Dropshipping and Amazon FBA (fulfillment by Amazon) are two of the most profitable e-commerce business models. Selling on Amazon and operating a dropshipping store are both great e-commerce ventures. Both business models are alluring to those who want to make an online, semi-automated, and location-independent income.
Anyone who’s getting into the e-commerce industry may find it challenging to choose the best business model to pursue. Let’s take a closer look at both dropshipping and FBA to pinpoint their pros and cons, operational set-up, and ultimately, profitability in 2021.
- 1 Dropshipping
- 2 How Does Dropshipping Work?
- 3 Pros of Dropshipping
- 4 Cons of Dropshipping
- 5 AMAZON FBA
- 6 Amazon FBA Pros
- 7 Amazon FBA Cons
- 8 Dropshipping vs FBA: Which is More Profitable?
- 9 Final Words
Dropshipping is an e-commerce business model that allows retailers to place orders directly with vendors, who are typically wholesale companies. After “dropping” orders to the wholesalers and furnishing them with customers’ details, the wholesalers will directly ship them to the buyers. Thus, dropshipping is an order fulfillment process that involves shipping products directly from suppliers/wholesalers to customers.
How Does Dropshipping Work?
As a drop-shipper, you don’t need a fulfillment warehouse. Instead, all you have to do is advertise products on your website at retail prices. When customers place orders, you’ll also order the products from suppliers at wholesale prices. Once the suppliers receive your order, they’ll ship the products directly to your customers.
In this business model, your profit is the difference between what the customers paid for the products and how you purchased the products from suppliers. One key benefit of dropshipping is that you don’t need to maintain a sales inventory. Drop-shippers don’t physically handle the items that they purchase from suppliers. It’s also convenient and cost-effective.
Pros of Dropshipping
No Upfront Inventory Costs
Arguably, the most significant advantage of dropshipping is that entrepreneurs don’t need to have their products to get started. Thus, no initial investment is required to purchase products in bulk or set up a warehouse.
As a drop-shipper, all you have to do is set up an e-commerce website and find suppliers of products you want to sell. When customers place orders, you’ll receive money from them before you place the orders with suppliers. Thus, you’ll be buying items at wholesale prices before selling them at retail prices. If customers don’t make any orders, you won’t need to purchase items from suppliers.
No Shipping is Required
The COVID-19 pandemic showed us just how fragile the logistics industry is. Due to supply chain challenges, e-commerce businesses found it challenging to fulfill customers’ orders. E-Commerce dropship businesses don’t handle shipments since the task is left to suppliers. Also, they don’t spend time packaging the ordered items. Instead, their work is to manage the front end of their websites and ensure that orders made by customers go through to suppliers.
Low Initial Investment
There are minimal requirements that drop-shippers should fulfill to get started. Likewise, the initial investment is low. One only needs an e-commerce website to create a dropshipping company. Once the website is set up and suppliers approve you, you can list and sell products online.
Setting up an e-commerce website for your dropshipping company may seem like a daunting task, more so if you have little know-how in this area. Fortunately, you can leverage services such as Bigcommerce, Woocommerce, and Shopify to create an e-commerce website. These services come with ready-made templates to choose from. By using such services, you’ll keep your costs low.
You Can Drop-Ship Most Anything
Traditional e-commerce entrepreneurs’ worst nightmare is finding space to store and ship large items ordered by customers. The same cannot be said of drop shippers since they can sell almost anything. A quick search on Google or eBay for specific items will reveal that some companies sell all types of products. Many of these companies are drop shippers.
As a go-between between suppliers and buyers, you don’t handle any of the items you sell. You can drop ship anything without worrying about issues such as logistics and warehouse space. Thus, drop shippers can sell anything, be it small items or heavy farm machinery.
Managing a Dropshipping Company Can be less work than self fulfilling orders
As a drop shipper, you only need to undertake general website management, address customers’ queries, and forward orders to suppliers. These tasks don’t take too much time, more so than the functions that suppliers will undertake. Once you get a system in place it can be relatively straight forward. Therefore, you will have ample time to manage other aspects of the business, such as marketing.
It’s Easy to Create a Customer List
If you sell products directly to Amazon customers, you won’t get access to their contact details. Therefore, building rapport with customers is difficult since all they do is add items to their carts before checking out.
With dropshipping, you gain access to customers’ contact details, including email addresses. It’s easy to build rapport with them, more so when you conduct follow-ups to determine their satisfaction with the products they bought from you. Over time, you can create a customer list that enables you to generate repeat purchases.
