What’s the Difference Between Dropshipping and Amazon FBA
If you are interested in getting into a side hustle or entrepreneur opportunities, dropshipping and Amazon FBA are two popular options available. There are distinct differences between the two and how you operate them, helping you make more money.
Dropshipping is when you will place an order with a wholesale company, and then they make the goods and ship them to the customer as they’re ordered. Amazon’s FBA or fulfillment by Amazon means that Amazon stores your products for you and offers their shipping to customers. In both cases, you are the middle man between the order fulfillment and the customer and do not hold any inventory of your product yourself.
There are pros and cons to each method, but it all depends on how much risk you want with your company and your product. Read on to determine the differences between the two and how you can make the right choice for your business.
What is Dropshipping?
Dropshipping has the entrepreneur make an online store offering products to their customers. Once a customer buys something, the business provider places an order with their supplier, who makes and ships the product directly to the customer. The shop owner never touches any physical product.
Up next, we’ll outline the pros and cons of dropshipping. Each of the pros and cons explained here will help you decide if this is the right route for your business.
Pros of Dropshipping
Dropshipping can be very helpful if you are selling a customized product to your customer. There are a couple of pros that come with drop shipping because of its ability to be more affordable for new entrepreneurs.
Less Investment Capital
Since dropshipping is an online-centered business, it does not require you to have a brick-and-mortar store or buy a lot of inventory. It saves you from spending many startup costs that can be difficult to have when you are new to the industry.
Dropshipping has you be the middle man between the customer and wholesaler. Because of this business model, you have less responsibility. As you only need to transfer the orders to your supplier and don’t have to worry about manufacturing or shipping out any product yourself.
There is no need to buy large quantities of inventory for your dropshipping business. This makes the financial risk much less because you only need to maintain and update your online store.
If you bought a whole bunch of inventory and only sold one type of product, you would not be able to bring more customers to your site. But with dropshipping, you can diversify your products based on your supplier and sell several different things to various consumers.
It is easy to offer your customers customization options in the dropshipping model along with product diversity. You can list a variety of products and customers can choose what they want, and because the supplier takes care of the rest, it is of no risk to you.
Since you are not storing and shipping your product, you have a lot more time. By outsourcing the work, you can either come up with new products or spend your time elsewhere!
Work From Anywhere
One of the best benefits of having a dropshipping business model is that everything is online. Since you do not have to store products, you can work from anywhere in the world, as long as you keep your store up and running. It allows you more freedom on when and where you work.
Cons of Dropshipping
Of course, there are always some negatives that balance out the positives. To make the best decision for your business, it’s important to know the entire scope of what you’re working with. Coming up, the cons.
Smaller Profit Margins
When being the middle man between the consumer and the supplier, your profit margins become slimmer. The market for dropshipping goods is quite saturated, so you do not want to overprice your product because consumers will go elsewhere.
But when you price your items, there is often going to be a very tiny amount of money between the supplier price and what you can charge.
When selling a product as advertised by your supplier, it can be challenging to answer customer service questions or specify the product you are selling. You are not making the product, so knowing the specifics about a product can be difficult.
There are a lot of people who are in the dropshipping market. This can make it a very competitive environment due to some offering lower prices than others. By entering the dropshipping field, you subject yourself to that environment and a high chance of being outsold.
Long Shipping Times
Depending on who you choose as your dropshipping supplier, you may have to deal with long shipping times. Which can upset customers and cause unexpected returns and refunds. If you chose to dropship from Ali Express, expect shipping complications. However, there are many other options to choose from and you can often find smaller, local dropshipping suppliers for more niched down products.
What is Amazon FBA?
Amazon’s fulfillment by Amazon works similarly to dropshipping but comes with some different startup costs and risks. The one main difference is that you are listing your product on Amazon, sending the product directly to the Amazon warehouse(s) and, when purchased, Amazon takes care of fulfillment, shipping it directly to the customers from their warehouse(s).
Pros of Amazon FBA
If dropshipping doesn’t seem like the perfect fit, Amazon FBA might still be an option. Here are the pros of Amazon FBA.
Amazon handles all of the shipping and storage of your products. Because of this, you can scale your business and allow amazon to answer any customer issues. Also, because of Amazon’s reputation, you can focus on selling your product on an established marketplace, instead of trying to make a name for yourself on the vast world wide web.
Large Customer Base
Because Amazon is a worldwide online retailer, you have the opportunity to sell to hundreds and thousands of people. Your products will have a more extensive customer base and allow you to sell your product to many different people thanks to Amazon’s reputation and customer service.
Higher Profit Margins
Using Amazon FBA, you can charge whatever price you like for a product. This is because of the reputation of Amazon and its customer base. You will be able to make more money than if you were using dropshipping. And customers are willing to pay more for faster shipping.
Cons of Amazon FBA
There are a few drawbacks to using Amazon FBA. If you’re not aware of these ahead of time, they can really throw a wrench in your plans. Here we’ll outline the cons, so you can be prepared.
Since you are selling out of an Amazon warehouse, you may not be aware of your stock which can cause you to spend more capital than need be, or run out of stock without realizing.
Amazon has a lot of people participating in the FBA program. This can mean that some people are selling the same products as you for different prices, which can cause a lot of competition in the marketplace. This may be especially difficult for new entrepreneurs and can cause them to make less money.
Dependency on Amazon
Sometimes Amazon may drop your shop, especially if it is getting low traffic. You may not be aware, and you can lose your business. If their regulations change, you may win or lose money for your business, depending on the regulations. You are playing on Amazon’s turf and need to play by their, very strict, rules.
To start Amazon FBA, you need capital. You have to buy inventory and pay to ship it to the Amazon warehouse and provide Amazon with a fixed amount to use their services. It can be an issue for new entrepreneurs who may not have the capital needed to enter an FBA agreement.
Amazon generally charges sellers a 15% fee on every sale for using their platform as well as the $40.00 monthly cost for having an Amazon Seller Central account and the cost of using their warehouse services. You need to be sure to factor these fees into your product sale price in order to make a profit.
Understanding the Differences
As you look at the pros and cons, you can see different needs for both businesses. Each one requires additional startup costs; FBA has higher startup capital that can be costly for someone new to the business world.
Both business models will require a different level of risk, the riskier option depends on your personal strengths and weaknesses. Amazon FBA requires more capital upfront as you need to purchase all of your inventory up front and pay Amazon fees. However, Amazon presents your products to it’s millions of paying customers who trust their service and platform, giving you a better chance at making sales.
Dropshipping on the other hand, requires less capital upfront and, other than the initial purchase for your domain and hosting, you can keep costs quite minimal. That being said, you will need to drive all of your own traffic and depending on how you choose to go about doing that, can potentially be either a very expensive venture paying for ads, or a time consuming process trying to grow organic traffic.
Both of these business models can be great for creating an online business but depending on your experience and business expertise, you want to weigh the pros and cons and choose the one that works best for you!