E-commerce has become a pretty popular business model among many kitchen table entrepreneurs in the last ten years. Beside Private Labeling, there are two successful ways to launch your online shop - dropshipping and Amazon FBA. These models may appear alike for an inexperienced seller, but each model has its pros and cons.
This post will give you complete information about dropshipping vs FBA and describe their main differences. It will help you make a more informed decision before starting a business in e-commerce.
What is Dropshipping?
Dropshipping is a simple e-commerce solution, especially popular among new sellers or small shops. In this model, you stand as a retailer that sells an existing product that belongs to another manufacturer. Using the manufacturers' photos, you create a website or a listing on any online market, such as Amazon, Shopify, etc. When the customer buys the product from your shop, you "drop" the order to the supplier with all contact information for the shipping.
This method has been one of the most trending retail businesses in the USA, Canada, the UK, and Europe for many years. It is cost-effective, comparatively profitable, and convenient. It doesn't require a significant investment because all the seller really needs to do is provide customer support and check that the product is available from the supplier.
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What Is Dropshipping?
What is Amazon FBA?
Amazon FBA is a popular program provided by the most known e-commerce marketplace Amazon.com. FBA stands for Fulfillment by Amazon - a service that helps businesses grow by providing access to Amazon's warehouses and logistics network. The products you're selling with this program become eligible for many Amazon shipping promotions and the Amazon Prime subscription service.
Briefly, the main difference in dropshipping vs Amazon FBA is that with FBA, you need to buy all the goods and ship them to a warehouse so Amazon can do the logistics.
This model is especially popular among sellers who cater to a large audience or prefer sticking with only one online market. It needs more investment than dropshipping but provides more promising possibilities to an entrepreneur.
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Amazon FBA Trends in 2024
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Amazon FBA or Dropshipping: what's the difference?
The main question is: which model is the best for your business? Both solutions look quite similar and can be profitable with due effort. Let's take a closer look at the differences that will help you to choose the best concept.
FBA vs Dropshipping
Investment
Dropshipping doesn't require a huge investment. The customer purchases the product first, so you automatically get enough money for orders unless you sell on Amazon. If you prefer Amazon dropshipping, you get the payment on the 14th day after the purchase. In that case, it would be wise to plan that expense point in advance.
The vendor pays for the shipping and holds a warehouse - these expenses also don't need your involvement. As a retailer, you should only pay for advertisement (if you wish) and handle a return (refund) if a customer isn't satisfied with the product.
As you can see, dropshipping is quite pocket-friendly. It saves you from unwanted expenses, perfectly explaining the method's popularity among many sellers.
Unlike dropshipping, FBA requires way more investment. First, you need to pay Amazon fees for the possibility of selling on the marketplace. Second, the program also has included fees, such as shipment payments. Third, you have to buy all the goods you wish to sell because FBA only works with the seller's own products. And don't forget that you need to arrange the delivery of your products to the Amazon warehouse!
So Amazon FBA is quite pricy. With this solution, you need to plan all your expenses to keep the ability to sell anything.
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Risk
The risk exists in both models. In dropshipping, the main catch is in the logistics. Though the vendor sends the goods to the buyer, you are still responsible for reaching the destination. If it doesn’t - the customer will ask you about it.
If you dropship through Amazon, you also need to pay attention to any shipping information from your side. According to the rules, all invoices, packing slips, external packaging, and any other information included with the product must only indicate you as the seller.
Next, if you don’t follow the vendors announcements about product availability, you may sell a non-existing product. This is quite unpleasant, but the refund usually solves the problem.
Also, please note that sometimes a vendor may refuse to send the goods. If you’ve been “caught” on dropshipping by using different addresses from the same account, the vendor can ban you from the shop. You can always speak with a vendor before starting a reselling business tho.
The good side is that you don't need to maintain a vast inventory in dropshipping. If for any reason something goes wrong, you can simply change the direction of your business. You will hardly feel any severe loss because, as said above, this model doesn't need too many investments.
But with Amazon FBA, the risk of money loss is significantly lesser. The main point here is that if your sales plan goes to ruin, you need to dispose of the entire inventory of prepaid goods.
Plus, Amazon restrictions may appear out of nowhere sometimes. It’s an unpredictable part of the marketplace. And don’t forget that fees don't go anywhere.
It is highly recommended to conduct deep market research regardless of the chosen business model. It would be best to have a complete plan with a general target audience, seasonal demand, sales possibility, etc. Without it, you will hardly sell anything at all.
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Profit Margin
In dropshipping, the sales revenue is comparatively lesser. Firstly, because you have to work with an already made product that you may not change or upgrade. You will hardly be the only seller that works with the chosen manufacturer. So you will probably end up selling the same goods as your competitor. As you understand, in that case, it's impossible to sell a $20 product for $40. It doesn't make sense for a customer to pay more for products that others sell cheaper. So the profit from one $20 item will be $5 - $10 maximum.
With Amazon FBA, you can build a better profit margin. This is mainly possible because the customer who looks for a product on Amazon usually sticks with this one market and doesn't look for cheaper variations elsewhere. So technically, the only price competition you will face is created by Amazon vendors.
Plus, with the FBA program, you have more possibilities to sell a unique product, which raises your chance of higher profit. When you order the product from a vendor, you may ask to add some changes such as different colors, your logo, etc. When you create a product listing, you may also add some details to make the goods more attractive. Just make sure that your listing is made according to Amazon policies.
