Finding the best fulfillment method is crucial to the success of your online business; as the eCommerce industry grows more competitive by the year, Amazon sellers are employing new strategies to optimize their order fulfillment and boost customer satisfaction.
As Amazon's platform has become most sellers' go-to when creating a profitable eCommerce business, there’s no better way to attain a loyal customer base. Needless to say, the more customers that buy your products, the greater your profit margins will be.
A vital facet of selling online is the shipping process, so today, we shall cover which business model will best suit your order fulfillment method.
Specifically, we shall compare the Amazon FBA and dropshipping business models and explore the significant advantages and disadvantages of both.
By the time you've finished reading our informative guide, you’ll be able to compare Amazon FBA to Amazon dropshipping and make the right decision for your own business when it comes to shipping and selling products on one of the most popular eCommerce sites on the web!
What is The Amazon FBA Business Model?
The Amazon FBA business model has been a very popular choice for Amazon sellers, with 73% of Amazon sellers employing Amazon's FBA program to fulfill customer orders.
Amazon FBA refers to fulfillment by Amazon. This is a service provided by Amazon as a means for third-party sellers to automate their order fulfillment and shipping service.
Essentially, Amazon FBA sellers will send their inventory to an Amazon warehouse, and Amazon will then pick, pack, and ship your order for you.
When you use one of Amazon's fulfillment centers, Amazon will even handle customer service for you!
It's easy to see the appeal of one of the most popular eCommerce business models, especially for those who have just started selling products from their eCommerce store.
What is The Dropshipping Business Model?
The dropshipping model refers to sellers who outsource the processes of procuring, storing, and shipping products to third-party logistics companies.
Put simply, Amazon's dropshipping model is a means of selling products online without needing to keep them in stock.
Your job is to promote the products from your online store. When a customer places an order, you then send the order to your dropshipping supplier and inform the customer that their order is being processed.
Overall, when you employ the dropshipping model, you can start a profitable online business without worrying about the cost of warehouse space, juggling a supply chain, or managing stock.
Amazon FBA vs Dropshipping: Which Model Works Best for Sellers?
Comparing Amazon FBA and dropshipping is the only way to know which model will generate higher profits for your online business.
Below, we shall emphasize the benefits of both models to help you decide which fulfillment service is best for your business.
The Pros of Amazon FBA Business Models
There are many benefits to utilizing Amazon's FBA program, and below, we shall investigate why running an Amazon FBA business is preferable to other business models.
Lower Shipping Costs
Amazon FBA gets your products to your customers at a lower cost because Amazon secures substantial discounts with all of the major delivery carriers.
Your fulfillment fees will reflect a fraction of that discount, allowing your business to generate higher profits than if you were to ship your products via an FBM (fulfillment by merchant) business model.
By working with Amazon's FBA program, you also don't need to factor in the cost of external packaging - Amazon will take care of this for you.
Faster Shipping Process
You aren't the only ones saving money - because FBA products are eligible for free shipping, your customer base will also experience the benefits.
If your customers are Prime members, they will also reap the benefits of same-day fulfillment services, making it more probable that your customers will be satisfied and leave a positive product review.
This is faster than if you were to ship products with a third-party supplier.
More Storage Space
With Amazon FBA, you don't have to worry about arranging and paying for a third-party warehouse or creating storage space from your own home.
Amazon's fulfillment centers manage your inventory with such professionalism that you also don't have to worry about the compromise of product quality.
While you must pay a fee for this service, if you have a good inventory performance, you'll get unlimited space within an Amazon warehouse.
Customer Service Management
Customer service can demand a lot of your time, but with Amazon FBA, customer service management isn't something you need to worry about.
Any customer concerns will go directly to Amazon's customer service specialists, which saves you time and could potentially be a more appropriate alternative method of customer service, as Amazon is available 24/7 via chat, email, and phone.
With Amazon FBA, Amazon is only one of the selling platforms that you are allowed to sell to your target customer base - you also have access to multi-channel fulfillment solutions.
When you sell online as an Amazon FBA seller, you can sell your FBA products on a multitude of platforms and channels (like BigCommerce and eBay), and Amazon will still fulfill those products.
Since Amazon is picking, packing, and shipping your orders for you, you have more free time to improve other areas of your business.
For instance, if you want to refine your product research with a first-rate FBA calculator such as SellerAmp, you can relax knowing that you have the time to review a thorough analysis of your competitor's storefront and your own product history!
The Pros of The Dropshipping Business Model
Now that you know the many advantages of the Amazon FBA model, it is time to consider the benefits of running a dropshipping store.
Minimal Upfront Investment
You don't have to invest capital when acquiring inventory or when you have found a storage facility to store it.
This means you also don't need to spend time organizing your inventory or hiring staff to help you fulfill customer orders.
Your only upfront investment will be used to purchase products and register your domain.
Broad Product Offerings
By running a dropshipping store, retailers can offer you a wider range of product offerings.
For a small eCommerce business without a wealth of storage space, this can be incredibly beneficial to your profit margins as you can offer a broader range of products to your customer base.
