you stand up your dropshipping business properly and manage to establish relationships with reputable and dependable suppliers, passive income can absolutely result.
When orders are placed and fulfilled automatically, it’s reasonable to start making money in your sleep. And that, after all, is one of the ways to reach true financial independence.
Here are five dropshipping cons to consider:
1. Profit margins are hard to protect
2. A general lack of control over processes
3. Potential of poor or inadequate customer service
4. Unpredictable orders and inventory availability, and
5. A tendency to have to drop prices to compete
Profit margins when dropshipping are tough to protect for a few reasons. Your goal as a dropshipper is to establish margins for products you list on your website, which will account for shipping costs, taxes, and other fees related to the transaction.
Protecting this margin isn’t easy because there are so many “hidden” costs. The golden rule is if you can sell more products as a dropshipper than you would have if you are controlling inventory yourself, then lower profit margins won’t matter. But it takes a long time to get there.
Because you’re never touching the products you’re selling as a dropshipper; quality control is challenging. One way to counterbalance this is to order samples of products you sell, but that can get costly.
When you can’t exercise control over the quality, you’re leaving that process up to suppliers and warehouses with whom you work. That’s a heady situation.
It only takes one bad lot of products or an awkwardly handled customer service situation to damage your brand permanently. Therefore, the onus is on you to think of creative ways to thank customers for their business and check in occasionally to make sure everything’s going smoothly.
The potential of poor customer service is a strong possibility. When the warehouse has to carry so much process and logistical weight, customer service isn’t top-of-mind. Their primary goal is order fulfillment and doing so as quickly as possible.
After all, without rapid fulfillment, your supplier isn’t going to see their part of the sale anytime soon. Even if you actively control customer service expectations with suppliers, there’s no guarantee they will respond how you would like to customer issues, complaints, or needs.
Usually, offering more variety as an Amazon seller is a good thing, but as a dropshipper, it can be challenging. If you offer substantial variety in your product line, there’s a good chance products come from multiple suppliers.
When this happens, your customers might receive several packages for a single order. We all know how annoying it is when this happens when you make an Amazon order yourself, so imagine how your potential customers might feel, especially if their purchase is something they urgently need.
Because of the sea of competition in dropshipping, creating separation for your brand is difficult. It will be very tempting to do so by lowering prices. This practice is referred to as “the race to the bottom.”
Risk comes here on a couple of levels. When you lower prices, customers start to expect lower prices, and it’s hard to break away from that pattern. While lower prices can come at a higher sales volume, they also create a lower profit margin. Trying to protect the balance between those two factors can be a pain.
Just like with dropshipping, there are some pros and cons to consider with FBA on Amazon.
The Pros and Cons of FBA on Amazon
The upside of using Amazon FBA rather than dropshipping or Amazon FBM is well-established and obvious.
Here are a few of the primary reasons to use Amazon FBA:
1. Logistics and shipping are straightforward
2. You don’t have to mess with returns – Amazon takes care of those for you
3. Amazon’s processing volume helps you establish discounted shipping rates
4. Amazon has more warehouse storage available than you’ll ever need
5. You don’t have to worry about customer service – but unlike with dropshippers, Amazon takes customer service seriously and the risk of offloading it, here, is minimal
6. Amazon’s speed works in your favor – they do everything with a sense of urgency, and
7. The ability to work with multi-channel marketing campaigns that would be nearly impossible to do independently unless you have full-time marketing staffers
When you work with Amazon FBA, you don’t have to mess with a lot of what comes with building your own brand. As a dropshipper, brand-building activity is essential to ensure you’ll be able to separate yourself from the pack. This separation is significant in saturated market niches or where there’s stiff competition for everyone’s dollar.
If your product takes off and becomes the next big thing, Amazon will put the power of their logistics and fulfillment networks to work and ensure all of your orders are processed and your customers are happy.
Unsurprisingly, being able to leverage Amazon’s powerful capabilities comes with tradeoffs.
Here are some of the cons of going with the Amazon FBA model:
* Even when you know what you’re doing, it can get expensive very quickly
* Returns tend to happen more often
* Amazon’s not a charity – they will make you pony up if they have to hold too much of your inventory in storage for too long
* Product prep is difficult – Amazon is very particular about packaging, labeling, and marketing of products
* Pooling products for orders can cause anxiety, and
* If you’re selling in multiple markets around the world, trying to stay on top of local regulations and tax implications is stressful
Amazon charges storage and fulfillment fees for all inventory they hold for you. To make sure this doesn’t become a monster that destroys profit margins, you need an intimate understanding of how costs relate to gross profit.
