Amazon FBA (Fulfillment by Amazon) is Amazon’s popular delivery fulfillment service. It allows sellers to focus on what they do best: creating great products and listing them on Amazon, rather than getting stuck in day-to-day logistics operations. Amazon shoppers on the other hand reap the full benefits of Amazon’s near perfect logistics operations with same-day shipping and convenient return options.
Many brands consider dropshipping products using the Amazon platform merely as a marketplace to list products a viable alternative that offers more flexibility. Both dropshipping (on Amazon or via a direct-to-consumer ecommerce website) or leveraging Amazon FBA are possible routes to launching a new business successfully. Monthly searches on Google.com for “Dropshipping” and “Amazon FBA” reflect this, while showing a clear post-covid drop for both search terms.
Dropshipping and Amazon FBA Explained
As e-commerce continues to soar, figuring out how you will deliver your products to ensure happy customers is crucial to the success of your online enterprise. With hundreds of marketplaces and e-commerce platforms to choose from, which one is the right choice for your business? In this article, we will consider the advantages and challenges of two popular e-commerce strategies:
Amazon FBA (Fulfillment by Amazon) — you have Amazon handle your storage and order fulfillment.
Dropshipping — you (or a third party) handle your storage and order fulfillment.
Making the right choice affects the profitability, scalability and customer success of your businesses.
What is Amazon FBA?
Amazon FBA stands for Fulfillment by Amazon. It is Amazon’s fulfillment service for sellers to outsource their warehousing and shipping logistics to Amazon. As a seller, you send your product to Amazon’s fulfillment centers, where the items are stored until a sale is made. Once an order is placed, Amazon handles the picking, packing, shipping, customer servicing, and product returns. This allows sellers to leverage Amazon’s global consumer marketplace and vast logistical capabilities to ensure faster delivery and streamline your business operations. All you need to do is ship your products to Amazon, and FBA takes care of the rest.
What is Dropshipping?
Dropshipping lets you start an online business with minimal capital. It is a business model where you can list a product for sale online without purchasing any inventory upfront. Instead, you only pay for the inventory once your customer has paid you. However, you’ll pay a higher wholesale price for each product, which means your profit margins will be smaller. When you receive an order, you transfer your customer details to a third-party company, typically your supplier or manufacturer, who is responsible for shipping the product straight to your customer.
How about dropshipping on Amazon?
Dropshipping on Amazon falls under the Fulfilled by Merchant (FBM) business model where you handle your own storage and order fulfillment. This allows you to save time and money instead of using Amazon FBA services. While some brands choose to mix and match their business approach to satisfy their unique fulfilment needs, with roughly 22–33% of online retailers dropshipping on Amazon for additional income, this approach has its own challenges and is generally more suitable for larger brands with strong fulfillment capabilities. Dropshipping on Amazon has higher overhead costs and increased operational complexity such as inventory management. In addition, to qualify for Amazon Prime, sellers need to show a positive fulfillment history with records such as on-time shipping rate of 99% and low product return rate.
What are the benefits of Amazon FBA vs Dropshipping?
Benefits of Amazon FBA
Amazon Prime: Your products are automatically eligible for Prime Two-Day Shipping wich will boost shopper confidence.
Convenience: Amazon provides a seamless customer experience with convenient payment options, returns and refunds.
Hands-off Logistics: Amazon manages your inventory, warehousing and order fulfillment needs including picking, packing, and shipping.
Increased Visibility and More Sales: Products using FBA are more likely to appear higher in Amazon search results and are perceived as more trustworthy by consumers, potentially increasing sales volume.
Trust: Customers feel more confident making purchases through Amazon knowing it is more reliable and efficient compared to independent dropshipping websites – with potentially few customer reviews.
Benefits of Dropshipping
Lower Overhead Costs: Since there is no need to purchase inventory or manage a warehouse, your overhead costs are minimal.
Flexibility: You can offer a broader range of products and test the market without financially commitment to product inventory.
Scalability: It is easy to scale a dropshipping business as most of the logistical responsibilities are carried out by your supplier.
Owning Customer Data: As we all know, “data is the new oil”. Owning customer first-party data such as email addresses that can later be used in direct response marketing can help you grow a healthy and profitable brand over time.
Not Depending on Amazon: Any change that Amazon makes to the way it operates impacts your business directly and you will have very limited ability to negotiate terms with Amazon.
What are the drawbacks of Amazon FBA VS. Dropshipping?
Limitations of Amazon FBA
Higher Operational Costs: Amazon charges for storage, handling, and other logistical services, which can reduce your profit especially for low-margin products.
Less Inventory Control: Sellers need to rely on Amazon’s systems and processes which can lead to discrepancies and issues such as long-term storage fees.
Dependence on Amazon: Relying on Amazon’s infrastructure puts businesses at risk of policy changes that could affect operation and sales.
Limitations of Dropshipping
High Customer Acquisition Cost: Especially when you start out with a direct-to-consumer eCommerce website, you start with zero traffic and will likely require upfront investment (i.e. ads) to drive relevant traffic and acquire your first customers.
Complex Operations: Handling returns, customer service and special requests can be more challenging for you as a seller when you are not directly responsible for the product handling and order fulfillment.
Slower Shipping: Customers may not have the patience to wait for a longer period to receive their items, especially when compared to Amazon Prime’s expedited shipping.
Lower Customer Trust: It can be more difficult for customers to trust independent websites, leading to concerns about quality, refund policies, shipping times, etc.
What Products Are Better Fit for Amazon FBA vs. Dropshipping
Some products are better suited for dropshipping than others. As dropship products are sourced and shipped directly from the supplier, you don’t always have the ability to customize and tailor the design of your products. Thus, the nature of your product plays a crucial role when deciding between Amazon FBA and dropshipping.
Amazon FBA is ideal for:
Small and lightweight items that are fast-selling and can benefit from Amazon Prime’s shipping speed.
Higher-value products where the profit margin can absorb Amazon FBA fees.
Products where high visibility on Amazon’s marketplace can lead to significant sales volume.
Dropshipping is suitable for:
Niche products that are not consistently in high demand but can yield substantial profit margins per sale.
Products with variable demand, allowing sellers to adjust their offerings without the burden of excess inventory.
High-margin, low-volume products where holding inventory could be risky and expensive.
Conclusion: When to Opt for Amazon FBA and when for Dropshipping
Dropshipping can be an attractive option for newcomers due to lower upfront costs and minimal operational/logistical effort, but it comes with its own risks such as poor product quality, longer shipping times, and increased risk of customer dissatisfaction. With dropshipping, it is important that you carefully select your suppliers to ensure you build a reputable brand while maintaining customer satisfaction and trust. While there is potential for success with this business model, the dropshipping success rate is only around 10–20% compared to the slightly higher Amazon FBA success rate of 11–25% where 64% of Amazon sellers become profitable within 12 months. While dropshipping provides more flexibility with lower upfront costs, Amazon FBA offers sellers with access to their vast customer and operational network with rapid delivery and Prime benefits.