Online store owners who choose to ship and sell products via dropshipping can operate from anywhere, regardless of location.
You can offer a range of different products and adapt your product offerings to fluctuations within the Amazon marketplace with ease.
The following list will emphasize the responsibilities that you will not have to handle as a dropshipper selling stock:
- You don't have to find, manage, and pay for a warehouse.
- You don't have to handle the packing and shipping of your orders.
- You don't need to maintain stock levels.
- You don't have to manage returns.
By not having to worry about these facets of order fulfillment, you will save valuable time that could be used to refine other areas of your business.
A lot of the work that goes into dropshipping is the responsibility of the supplier.
Garnering sales may take some patience and a lot of work, but if your business experiences a boom in popularity, you can relax knowing that your profits will double, but your workload won't.
Amazon FBA vs Dropshipping: Which Model Has the Most Drawbacks?
Nothing is perfect. Both Amazon FBA and dropshipping have disadvantages that you should be aware of before you choose either method of fulfillment.
We have ensembled a range of drawbacks for both business models to help you decide if the negatives outweigh the positives.
The Cons of Amazon FBA Business Models
Although Amazon FBA is the most popular choice for Amazon sellers, it is essential to know why it isn't the go-to method of fulfillment for every seller.
Complex Inventory Tracking System
Amazon's inventory management system can be overwhelming, especially for new sellers who aren't familiar with its many features.
You may have a preferred way of managing and tracking your stock, but with Amazon FBA, you have no sway over their particular methods of inventory organization.
Increased Return Rates
Expect higher return rates because customers can return their orders directly to Amazon without your approval.
If your customer chooses to return your products, Amazon will take care of the return shipping for you.
This can mean that you have to pay additional costs, and there is a risk that your products will return damaged and become unsellable.
No Branding Opportunities
For most customers, the only branding they will encounter is Amazon's own logo.
Many Amazon FBA sellers aren't able to imbue their own branding on the packaging or promotional materials, meaning that customers may not even know of the brand that produced the products they are happy with.
Confusing Sales Taxes
Each state has its own tax rules and rates, which can be challenging to adhere to if the warehouse you use is in a different location.
Some FBA sellers may need to collect and remit sales tax, which can be a substantial strain on your resources.
Lack of Control Over Customer Relationships
Although it is incredibly beneficial to have Amazon handle the customer service element of order fulfillment, it means that you have no direct means of building rapport with your clients, which can make garnering brand loyalty difficult.
The Cons of The Dropshipping Business Model
Although the cheap initial investment of opening a dropshipping store has its perks, those same perks have produced considerable disadvantages that could be more detrimental to your business rather than beneficial.
The appeal of low startup costs has resulted in a fiercely competitive landscape for dropshippers.
Additionally, the ease of dropshipping requires no particular skill set and is not high-risk, meaning that anyone can become a dropshipper, and because of this, the competition for organic traffic has never been more prominent.
Because customers will likely come across your products from different companies, it is also likely that they could save money by buying that product from another dropshipper.
You could combat this by lowering the price of your product, but you risk comprising your profit margin in the process.
Slim Profit Margins
Dropshipping's profitability is heavily reliant on increasing traffic to a seller's online store. If you are new to dropshipping, generating profits can prove to be difficult since you don't have an established customer base.
Since your customer base will take a while to expand, and you are likely to buy individual products (rather than in bulk), your profit margin will suffer.
You'll only experience significant financial gain once you have scaled up your business.
Quality Control is Challenging
Dropshipping prevents you from inspecting the quality of your products before they are shipped, meaning that if your product doesn't meet its descriptions, it will be shipped regardless.
If any issues arise, such as late deliveries, broken products, or missing items, the customer will contact you instead of your supplier.
It will be your responsibility to rectify those mistakes in order to maintain your business's reputation, which can take time and be frustrating if you are blamed for something out of your control.
Consistent mistakes can result in dissatisfied customers, which will impact your reviews and ratings, resulting in lost revenue.
You Have No Control Over Your Supply Chain
Even if you do everything perfectly, your dependence on an unreliable supplier could jeopardize your business.
If your supplier runs out of stock, you will have to stop selling their items to your customers temporarily.
Some of your customers may be understanding of this, but if not, you could lose clients.
Limited Brand Recognition
Branding opportunities for your business are limited with dropshipping.
The items and services you provide will be credited to multiple suppliers and distributors you work with rather than yourself.
Amazon FBA vs Dropshipping: Which Model is the Winner?
Ultimately, that decision is yours to make. You know your business better than anyone.
However, based on the evidence above, it is clear to see why 73% of Amazon sellers opt for Amazon FBA.
With excellent customer service management and multi-channel fulfillment, you are not only allowed to satisfy customers via Amazon's platform, but you can expand your customer base and develop a polished eCommerce business that has a wealth of loyal clients.
The maintenance of your stock levels and quality control is in your hands, and you don't have to worry about unreliable suppliers.
Ultimately, the cheapest option isn't always the best one.
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