Dropshipping Vs Amazon FBA: Ultimate ComparisonBy Josh Snow
Ecommerce business is booming. And with ever more people preferring to buy goods and services online, it shows no signs of slowing anytime soon. In fact, with the rise of business models like dropshipping and Amazon FBA, that allow business owners to essentially outsource manufacturing and even order fulfillment, more and more people can now get their piece of the ecommerce pie.
These two business models have some big similarities, and they are both viable options for people looking to get started or expand in the world of online business. But how do they compare? Is one better than the other? And is one a better fit for you? Let’s take a look at exactly what the two business models consist of and then compare the two to find out.
What is dropshipping?
First things first, let’s go over exactly what we mean when we talk about dropshipping. Dropshipping is a bit like a traditional ecommerce business model, as it involves selling goods to customers online. However, there is one crucial difference — a third party supplier manufactures and ships the products for you.
Usually straight to the customer. That means it is up to you to find a supplier, build a website to sell your goods and drive traffic to that site. Every time someone places an order, your supplier will take care of sending the item to the customer while you take care of customer service. You make your money from the profit margins of cost to sale price, although typically the profit margins are quite low.
What is Amazon FBA?
Amazon FBA is similar to dropshipping in that the goods you sell to customers are manufactured by someone else. Where it differs is that the storage, shipping and customer service process is all fulfilled by Amazon. Hence the name FBA or ‘Fulfilled by Amazon’. Once you find a supplier of goods, you can ship these straight to Amazon’s warehouses where they can fulfil orders as they come in.
They even take care of the customer service for you, so you can just sit back and relax. Like dropshipping you are in charge of listing these products online, although with this business model, that is usually through the Amazon platform. The idea is to buy products at cheap prices and sell them for a profit. You need to take into account that Amazon will obviously take a significant fee for their services.
So what is the difference?
The real difference here comes down to the extra services taken on by Amazon. While both models involve you sourcing the products from a supplier, Amazon takes care of customer service too. In a dropshipping business any returns or queries will need to be dealt with by you, while in an FBA business this is all done by Amazon.
This means an FBA business model can be more hands off. To start an FBA business you will need more capital to invest upfront, while you can get started in dropshipping without much cash. On the flip side an FBA business can have potential for higher profit margins.
What are the benefits of dropshipping?
There are plenty of pros to the dropshipping business model that have allowed many people to make huge profits as well as chase the location independent lifestyle they want. Let’s check out what’s so great about dropshipping.
One of the great things about dropshipping is that it is pretty hands off. Your supplier manufacturers the product as well as packing and shipping it straight to the client meaning your business can passively generate income.
You will need to invest some time initially to list the product for sale online, but once a customer places an order, your supplier does the rest. Just be aware that you may need to invest a few hours a week working on SEO or other methods to send traffic to your site as well as deal with any customer queries and returns.
Low upfront costs
Dropshipping has pretty low financial barriers to enter, meaning you can get started without having a large amount of capital up front. You pay your supplier for what you sell and so you don’t need to cough up for large amounts of stock before you start.
Low risk and bar to entry
Dropshipping is very low risk. You can easily test out different products without risking a lot of money if it doesn’t sell. If one product doesn’t work out or you have issues with a supplier, it is easy to switch up your supplier and try another. You can usually get approved with a whole host of sellers very quickly so can get started in just a few short weeks.
As dropshipping is not very time-intensive, it means that it is an easy business to scale. You can add multiple products to your business without too much extra work. This helps you maximize your profits but also helps you not rely on just one income stream should one product have sales problems.
If you strive for a 100% location independent lifestyle, dropshipping could help you achieve it. All the sales are done online and your supplier deals with all the physical side for you. Therefore you can just as easily be running your business from a beach in Thailand or a cafe in Tokyo.
What are the downsides of dropshipping?
There is nothing that doesn’t have a downside, and dropshipping business model is no different. Let’s take a look at the cons of dropshipping.
As all your manufacturing and shipping is fulfilled by a third party, you are limited in how much profit you can make. You can make money by charging the end customer a higher price than you buy for, but to stay competitive in a saturated market you are limited in how much you can raise prices.
Customer service issues
As you are not the one in control of physically fulfilling orders, customer service can cause some issues. If your supplier does not inform you on every supply chain glitch, it can be difficult to troubleshoot problems and respond appropriately to upset clients.
