Amazon FBA and Dropshipping are two well-known eCommerce business models. However, while both methods appear similar, they differ in terms of inventory management.
Both business models help eCommerce store owners manage their orders and logistics. These are essential for streamlining a store’s workflow and allowing sellers to handle multiple orders efficiently. As a result, when starting an online business, selecting an appropriate eCommerce model is critical.
This article will compare the key differences between Amazon FBA and Dropshipping, including definitions, shipping costs, and pros and cons. Then, we’ll share our final suggestions for deciding between dropshipping and Amazon FBA when selling products online.
What is Amazon FBA?
Amazon FBA, or Fulfillment by Amazon, is a service that helps businesses with product warehousing and shipping.
Instead of setting up their own warehouse, eCommerce store owners can send their products to Amazon’s Fulfillment Center using Amazon FBA. Then, for each customer order, Amazon Warehouse will manage the product shipment from packing to delivery.
Amazon, as a large e-commerce platform, offers global fulfillment networks. In 2022, statistics from Statista’s report on “Fulfillment methods used by third-party sellers on Amazon” showed that 68% of Amazon users used this service because of its simple order fulfillment process and extensive product inventory.
Amazon FBA provides sellers with access to the Inventory Performance Dashboard, which allows them to monitor the elements affecting their Inventory Performance Index (IPI) score. You can also use the seller toolkit to track inventory age, oversupply, update product listings, and keep stocks in stock.
Also, Fulfillment by Amazon provides shipping promotions to assist FBA sellers in lowering shipment costs and increasing profit margins.
Amazon FBA Pros
Amazon FBA will allow you to focus on growing your brand and business, simultaneously targeting a global audience. In addition, you won’t need to create a website because you can leverage Amazon’s platform and positive reputation.
Using FBA allows you to completely delegate the storage and fulfillment of your products and your customer service tasks, allowing you to focus on making money. Even with FBA fees, good profits are possible. Here is a list of Amazon FBA pros:
- You have no administrative responsibilities
- Customer service is pre-installed
- Significantly higher profits are possible
- You will not be required to create a website
- It is a time-saving service that allows you to focus on growing your business
- It is simple to establish a brand
- You’ll have immediate access to Amazon’s global audience. A report by Amazon shows that over 300 million customers are buying products on Amazon.
- You will have access to a simple refund and return service
- There is no need for customer interaction
Amazon FBA Cons
Amazon’s FBA fees, while reasonable given that you reach an already prepared audience and can automate your entire storage, selection, and packing. All these, combined with the dispatch process and your customer service, can significantly eat into your profits. You’ll also need significant capital to purchase stock and ship it to Amazon FBA. Amazon is a highly saturated platform with high demand for FBA, so if you source the wrong product, you may need help to sell or switch products. It will also be more difficult for you to build an email list because Amazon owns the customers, not you. Here is a list of Amazon FBA cons:
- You must follow Amazon FBA’s stringent rules and regulations
- Initial start-ups necessitate a significant amount of capital
- Amazon ultimately owns all customers
- You must account for FBA storage and shipping fees, which are charged on each sale
- Amazon is a crowded marketplace, and FBA product competition is fierce
- You rely solely on one platform for sales
What is Dropshipping?
Dropshipping is an eCommerce fulfillment model that also involves third parties, such as retailers or manufacturers.
This model enables sellers to advertise products and begin selling online without purchasing stock or managing a goods inventory. When customers place online orders, the store owners will forward the order information to third parties. The retailer or manufacturer will then handle product delivery to customers.
Dropshipping is a simple process because the manufacturer handles all logistics from the start, allowing you to focus on building your brand. However, some things to consider when starting dropshipping include market competition, dropshipping niche, suppliers, and legal requirements for establishing your business.
Dropshipping enables you to sell products without putting any money upfront, which is why it’s such a popular strategy. If you choose the wrong product to sell, you can quickly remove your listing and switch to a different product without worrying about the unsaleable stock.
It’s a business model that can be run from anywhere because your only responsibilities are to keep track of your inventory and ensure that orders are sent to your dropshipper for fulfillment. Furthermore, you can begin building a list of customers you can upsell. Using a dropshipper allows you to take a hands-off approach while minimizing risk. Here are a few Dropshipping pros:
- There is no need for an initial investment in products
- There are numerous product options available
- There is less risk because no capital is required to be invested
- It is a time-saving service because your storage and shipping are handled
- Over time, you’ll be able to build a customer list and a connection
If you don’t have any capital, dropshipping is a risk-free alternative to Amazon FBA. However, you will rely on product information from your supplier, which may be insufficient, requiring you to conduct additional research to ensure you have the correct details and can properly advertise the product.
Because your dropshipper sets your product prices and you won’t be buying in bulk, you cannot negotiate on the stock. Your profit margins are likely to be low, leaving no room for you to offer your customers exclusive deals or discounts.
Competition may be fierce, and you must communicate with customers regarding returns, refunds, and inquiries, so it is not a completely ‘hands-off’ approach. Below is a list of Dropshipping cons:
- Suppliers may provide you with insufficient product information
- You will be unable to negotiate product pricing with your supplier
- You will face fierce product competition
- You may encounter potential restrictions on where your products can be sold
- The profit margins will be slim
- You are not permitted to offer specials or discounts
- There is no way to create a brand
- Customers must be contacted directly
- A website must be created
What Are the Main Differences Between Amazon FBA and Dropshipping
The biggest difference between Amazon FBA and dropshipping is inventory ownership. Amazon FBA is a product warehousing and shipment service that allows businesses and entrepreneurs to manage inventory while Amazon FBA manages customer orders. In the meantime, dropshipping is a low-cost fulfillment method in which the manufacturer manages the logistics.
Which Business Model is Right for You?
It’s a challenging choice. However, the decision between Amazon FBA and dropshipping will ultimately come down to how much money you have to invest and how much risk you are willing to take. So, consider this:
Do you want to put your money into a stock that may or may not sell, but you want to be in charge of building a brand with the potential for great profit margins with the right product?
Do you want to sell someone else’s inventory with minimal or no risk but with the possibility of losing money on these highly competitive products?
The answers you give to these questions will determine which path you should take when deciding between Amazon FBA and dropshipping. Whichever option you choose, you must treat it as a serious business because both Amazon FBA and the dropshipping model require effort to get started and succeed.