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Dropshipping vs. Amazon FBA: Which Is The Best Business Model?

Dropshipping and Amazon FBA are great methods to get started with an eCommerce business, but which one is right for you?

New entrepreneurs constantly want to know which business model to choose since each model has its pros and cons that need to be considered before making a choice.

This article compares and reviews both models to help you make an informed decision for your eCommerce business. We cover everything from investment costs, risk factors, competition, shipping methods, and more. 

By the end of this post, you should have all of the information necessary to decide if dropshipping or selling on Amazon is better suited for your needs. Let's get started.

Dropshipping vs. Amazon FBA: Overview

Before we look at how both models work, let's take a look at the basics of each one. This will help us understand the differences between them and how they compare to each other.

What Is Dropshipping?

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Image credit: oberlo.com

Dropshipping is a business model where merchants sell physical products online without keeping inventory. When using the dropshipping model, you act as a middleman between your customers and the manufacturer or distributor of the product.

You'll sell items by placing orders with suppliers through your eCommerce store after receiving customers' orders. When an order is placed, you'll contact the supplier with details on what item needs to be shipped, the quantity of the product(s) ordered, and the shipping address. The supplier will then ship the items directly to your customer.

What Is Amazon FBA?

FBA – short for "Fulfillment by Amazon" – is a fulfillment method that allows people to use Amazon's warehouse for storage and shipping. Amazon FBA is mainly used by individuals who wish to conduct eCommerce on Amazon, but it can also be used for other sales channels like Shopify, eBay, or personal websites.

Dropshipping vs. Amazon FBA: Investment Requirement

Investment is an essential factor in any business. The capital investment needed to succeed varies depending on the type of eCommerce model you decide to use.

Dropshipping

The primary investment required to start a dropshipping business is your time and knowledge of eCommerce. You don't have to hold any inventory, which is the highest cost of a traditional eCommerce business. With a computer and an internet connection, you can list your products on eBay, Facebook, or Craigslist, but you are limited in what type of products you can sell.

If you want to start a dropshipping store, the cost will vary greatly depending on the platform and tools you use. For example, if you choose to set up an online store with Shopify, you have to pay monthly fees that range from $29 to $299 per month.
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Image credit: shopify.com

Amazon FBA

Setting up an FBA business requires a more significant capital investment than dropshipping. You will need to purchase products, store them in an Amazon warehouse, and pay for shipping. You also need to pay for an Amazon seller account, which costs $39.99 per month.

Dropshipping vs. Amazon FBA: Risk

A business is only as good as its risk management system. Let's look at how much risk each business carries.

Dropshipping

Dropshippers have a lower risk because they don't invest any money when starting - they can test out which product niches are profitable. Dropshipping allows sellers to quickly move from one product to another without losing money or needing much upfront capital.

Amazon FBA

Using Amazon FBA is a much riskier business than dropshipping. You're putting all of your business endeavors in Amazon's hands by sending them products, giving them control over how they store and ship those items, and putting your name on the line to keep up with Amazon's standards.

Dropshipping vs. Amazon FBA: Customer Base

Knowing who your customers are is essential for business, whether you are running a dropshipping store or an FBA business. Customers are the key to success for any business.

Dropshipping

Dropshipping stores have a small customer base because they are new on the market. Getting traffic to your dropshipping store is difficult because of the stiff competition. Dropshippers rely on SEO, marketing campaigns, and social media management for their traffic, which can be costly.

Amazon FBA

Amazon is the most visited eCommerce platform - as of June 2021, Amazon had 2.45 billion monthly visits. This means Amazon FBA businesses have easy access to customers. This is an advantage because you won't have to spend a lot of time on SEO, marketing campaigns, and social media marketing.

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Image credit: statista.com

Dropshipping vs. Amazon FBA: Competition

Competition is another factor to consider when deciding on your eCommerce business model. Competition has a significant effect on your business, whether you choose dropshipping or Amazon FBA.

Dropshipping

Dropshipping is a popular business model because of its low cost and low risk. This leads to a lot of competition, making it difficult for new online businesses to gain traction. In niche markets, there might not be enough customers to support more than a couple of dropshippers.

Amazon FBA

When you sell on Amazon, the competition is mainly from other Amazon sellers. But the most significant advantage is the huge customer base which you can tap into. So unlike dropshippers, Amazon FBA sellers still have the upper hand because they are selling on the biggest online marketplace in the world.

Dropshipping vs. Amazon FBA: Flexibility

Flexibility is how easy it is for you to change your eCommerce business model as needed. Being flexible is important because it allows you to adapt to the market and move on if things don't work out.

Dropshipping

Since dropshipping doesn't require any up-front investment, it is easier to adapt to new dropshipping trends. If you see your competition growing, you can easily switch to another supplier and start selling their products instead. You don't need to worry about out-of-stock items like a traditional eCommerce store does.

Amazon FBA

Amazon FBA requires sellers to have inventory, which means you can't take advantage of unexpected demand. If your product is out-of-stock, it will be difficult to know how much demand is for that particular item until you can reorder. It's also not easy to jump into trends like you can with dropshipping. You will need to find a product and supplier before deciding to commit inventory and money.

Dropshipping vs. Amazon FBA: Control

When you choose to run an eCommerce business, it's important that you know how much control you have over that business. Let's now look at how much control you have over your business success with these two business models.

