Amazon FBA vs. Dropshipping: Which is Best For Amazon Sellers in 2023?
Updated
May 31, 2024
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Amazon FBA and dropshipping are game-changers for the e-commerce market because they allow startups to effectively scale their businesses. FBA is currently the most popular fulfillment method, as approximately 89% of Amazon sellers use it. However, this doesn’t make it the best approach for every business.
So which order fulfillment method works best for your Amazon business? In this Merch Jar article, we’ll go over the unique differences between Amazon FBA and dropshipping so you can make the most informed decision.
Ready? Let’s dive in!
What is Amazon FBA?
Amazon FBA (Fulfillment by Amazon) is a reliable service that Amazon offers to help third-party sellers with storage, automating their order fulfillment, product shipping, order returns, and customer service.
This is how FBA works:
Online sellers with an FBA private label send their product inventory to their nearest Amazon fulfillment centers
Amazon receives the products, sorts them, and stores them in the fulfillment centers
Customers order the seller’s products from the Amazon marketplace
As soon as the order is confirmed, Amazon FBA packs and ships the product to the customer
Amazon FBA handles all customer service, including if customers want to return a product and get a refund
Your revenue goes straight into your account after a period of 2 weeks
Amazon will notify you when your product stock is running low so you can replenish it in good time
Essentially, when you pay for Amazon FBA, all you have to do is send your stock and collect the revenue from your orders.
Pros & Cons of Amazon FBA
Pros
Gain customer trust: When Amazon ships your products, your listings automatically receive the Prime shipping badge. This helps customers trust your products more because they know Amazon Prime shipping is reliable and fast.
Lower operating costs: There’s no need to worry about organizing storage, hiring staff, or logistics management because Amazon FBA covers everything.
Strengthen your Amazon ranking: For Amazon sellers, if you use the FBA program, your product shows higher up on product search pages.
Cons
High fees: Depending on the size and weight of your products, Amazon FBA fees can be quite costly. Additionally, sellers also need to pay monthly storage fees, and this can become quite burdensome if your stock isn’t moving as fast.
Limits on restocking: Sometimes, you may not be able to send in as much stock as you would like because Amazon puts restock limits per storage type.
Increase in returns: Amazon has a no-questions-asked return policy, which can encourage customers to return products more frequently.
What is Dropshipping?
Dropshipping is an order fulfillment method where the online seller doesn’t keep the products they sell in stock. Essentially, the seller will list the products online, and once an order is made, they will have it shipped from the supplier without having to purchase any stock themselves.
The dropshipping model is quite easy for any e-commerce seller to get started with because there’s no major upfront investment. It’s important to point out though, that Amazon does have a strict dropship policy. For example, sellers aren’t allowed to dropship products from other retailers, like Walmart. Additionally, even though sellers aren’t directly responsible for the shipping and handling of products, they need to stay responsible for accepting and processing returns.
Pros & Cons of Dropshipping
Pros
Easy to get started: Dropshipping generally has low barriers to entry because you can simply find your products from a supplier and immediately start listing them on Amazon.
Low costs: The startup costs are quite low because you don’t have to worry about ordering inventory or spending on storage.
Unlimited product options: Since you won’t have to worry about acquiring stock, you have the freedom to list a very wide variety of products for your business.
Cons
More competition: Since dropshipping is so easy to start, you’ll find more competition.
Inadequate quality control: As you don’t have access to the products yourself, you can’t guarantee the quality will be of a high standard.
Slow delivery times: Depending on the manufacturer or supplier you choose, you are at a higher risk of facing slow delivery times. This might make it difficult to compete with products with the Amazon Prime badge.
Key Differences Between Amazon FBA & Dropshipping
1. Scalability
Amazon FBA: Since Amazon handles so much of the logistical process, you’ll have a lot more time to focus on elevating the quality of your products, marketing, and scaling your business. Although getting started with the Amazon Fulfillment network can take a bit more time, FBA offers you a larger customer base to sell to so you can generate consistent sales. Reliable and fast shipping can also help generate positive reviews that bring more customers to your storefront.
Dropshipping: While scaling with dropshipping is possible, it can take a lot more effort on your part to build strong business relationships with your suppliers. You may have to experiment with different suppliers, in the beginning, to figure out which ones can help you deliver optimum products and services for your customer.
2. Customization
Amazon FBA: Since you’re selling directly from Amazon, you won’t have many customization options. FBA sellers all have to stick to the standard Amazon sales page listing.
Dropshipping: When you’re using a dropshipping method with your own online store, you have more freedom when it comes to customizing your listing page. You’ll be able to personalize the look and feel of your website and add creative product images that reflect your brand image. Additionally, if you also choose to have an Amazon storefront, you’ll be able to direct your customers to it from your online store’s main website.
3. Investment
Amazon FBA: To use Amazon FBA, you need to have investment capital, and you’re looking at a minimum of about $5,000. For such a reliable service, you’ll have to consider the cost of sourcing your stock, fulfillment fees (e.g., picking up and packing orders, shipping and handling, product returns, and customer service), storage fees, and long-term storage fees.
Dropshipping: A major benefit of dropshipping is that you can start a store with little to no budget. Your supplier will be the one to handle the stock, storage, and shipping of your products, saving you a ton of logistical costs.
4. Risk
Amazon FBA: Although FBA has higher growth potential, the risk is also much higher because you need to pay upfront for the inventory you send to Amazon. You’ll have to consider incurring losses for products that you can’t sell on time because of shifting market demand. Additionally, it can be more difficult to secure repeat customers through email lists since customers belong to Amazon and not you.
Dropshipping: You face a much lower risk because you don’t have to invest capital or acquire the stock yourself. With dropshipping, you’ll only buy the products that have actually been ordered by your customers.
Amazon FBA vs. Dropshipping: Our Verdict
Ultimately, dropshipping is a risk-free alternative to Amazon FBA. Especially if you don’t have enough capital to invest in FBA. While risk-free, it can be difficult to compete with Amazon Prime products, as they’re generally seen as more trustworthy products. Additionally, customers can expect their orders much quicker and more reliably, as most Prime products are delivered the next day. With dropshipping, you essentially have to rely on your supplier to fulfill your orders, and it can be difficult to manage logistically if you’re not careful.
Furthermore, with Amazon FBA, you can provide your customers with elite customer service and offer them attractive deals such as free shipping if they are Amazon Prime members. Dropshipping, unfortunately, doesn’t offer you such luxuries. You can also find that your profit margins are smaller with dropshipping because your product prices are led by your supplier, and you’re not purchasing in bulk.
To know which fulfillment method is perfect for you, consider your business model. If you’re just starting up in e-commerce, dropshipping is a great place to start because it’s low-risk. Once you establish your business and gain enough revenue, it’s well worth investing in Amazon FBA to help you scale.
Elevate Your Amazon Advertising With Merch Jar
Whichever fulfillment method you choose for your business, you’ll greatly benefit from using an Amazon ads management tool to help you reach your target customers. Merch Jar is dedicated to reducing the time and energy you put into managing your Amazon ad campaigns by automating your targeting efforts and analyzing your ad performance. This way, you can spend more time focusing on scaling your business.