Most customers make one-off purchases on dropshipping websites. Nevertheless, this doesn’t mean you can’t leverage customer lists from other items, stores, or niches you have. Having an idea about products that your customers are interested in is valuable in building a profitable and sustainable dropshipping company.
Dropshipping is a Learning Opportunity
Indeed, learning about dropshipping is a steep learning curve. It takes a lot of time and effort for one to become an expert drop-shipper. Even so, running a dropshipping business exposes you to the different facets of the e-commerce industry. You gain valuable experience regarding email marketing, Google ads, SEO, and website creation.
Due to the low initial investment and high-profit potential, operating a dropshipping store can be a step in the right direction for anyone who wants to venture into online businesses. You gain valuable lessons that can be applied in other e-commerce ventures.
Cons of Dropshipping
It Takes Time to Build a Brand
Building a profitable dropshipping company takes more time than what people advertise on the Internet. You need to create an e-commerce site, market the business, and meet suppliers’ requirements. Therefore, dropshipping is not the ideal business for those who want to make quick money on the Internet. In fact there is no quick way to make money period. In the words of the late great Steve Jobs “If you look really closely, most overnight successes took a really long time”
Lack of an Existing Customer Base
One major downside of dropshipping is that you won’t have a customer base to sell products to. You first need to build trust with customers and suppliers since few people are willing to work with brand names they don’t recognize.
Drop shippers face stiff competition from established e-commerce brands and other drop shippers. Other drop shippers will also be competing for the same buyers using the marketing strategies you employ. The stiff competition can increase ad spend and the overall cost of running a dropshipping company.
Lack of Control Over the Inventory
Drop shippers often rely on suppliers to provide timely and accurate information about the products they sell and their availability. It’s easy to encounter situations whereby buyers ordered items that are out of stock or defective. If suppliers send out the wrong products, drop shippers’ responsibility to handle returns and refunds.
Suppliers Control the Sales Channel
As a drop shipper, you may come across great products to sell and think you could make good money selling them on eBay or Amazon, only for a supplier to decline to sell their products on these platforms. Typically, customers shop for items on channels such as eBay and Amazon. However, if your suppliers also sell products on these channels, you’ll be competing with them for sales. Thus, you’ll be forced to either lower your retail prices or sell on other channels.
Amazon FBA is a service provided by the retail giant to third-party sellers. Through this business model, sellers can send their products to Amazon warehouses for storage. Whenever customers place orders, Amazon packs and ships them; thus, taking care of shipping costs, returns, and refunds. Should your products get damaged while in Amazon’s warehouses, the company will take full responsibility
In simple terms, Amazon FBA is a service where you sell items while Amazon ships them. You only store the items you want to sell in Amazon fulfillment centers, and the company does everything else. The business model helps entrepreneurs enhance their sales by leveraging Amazon’s world-class e-commerce expertise.
As an FBA merchant, you send the products you sell to Amazon’s warehouses, either directly or through international manufacturers of your choice. Amazon will provide storage space in its warehouses for your inventory, besides taking care of the items’ packing and shipping when customers place orders.
FBA merchants don’t need to create websites, advertise products, or directly collect money for buyers’ purchases. When customers buy products, Amazon will fulfill the orders and take care of the shipping process.
Amazon FBA Pros
Solid Customer Base
Amazon is a large online retailer with millions of customers. If your product ranks for keywords that shoppers search for, you’ll undoubtedly attract a steady stream of buyers. You don’t have to convince shoppers to trust you since you’ll be relying on Amazon’s brand name.
You Benefit from Amazon’s Brand Image
When you sell products through Amazon, you’ll be banking on the retailer’s reputation and goodwill. Few Amazon buyers realize that it’s third-party sellers who list products on Amazon. They trust Amazon and the products they purchase from the website. The entire buying process involves interacting with Amazon only without the involvement of third-parties.
When running a dropshipping store, you’ll find yourself answering customers’ calls, emails, and phone calls to sell products or follow up on sales. As the middleman between suppliers and customers, you’ll have to deal with returns, refunds, and complaints. With FBA, the retailer handles all customer service on your behalf. Thus, you won’t spend your days replying to emails or following up on customers’ complaints. You have a small window as an FBA seller to talk with your customer to follow up and make sure they are satisfied, but that is about it
High Potential for Profit
There’s a high potential for profit with Amazon FBA. The profit margins involved in this business model depend on the products you sell. For instance, it’s possible to purchase a product in China for $10 before selling it in America for $20.