Dropshipping

Dropshipping allows you to maintain complete control over your store's success without having to tie up your capital in expensive inventory. You are in charge of marketing and pricing, which means you get complete control over how much profit you make on each sale.

Amazon FBA

Since Amazon FBA sellers take on the role of an Amazon seller instead of a business owner, all the control goes to Amazon. The terms and conditions often change, so you have limited control over your brand's image. For example, selling a particular type of clothing on Amazon might be prohibited if it does not meet their standards.

Dropshipping vs. Amazon FBA: Shipping Time

Shipping time is how long it takes for your product to arrive at the customer's doorstep. Online customers are impatient and have become accustomed to two-day shipping offered by large eCommerce platforms.

Dropshipping

When it comes to dropshipping, the supplier will ship your product directly, so you don't have any control over how long it takes to receive your products. Most suppliers tend to be very quick with their shipping, but some suppliers are slower than others.

Amazon FBA

Amazon FBA businesses can make use of Amazon's highly convenient shipping services. FBA products are eligible for Prime shipping, which means you can guarantee speedy delivery times to your customers. This option also allows you to choose from a broader range of shipping options, including international shipping.

Amazon FBA vs. Dropshipping: Profit margin

Profit is the main factor that determines business success. Profit margins determine how much money you can keep after paying your suppliers and other business expenses.

Dropshipping

Dropshipping is less profitable than Amazon FBA because of the stiff competition in online retail. With dropshipping, you are forced to sell your products at the same price as your competitors to avoid losing customers. This can significantly reduce your profit margins since you have to compete with each other on pricing.

Amazon FBA

Since Amazon FBA businesses have their product inventory, they have more control when determining product prices. Because of buying the products in bulk, they buy at wholesale price and they can negotiate much lower prices than retail businesses. This allows them to pass the savings onto their customers. With this amount of control, it also makes it easy to earn a high-profit margin.

Dropshipping vs. Amazon FBA: Marketing

Ease of marketing is an important factor to consider when choosing your eCommerce platform. You need to make sure that you can reach the right target market and track its preferences and interests for future marketing campaigns.

Dropshipping

Dropshippers can be more flexible with their products and suppliers so they can push the boundaries of advertising. This includes everything from Facebook marketing to YouTubers. Some dropshippers use influencers, in particular, to promote their products effectively without having to pay huge amounts of money.

Amazon FBA

Since your products are on Amazon, the most appropriate form of marketing is Amazon PPC. It will help if you manage this yourself, which means you will have to spend your time learning how it works and running experiments to maximize your profit. This is time-consuming, but it can bring in a lot of profit if you have the time to do it.

Amazon FBA vs. Dropshipping: Scalability

One of the most critical factors to consider when deciding between dropshipping and Amazon FBA is whether you can scale your business.

Dropshipping

If you choose dropshipping, scaling will depend on how fast you can find suppliers who meet your standards. You will also need to make sure that supply chains can support the increased demand and if their factories can keep up with this.

A new dropshipper needs to get a significant amount of traffic from search engines or social media platforms, which would require a solid marketing budget. Without a marketing budget, it isn't easy to scale your dropshipping business.

Amazon FBA

Scalability for Amazon sellers is infinite because of its huge customer base and high-demand products. All you have to do is invest in more product inventory, which you could easily do by using your profits.

Amazon FBA vs. Dropshipping: Customer Support

Customer support is essential for all businesses that want to succeed in the long run. In this area, Amazon FBA beats dropshipping hands down.

Dropshipping

Customer support for a dropshipper consists of managing all the customer queries, complaints, and comments. This includes dealing with all the questions about the products themselves and any problems customers might have with delivery or returns. This is draining because you have to manage all the complaints yourself so it's easy for customers to become annoyed by your lack of responsiveness.

Amazon FBA

When you use FBA, orders are sent directly to the customer's address from the Amazon warehouse. The only point of contact for customers is Amazon’s customer service department. This makes it much easier to focus on other aspects of your business since you don’t have to deal with customer issues.

Dropshipping vs. Amazon FBA FAQ

Can I use both dropshipping and Amazon FBA?

Yes, many people do this even though they are considered to be two different things. It takes a fair amount of time to determine which one works best for your business. Once you've made the decision, then you can cut down on your costs and make more profits.

How do I know if it is time to leave my dropshipping supplier?

If you are not profitable or find it impossible to scale, then you should consider leaving your dropshipping supplier.  If you're getting complaints such as late deliveries, poor quality products, or expensive shipping costs, then you should think about switching your supplier.

Dropshipping vs. Amazon FBA: The Bottom Line

When To Use Dropshipping

Dropshipping can be beneficial if you are looking to start an online business with minimal investment. It is easy to learn too, which is another advantage. Dropshipping is also flexible because you can move on to other suppliers and try new products without changing anything else about your business.

Consider the different options available for dropshipping, such as reverse dropshipping and eBay dropshipping before you make a final decision.

When To Use Amazon FBA

An FBA business model will be more effective for businesses that want to scale quickly since they can take advantage of the large customer base of Amazon. FBA sellers also use Amazon customer support which makes everything easier. However, this comes with high costs because of the fees associated with the FBA program.

In the end, the best business model for you will depend on your preferences and willingness to put in the work.

About the author 

Mike Vestil

Mike Vestil is an author, investor, and speaker known for building a business from zero to $1.5 million in 12 months while traveling the world.

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