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Amazon seller profit margin formula
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Customer Base
With the all-around-the-Web dropshipping model, you can only rely on yourself when it comes to the customer base. You have to create it using emails, Internet ads, social media, and more. This is hard; it takes money and time because no one will ever look for a product they don't know exists.
Pros and Cons of Dropshipping
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With Amazon FBA, you automatically access the whole platform with millions of potential customers. People are already looking for something to buy, so they will eventually come to your store. Of course, advertisement is required here but takes less effort. Amazon has a helpful AD program that becomes automatically available for every new listing. It is cheaper than web advertising, has all the needed instruments for manual setting, and can even be fully automated.
If you decide to dropship through Amazon, you can have the same customer base as FBA. Still, FBA sellers can outplay you with another powerful benefit.
Shipping
Even though the vendor provides the delivery to a customer, you still have full responsibility when it comes to logistics. Not only do you need to give a vendor an address, but you also track every shipment to make sure everything goes fine.
Another catch: you will never be able to control the shipping quality or speed. So if your vendor's warehouse is in China, it will take a lot of time to be delivered to the US. There's hardly a thing you can do about it.
With Amazon FBA, the market takes the shipping responsibility as well, but the quality rises significantly. Amazon delivery usually takes 1-3 days which is very important for the customer. No one likes to wait, so the customer will most likely return to the seller with faster delivery.
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Competition
Both dropshipping and FBA are competitive. There may be hundreds of vendors trying to sell just the same product. But if dropshipping can be spread around the whole webspace, Amazon FBA is centered on the same market. Imagine the tension level!
Besides, there is internal competition between e-commerce vs dropshipping in general. Sellers count each other's weaknesses and try to outperform the competitor at any price. So the main point here is that you should never think that this will be easy for you. Both dropshipping and Amazon FBA need your attention and care. You cannot start a shop and think it will just work by itself.
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Customer Service
As a dropshipper, you have all your customers' contacts. You can work with questions, feedback, returns, and refunds. This means that you have the possibility to build a better reputation and change the customer's impression if something goes wrong.
In the Amazon FBA program, you will not have any chance to chat with your customer. All customer service lies on Amazon, so you can only rely on the market team if your client isn't satisfied. And if you've ever worked with Amazon, you know that it's not always flawless.
Customer Service by Amazon page
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How can Seller Assistant App help with FBA?
Now, when you know more about the main differences between Amazon FBA and dropshipping, you can make a more informed choice about what suits you best.
Seller Assistant App can simplify your life when it comes to Amazon FBA. The plugin has a lot of valuable tools to help you lead a business and save your time for other essential errands and chores.
Seller Assistant App
FBA Calculator
This little tool can calculate your potential expenses on the launch. It can also tell how much profit each product will bring, considering the competition.
Calculate ROI and Profit with FBA/FBM calculator
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Product type information
Seller Assistant App can show what type of goods you can freely sell with Amazon FBA. It shows the restrictions, storage requirements and cost, and more. With this plugin, you can quickly understand if you even need to start selling the product or choose another one.
Get Product Insights right on Amazon Product Page
Competitors
The app shows how many FBA and FBM sellers are working with the product. It will help you understand the competition level better and decide if you are ready for it.
Get Competition Insights with the Offers Feature
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Planning
Seller Assistant App has the possibility to download all critical data to Google Sheets in one click. This comes in handy in any business.
Seller Assistant App has the possibility to download all critical data to Google Sheets in one click
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Conclusion
Dropshipping and Amazon FBA have a lot in common. In both models, you don't need to produce the goods or keep the warehouse, nor manage the logistics.
In dropshipping, your vendor does the shipping and keeps the products you're willing to sell. Besides taking orders, all you need to do is provide customer service. In the Amazon FBA program, you should buy the goods and send the stock to the Amazon warehouse. The market will manage logistics, customer service, and returns. Both solutions have pros and cons that were widely discussed above.
We hope that our article was helpful to you. Now you can make a more informed decision about which business model is best for you. Subscribe for more posts and prosper with Seller Assistant App!
Originally published at https://www.sellerassistant.app/blog/amazon-fba-vs-dropshipping-which-model-to-choose-for-a-successful-business#profit-marginbr
Avaneesh Parasar - Stock Market Trader has completed his schooling from Patna & did his graduation from Delhi University in Bachelor of Commerce.
He started his own business of International Investment Management with Amazon Dropshipping.
He is an Entrepreneur, Business Trader/ Miner, Investor, Youtuber, and a Blogger as well.
He believes in the principal that “be 100%committed to things which are associated with you”.
He has also presented his views and experience on entrepreneurship and financial management across several national and international platforms.
He is a very simple person with big professional dreams to achieve.
Dropshipping is one of the easiest ways to break into ecommerce.
Here's how to start dropshipping If you're thinking about starting an online Dropshipping Ecommerce business.
Shopify dropshipping allows you to have no inventory, even when starting a business.
With dropshipping, you can focus on designing your website and building delivery networks.
What do you need to start?
Read in our article https://soft-loft.com/shopify-dropship-integration/
Want to try out your luck in eCommerce along with your other existing businesses?
To begin with, dropshipping can be a good option.
If you are having thoughts like ‘is dropshipping still profitable in 2021’ then let us tell you that when done right, it can help you make good profits.Ecommerce is not only for those who have products or manufacturing products.
You can sell things online without manufacturing or buying things, this is called Dropshipping.
What you think is Dropshipping dead?Why go with dropshipping business idea?You may have a question – is dropshipping profitable in 2021?
As compared to other kind of businesses, for an entrepreneur, dropshipping can be considered as a business plan with less risks involved.
