Amazon sellers have a couple of choices when it comes to their business model. You can choose to use fulfilled by Amazon (FBA) or fulfilled by merchant (FBM) options, with the latter including dropshipping. There are some big differences between FBA and dropshipping, so those who sell on Amazon must carefully decide which one to use.
In this guide, we will compare Amazon FBA and dropshipping to determine which is best for your business. Keep reading to learn what Amazon FBA and dropshipping are, their pros and cons, and which one is the right choice for your business.
What Is Amazon FBA?
FBA stands for fulfillment by Amazon. In this business model, Amazon handles all your product fulfillment, including storage, shipping, returns, and more. According to research, 89% of sellers on the platform use FBA.
Amazon FBA sellers enjoy a variety of benefits, but there are also drawbacks to this method. Let's check out the pros and cons.
Pros of Amazon FBA
FBA has tons of great benefits for sellers. Namely, the convenience that comes with outsourcing fulfillment to Amazon's robust service centers.
- Convenience: With FBA, Amazon will do all the picking, packing and shipping on your behalf.
- Reliability: Customers already trust Amazon. This can help to boost your sales by enhancing your trustworthiness.
- Customer Service: With FBA, you outsource customer service to Amazon, which means you don't have to deal with extra work. They handle customer service and returns for you.
- Time-Saving: You can focus on growing your business while Amazon deals with many of the practical tasks for you.
- Prime: FBA gives you access to Amazon Prime, which boosts customer satisfaction through quick deliveries. In 2019, 100 million Amazon customers used Prime over the holiday season. You can take advantage of customer desire for fast shipping, boosting sales.
- Big Marketplace: When you use FBA, you have instant access to Amazon's enormous marketplace. Amazon had 2.2 billion global web visits in April 2023, and this level of traffic is hard to come by.
- Profits: Products on Amazon often yield a higher profit margin, thanks to higher prices attracted by Amazon's customer service and reputation.
Cons of Amazon FBA
It's not all perfect. There are several drawbacks you should know about when considering Amazon FBA.
- FBA Fees: Amazon has standard FBA fees that vary depending on the size and weight of your items. In addition, you must pay monthly storage fees, including further fees for slow-moving inventory that is stocked for over 365 days.
- Restock Limits: Understandably, there's a limit to how much Amazon can stock. You have less control over the amount of product you would like to restock.
- Inventory Issues: You rely on Amazon for inventory information, which means it's easy to lose track of things. Although Amazon will reimburse you for lost inventory, you still need to be careful about maintaining proper records of stock.
- Restricted Products: Amazon has a list of restricted and regulated items. If an item has strict regulations, you may not be able to use FBA to store it for you.
- High Competition: Amazon FBA is highly saturated, which means competition is fierce.
- Customers Belong to Amazon: Ultimately, customers are shopping and purchasing through the Amazon platform. As a result, they may develop more brand loyalty to Amazon rather than your business.
- Blind Dependency: If Amazon changes its regulations and removes your store from its platform, there is little you can do about it.
- Startup Costs: When using FBA, the startup costs are relatively high. You need a decent amount of capital to start acquiring products and paying FBA fees.
What Is Dropshipping?
Dropshipping is a fulfilled-by-merchant (FBM) model that lets e-commerce sellers outsource the process of sourcing, storing, and shipping products to a supplier. The major benefits of this model include low overhead costs and increased efficiency. However, customer experience may suffer as a result.
The customer orders from your business and is not aware that a third-party supplier has shipped the product. As a result, you don't have to worry about storing products yourself. Notably, Amazon has strict guidelines about dropshipping; if you don't adhere to the rules, Amazon can suspend your account. For example, you cannot drop ship orders from other large retailers like Walmart.
Furthermore, you must identify the seller on all invoices, external packaging, and packing slips.
Here are more pros and cons of dropshipping.
Pros of Dropshipping
Dropshipping brings the seller several potential benefits, from low cost to low risk. Here are the advantages in more detail.
- Low Costs: Dropshipping has low upfront fees compared with other business models. You don't have to order products in bulk.
- Easy to Start: You can start dropshipping almost immediately. Once you have an agreement with a supplier, you can start listing products right away.
- Lower Risk: Since you don't have to invest capital, it's a low-risk way to start a business. Plus, you are not in control of inventory, so the risk of loss is minimal.
- Less Responsibility: The supplier handles everything, like packing and shipping, which means you have fewer responsibilities on that front.
Cons of Dropshipping
Dropshipping also has some disadvantages that sellers need to be aware of.
- High Competition: Since the barriers to entry are so low, dropshipping is a very competitive arena. Furthermore, there are fewer opportunities for branding, which means other sellers could be marketing the same product.