As people have discovered the benefits of dropshipping in recent years, the number of dropshipping businesses has soared. Therefore it is a highly competitive market with many sellers competing with each other to sell the same products. You can combat this by building a brand to stand out from the crowd, or master SEO and other methods to drive traffic and sales up.
Lack of control and information
As we’ve discussed, with dropshipping you are not in control of the logistical side of orders, and you possibly have never even seen your product. Therefore you have to rely on the product information given to you by your supplier. This could be scant or even inaccurate which could make it difficult to answer customer queries. As profit margins are low, you can’t really afford to create special offers and discounts to boost sales.
Unfortunately you will find many scams out there. Therefore it is important to work with reputable and verified suppliers.
What are the benefits of Amazon FBA?
So now let’s take a look at the pros of Amazon FBA and see how it compares.
Like the dropshipping model, this business model is pretty hands off and low maintenance once it is up and running. After sourcing the products and shipping them to Amazon’s warehouses, Amazon takes care of the rest for you. Of course you may need to liaise with suppliers and oversee sales, but time on this can be kept to a minimum.
Utilize Amazon’s reputation
One of the great things about Amazon FBA is that you can use Amazon’s brand name for your benefit. People already trust Amazon and it has a huge daily traffic flow already. That means you can access a ready-made customer base before you have an established brand.
Utilize Amazon’s Benefits
As an Amazon FBA seller your products are eligible for Amazon’s free super save delivery as well as Amazon Prime. Free shipping is a huge motivator for people to go ahead with sales and so it can boost your order flow significantly.
No customer service issues
Having Amazon deal with customer service for you can be a huge stress saver. You can maximize on their returns and replacements policies to build up customer loyalty without lifting a finger.
Higher profit margins
With an Amazon FBA business you are in charge of setting your prices. Amazon’s great reputation as an online marketplace means that you can get away with charging higher prices than on your own.
Like dropshipping, this remote and hands off model is perfect for people looking for a totally location independent lifestyle. Everything can be done from a laptop.
What are the downsides of Amazon FBA?
How do the cons of Amazon FBA compare to the cons of dropshipping? Let’s find out.
There is a higher cost to getting started with Amazon FBA than with dropshipping. You will likely need to initially invest a few thousand dollars in the first load of stock which can be a risk. Once you start selling though, the cost of maintaining stock levels should be absorbed by your profits.
Inventory management can be difficult at first when you are not used to it. The initial talks with manufacturers can take a long time, and it can be difficult to correctly establish your supplier’s capacity. As you invest in stock upfront, it is also possible that you could end up with left over stock. As you are managing your inventory remotely it can be hard to maintain your stock records.
You have to play by Amazon’s rules
Amazon FBA has a number of rules and restrictions that you have to adhere to. There are certain products that Amazon won’t work with so make sure to check these limitations before choosing a product. Obviously Amazon will also take a significant fee on every order for their service. Amazon also gives you limited reporting on sales which makes it difficult to know which of your keywords are ranking well and where exactly your traffic is coming from.
You are dependent on one platform
If you sell through Amazon, this means you are completely dependent on their platform. If they introduce new regulations down the line or something happens so you can no longer sell with them, you will likely have no back up.
Amazon’s enormous success means that it is a hugely competitive platform. There are huge numbers of sellers already selling every product under the sun. And you will be competing directly with these sellers. Product research is important here to find the right product to stand out from the crowd.
Which one should I choose?
So after looking at the pros and cons of both dropshipping and Amazon FBA, what’s the verdict? This really depends on what you are looking for in terms of running a business and your current situation.
If you are able and willing to invest some significant capital upfront and you don’t mind taking a risk, starting Amazon FBA might be the right choice for you. Although there are bigger costs to get started, you can achieve higher profit margins. You can access Amazon’s customer base and also potentially spend less time on the business as there are no customer queries to deal with.
If you don’t have money to invest upfront and prefer a low to no-risk venture, dropshipping could be better suited to you. There is a low barrier to enter the world of dropshipping and there is plenty of flexibility to try out different products.
Overall, both business model’s are a great choice for anyone that wants to pursue a location independent lifestyle. They can both serve you to make a passive income and they are both scalable. They can be good for people just starting out in the online world as the skills you need are easy to develop.
They could be a good choice for someone who already owns a repertoire of online business and is looking to expand with another. So having analysed the two models, which one is right for you?