The high-profit margins in Amazon FBA give you more flexibility when it comes to product pricing. Besides, it’s easier to recover the initial investment within a short time. In Amazon FBA, profit margins tend to increase with volume. If you purchase more products cheaply and sell them at a higher price, your profit margins will be even higher.
You Can Sell Anything
You can sell any item on Amazon as long as it meets the site’s requirements. Browsing through the site, you’ll realize that you can find almost anything you want. With FBA, you can buy products from manufacturers and label them to meet your customers’ requirements.
Amazon FBA Cons
High Initial Investment
You need a significant financial outlay to get started with Amazon FBA. You must have a fully-stocked inventory, which is costly depending on the products you sell. The first products you list on Amazon may not record-high sales. Once the products start selling, you’ll have to make reorders from suppliers to keep your inventory full. Thus, you’ll need an initial investment of between $5,000 to $10,000 for your FBA business to gain a footing.
Overreliance on One Platform
With FBA, the success of your business entirely relies on Amazon. If you breach any of the site’s rules, your account may be banned, which means you’ll lose your income. Furthermore, you’ll be at the mercy of Amazon systems algorithms. For instance, if your inventory runs out, your rankings will drop, translating into low sales. In your niche, there will be dozens of other retailers competing with you. More competition could mean less business and lower profit margins.
Typically, Amazon ranks items based on sales volumes. If your sales are low, your rankings will be equally low. Ultimately, buyers won’t be able to see your products when searching for items on Amazon. It’s difficult to build back your sales if your products rank lowly on Amazon.
You Can’t Build a Customer List
Amazon has ultimate control over customers who shop on the site. When you sell your products to customers, you won’t access their contact addresses or other details. Thus, you won’t know who your customers are, and neither can you contact them outside the platform. Therefore, your income and the success of your venture is primarily controlled by Amazon. Building a brand or generating repeat sales is hard since customers belong to Amazon rather than your store.
Restrictions on Products to Sell
Although you can list different products on your Amazon account, you can’t sell anything. The fact that a product can be sold on the site doesn’t mean you’re allowed to sell it. You’ll only know whether you’re allowed to sell a product or not once you send it to an Amazon warehouse.
It’s common to come across Amazon vendors stuck with large orders of products they can’t sell via the website. Therefore, it’s best to do your research before placing orders on products you intend to sell on Amazon.
Cash Flow Issues
Indeed, an Amazon FBA venture can make tons of money. However, you need a constant supply of cash to restock your inventory and build up the business. The more sales an Amazon vendor makes, the easier it is to restock his/her inventory. This may not seem like an issue of concern, more so if your products are popular with buyers.
However, vendors can’t access their money immediately. The wait time for restocking products can be weeks or even months. Running out of stock means losing your inventory, and therefore, Amazon FBA isn’t the way to go for entrepreneurs who don’t have other income sources to replenish their inventories.
Dropshipping vs FBA: Which is More Profitable?
Choosing between dropshipping and FBA is difficult because each of these e-commerce business models has its advantages and downsides.
Amazon FBA is ideal for you if:
- You run a small business and want to leverage Amazon’s goodwill and broad customer base
- You want organic traffic
- You have upfront capital for investing in an inventory
Conversely, dropshipping is ideal for you if:
- You’re making inroads into the e-commerce business
- You’re not a manufacturer, but you want to sell different products online
- You have minimal upfront capital
Although Amazon FBA is generally depicted as an e-commerce model that favors those who have enough money to invest in an inventory, that’s not entirely true. You can learn the ropes of the e-commerce industry by starting as a drop shipper before crossing over to Amazon FBA to boost your profitability.
As a drop shipper, you gain valuable lessons about the ecommerce business. You can use these lessons to your advantage when you build enough capital and cross over to Amazon FBA. Dropshipping hones your customer service and marketing skills, and this comes in handy when you become an Amazon vendor. You’ll have the know-how of ensuring that your products rank high on Amazon.
Amazon FBA and drop shipping are two high-opportunity platforms that e-commerce entrepreneurs can leverage. Business models are profitable, but that depends on the effort an e-commerce entrepreneur puts into his/her venture. Amazon FBA suits those with a significant amount of money to invest and reinvest into their business. Dropshipping favors those with smaller initial investment capital but impressive customer service and marketing skills.