- Fulfillment Timeline: You have no control over order selection, packing, or shipment, as this is up to the supplier.
- Lack of Inventory Management: Since you do not handle inventory, you may not have access to real-time updates on what is available and what is out of stock. There may also be supplier errors.
- Low Profit Margins: With few product differentiators, you may end up competing on price much more. This can affect your profit margins.
- Lack of Quality Control: Without direct access to the product, it is difficult to assure quality.
Key Differences Between Dropshipping and Amazon FBA
When it comes to comparing Amazon FBA vs. dropshipping, there are some similarities between the two. They are both ways of establishing e-commerce businesses on Amazon, with the main difference being who owns the inventory.
- Inventory Ownership: With Amazon FBA, you are in control of the product inventory and must pay for it upfront. With dropshipping, the supplier owns the products, but you only have to pay when a customer places an order.
- Shipping: Amazon packs and ships all FBA products, which is usually a rapid service thanks to Prime. With dropshipping, the supplier is responsible, but times may vary.
- Customer Service and Returns: Amazon handles all customer service and returns for FBA products. With FBM models like dropshipping, you are responsible.
You should carefully consider these factors when deciding between dropshipping and FBA. Essentially, the decision comes down to how much control you want over your business. Amazon FBA gives you more control, but dropshipping has much lower barriers to entry.
Key Players in Dropshipping and FBA
In drop shipping, there are several players involved, which can complicate matters more.
- Seller of Record: The seller of record is you or your business. This refers to the individual who sells the products to the end customer. The SoR sets the price and is responsible for sales tax. According to Amazon's dropshipping policy, you need to identify yourself as the SoR on all documents.
- Manufacturers: The manufacturer is the one who produces the items. You can purchase directly from the manufacturer, but depending on the availability, you could encounter scalability issues.
- Wholesalers: Wholesalers are middlemen who buy from manufacturers. They may provide dropshipping services that allow for better scalability.
This differs from Amazon FBA, where the players are you, your suppliers, and Amazon. You should consider this when deciding which business model is right for you, as it can alter your day-to-day significantly.
When using dropshipping as your method of choice, you will mostly be dealing with product sourcing and customer service. With Amazon FBA, you need to handle product sourcing and inventory. Ultimately, Amazon FBA gives you greater control over your business.
Which Is Right for Your Business?
The decision is down to you if you want to use dropshipping or Amazon FBA. It boils down to aligning your business goals with the resources and strategies that best suit them.
Amazon FBA is the best choice for a scalable venture that gives you greater control over your products and branding. You also get Prime eligibility, quality assurance, and the potential for higher profit margins. However, you must consider the associated fees.
On the other hand, startups with limited capital might prefer dropshipping. The low upfront investment, flexibility to test various niches, and reduced risk make it an attractive choice. However, you need to acknowledge the challenge of maintaining product quality, meeting customer expectations, and contending with a competitive market.
Here at OA Cheddar, we are big proponents of Amazon FBA. Taking advantage of the robust Amazon warehouse system gives you a much better opportunity to grow a reputable, awesome brand. We believe that, with the right strategies, Amazon FBA can take your business to new heights.
Sourcing Products: Dropshipping vs. FBA
With each method, you need to consider how you will source products. Dropshipping makes it relatively easy to find items to sell. There are lists of dropshipping suppliers available online, which makes it straightforward to find one that fits your niche. You also need to decide whether to opt for manufacturer or wholesale suppliers.
Meanwhile, there are numerous ways to source products for the Amazon fulfillment method:
- Arbitrage Software: Many forms of arbitrage software make it incredibly easy to find products in your niche. They scour other marketplaces like Alibaba and eBay, saving you time while tracking down products. They can even give you data on sales history.
- Leads Lists: If analyzing data sounds tedious, consider leads lists. Arbitrage experts use software to handpick and curate a list of products for you to choose from. This saves you even more time and reduces competition due to the limited available spots on each list.
- Local Suppliers: Network with local suppliers to strike up deals. You will need to practice your negotiation skills, but it's well worth it!
- Online Marketplace: You can also search online marketplaces yourself or browse wholesale suppliers. Contact the supplier to negotiate your terms.
Ultimately, Amazon FBA offers numerous ways to grow your business. You get more control over the whole process, from finding suppliers to branding and listing your products, setting prices, and more.
Take Your Amazon FBA Business to the Next Level
Are you ready to start selling on Amazon? We recommend using FBA to create a business that is scalable, flexible, and solid. And what better way to do it than with online arbitrage leads lists?
These thoughtfully curated lists from 7-figure resellers can help to guide your business toward unexplored opportunities and greater profitability. By leveraging lists, you can efficiently tap into new markets and gain invaluable insights that shape your strategies.
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