Since Amazon charges long-term storage fees under FBA, if the fees too consistently eat away at your profits, it’s probably worth revisiting your product line mix to double-check it makes sense and doesn’t need revision.
With returns being easy under FBA, customers are more likely to make impulse or “buy and try” type purchases to compare several products and return those they don’t like. Account for this in the way you price products. If refunds happen on occasion, they won’t be as damaging to your bottom line.
Amazon’s strict guidelines make it challenging to learn how to properly prep and ship products to their warehouses. The learning curve is steep -but with effort and willingness to learn – it’s not that bad. In general, be ready to do things the “Amazon Way,” and you’ll be fine.
Frequently Asked Questions on Amazon Dropshipping and Amazon FBA
Before people consider dropshipping, they tend to have a ton of questions, and understandably so! It seems like a weird concept that could be full of pitfalls.
Amazon Dropshipping Questions
In a perfect world, the margins are substantial once you start to understand the mechanisms. If things are running smoothly, you should consistently be making a 50% gross profit margin. If you’re really knocking it out of the park, you could earn as much as 80%-90% gross profit margin, although it’s rare. Don’t let the gurus convince you otherwise.
Usually, the products you’ll source will come from China or Vietnam. Be aggressive about establishing reasonable expectations among your customer base for when they’ll receive their products. It typically takes at least a week on the low side and as much as four weeks on the high side for Chinese factories to ship to your customers. Tracking is available for shipping, so it’s a solid best practice to reach out to your customer with tracking updates now and then to increase their peace of mind.
Absolutely not. Almost always, your dropshippers will be doing so “blindly.” They have no desire to interact with your customers. They’re providing a service you contract them to provide, and that’s it. It’s on you to keep customers happy, so remember this when choosing between dropshipping and FBA models.
* They don’t identify the right niche and get involved in one that’s too competitive or saturated
* They can’t find the right supplier partner and end up having to work with inferior products
* Time management becomes an issue, and
* The reality of needing to spend money to make money at first gets overwhelming
Amazon FBA Questions
The easiest way to determine the break-even point for Amazon FBA is to have a firm grasp on your monthly fixed costs, the sales price per unit sold, and your variable costs. Fixed costs and variable costs are fairly self-explanatory.
Here’s the formula to consider: Break-even point = (fixed costs / sales price per unit) – variable costs
Having a deep understanding of your average break-even point will help prevent many headaches down the road as you plan and account for your FBA business’s growth.
Understanding how much inventory you need for Amazon to have on hand in your warehouses for running smoothly is essential, and it isn’t easy. Understanding this number comes from a lot of trial and error, determining where your average lies, and what role factors like seasonality play in decision-making.
There’s plenty of room to make mistakes here, so you have to be careful! If you don’t provide Amazon enough products, they won’t be able to fulfill orders as necessary, and if you spend too much, you’ll pay for long-term storage fees. Realistically you’ll pay for one or another at first. But in time, you’ll understand where things need to sit to decrease your costs.
The answer is yes. Just because you have decided to be an FBA seller primarily, it doesn’t mean that you’re restricted from selling your products on other platforms like Walmart, eBay, and so on. It’s possible to create fulfillment orders for Amazon to ship your items to customers that purchased them from another platform.
It’s pretty easy to import and export your products using Amazon FBA. Just register for the non-domestic marketplaces where you want to sell and send your products to FBA as normal. There are many fees for entering into new territories and logistical issues to wade through. So please understand this side of expanding overseas won’t be easy. But in the end, it could well be worth the effort!
Determining Which is Right For Your Amazon Business
The biggest question to ask yourself is: How risk-tolerant are you? If you’re willing to take a little more risk, the rewards of dropshipping can be substantial. If you’re less risk-tolerant, Amazon FBA is the way to go.
It’s also vital to consider whether you’re ready to build a brand you want to white-label, and that will be the future of your business. If so, dropshipping could be a great route. Because once your brand is established, the rest starts to take care of itself.
Suppose you’re not as interested in branding and more interested in having a light lift as you’re building your business and want to take advantage of someone else’s existing infrastructure, then Amazon FBA is the right route.
Ultimately, it takes introspection to determine how much of a learning curve you want to tackle, how much risk you’re willing to take, and where you want to focus efforts when you’re deciding between the adoption of an Amazon dropship or Amazon FBA model.
The method you choose needs to match your personality, risk tolerance, and, most importantly, what you enjoy doing. Don’t jump into the decision too quickly! Take your time to do some introspection and really think it through. You’ll be glad you did!