If you intend to start an ecommerce business, you may already be working on your business plan and trying to figure out which ecommerce model will work best for you. You may have stumbled on two very popular ecommerce business models - dropshipping and Amazon FBA.
Both models have become very successful in the world of ecommerce and are now considered the most preferred especially for startups. With both models, sellers can transfer the responsibility of storing goods and fulfilling orders while focusing on other aspects of their business.
But as a startup how do you choose between dropshipping and Amazon FBA? Which will work best for your business?
To make the right decision, you need to know what both models are and how they work.
In this article, we will explore dropshipping vs Amazon FBA differences as well as their pros and cons to help you decide which will work best for your ecommerce business in 2022.
Dropshipping is an ecommerce business model where the business owner does not keep inventory or purchase stock in bulk. As an ecommerce business owner, you buy products from a wholesale company or manufacturer and have them send the products directly to your customer. All you have to do is advertise your products on an online marketplace like Shopify, eBay, and other suitable platforms.
When a customer places an order, you charge your customer while the wholesale company charges you. You won’t have direct contact with the products you sell. This means you only get to pay for the product when you get paid.
Over the years, dropshipping has been seen as a fast and easy way to make money. However, just like any ecommerce business model, you need to devise strategies on how to generate more income for your business.
Amazon FBA has built quite a reputation for being one of the best fulfillment networks.
FBA, which stands for Fulfillment by Amazon, is a service that allows online retailers selling on Amazon to simply send their products to an Amazon FBA warehouse and have Amazon handle the rest.
When your customer places an order on Amazon, Amazon picks, packs, and ships the product from the FBA warehouse directly to your customer. In addition, they handle customer service and even returns. This model is perfect for business owners looking to cater to a large audience. It is also known for being incredibly scalable.
There are a few differences between dropshipping and Amazon FBA.
With Amazon FBA, you do not have to handle customer service or product returns. On the other hand, with dropshipping, you may have to deal with returns and customer queries yourself.
One major difference between dropshipping and Amazon FBA is in the sourcing and payment of inventory. With FBA, you have to source and pay for your inventory (which will be sent to Amazon fulfillment centers) ahead of time. On the other hand, with dropshipping, you never have to take ownership of your inventory. Payment is made to your supplier after accepting confirmed orders.
With both dropshipping and Amazon FBA, you are exempted from the responsibility of order fulfillment. However, you are responsible for marketing your products and taking customer orders.
To help you choose the right business model for your ecommerce business, let’s look at some of the pros and cons of dropshipping vs Amazon FBA.
Now to the question you've been waiting for. Which is right for your business? Dropshipping or Amazon FBA?
As we've explained earlier, Amazon FBA is a fulfillment service where sellers can hand over the responsibility of picking, packing, and shipping orders to Amazon. With this service, you can focus on other aspects of your business while Amazon handles order fulfillment and even customer service. You can monitor your orders on your Amazon Seller Central account and know when you need to restock at the FBA warehouse.
What's more, you can leverage Amazon’s large customer base to get your products in front of millions of customers across the globe, increase sales and grow revenue with Amazon. However, it is important to note that all these benefits come at a price.
You will need to pay Amazon tons of FBA fees to enjoy this convenience. If you have enough capital and want to expand your ecommerce business, Amazon FBA may work best for you. It is also important to calculate how much Amazon will be getting on each sale and ensure your profit margin is positive.
On the other hand, dropshipping is a low-risk, low capital business model that allows you to start your ecommerce business even without capital.
You can run your business from any part of the world and diversify your products with little investment. If you are just testing the waters, perhaps you just started your ecommerce business, you may want to play it safe with dropshipping.
While dropshipping may seem like the cheapest and easiest business model, it requires strategic planning. You need to put in the work to pick the right products to sell and find reliable partners that can deliver the goods to your customers promptly and with few mistakes. Dropshipping takes away the responsibility of handling or even seeing your products. However, the downside to dropshipping is the high competition and low-profit margin.
With both business models, you don't get full control of your business. If you are using the FBA service, you will need to comply with Amazon's rules and regulations.
With dropshipping, a large part of your business will be controlled by your supplier or partner, coupled with little flexibility and low-profit margins.
In choosing between dropshipping and Amazon FBA, it all comes down to how much capital you have and the risk you are willing to take.
While Amazon FBA has similar benefits to dropshipping, Amazon will not be responsible for purchasing inventory. Amazon only stores already purchased inventory in their FBA warehouse.
However, you can dropship on the Amazon platform as long as you abide by the following rules:
You can check out Amazon's dropshipping policy here.
So that's it! The decision is now up to you. If you are looking to grow and expand your business, considering the high cost and risk, you can use the Amazon FBA model. On the other hand, if you want to play it safe, dropshipping could be just the right model. However, you need to consider several other factors in your business. You can go through the pros and cons of each model as listed above and make an informed decision.