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Is Amazon Dropshipping Profitable? 12 FAQs You Need to Read Before Starting

June 7, 2022

Is Amazon dropshipping profitable? The typical profit margin for Amazon dropshippers' is between 10% and 30%. Amazon takes their 15% seller's fee. So you need to find products at least 25% cheaper than what's listed on Amazon. You can try to dropship from wholesalers but usually the profit margin is not very good. You make real profit when you dropship from retailers like Wal-Mart and Home Depot since these places are constantly running clearance deals, however Amazon do not like products dropshiped from retailers.

The way around this, is to create a seasoned Amazon seller account that has trust with Amazon. With these accounts, Amazon is much less likely to ask for the letter of authorization.

What is Amazon dropshipping? You make money as the middleman, finding deals online and listing it at a higher price on Amazon. Once you receive the order from the customer, you place the order to the distributor or retailer and they ship the product to the customer for you.

As a drop shipper, you spend a lot of your time researching and hunting down discounted deals online, even calling up suppliers / distributors to strike deals. However, majority of dropshippers are making money by finding the cheaper deals from retail stores, because often these places will list their products for cheaper to get the business since they do not have the traffic like Amazon.

What are the Pros and Cons of Dropshipping on Amazon?

Pros

Grand View Research predicts the global dropshipping industry will grow by 28.8% each year until 2025. Amazon is more strict with dropshippers but they do also understand it has its place.

No need to invest in inventory.

Being able to take advantage of Amazon's large user base. 200 million prime users.

No Amazon FBA warehouse fees

Don’t need to create your own products or brand

Can list as many products as you want. Not tied down to few products because of inventory.

Cons

Lower profitability than other Amazon FBA business models (more on this below).

More competition = less profitability

Amazon holds funds for 2-3 weeks, which means you will need other sources of income or cash flow to fulfill orders

Amazon dropshippers face the highest number of account suspensions, which can be repealed with the right documentations, but this takes time

You may have to use credit

You must handle refunds and cash back

Supplier's Stock

If you get too many orders, your supplier may be out of stock. Then, you will either have to cancel your customer's order (EXTREME red flag for your metrics), or scramble to find another supplier. If you're lucky, you'll find one with as low a price as your original supplier. If not, your margins get even smaller.

Logistics

It takes a long time for the dropship product to reach the customer. This is because Amazon does not handle the fulfilment process. Rather, your supplier will package the product and ship. To stay within Amazon's Terms of Service, they cannot identify themselves.

Amazon's Dropshipping Policy

Ultimately, Amazon disallows many aspects of dropshipping in their Terms of Service. They will put up every barrier possible against you to motivate you to use their Amazon FBA services. However, there are loop holes around it which we will discuss.

Which of the Business Models is More Profitable, Amazon FBA or Dropshipping?

The average profit margin for Amazon FBA is 10%-20%. But there are many Amazon business models that fall under the Amazon FBA category.

Overall, these other Amazon FBA models have a higher profit margin than dropshipping.

Dropshipping Profit Margin

10-30%

Wholesale

Up to 50%, fixed

Retail Arbitrage

Possible to sell products that will provide a 50% profit margin, but a realistic number is closer to 20-30%

Private Label

25-30%

Passion Product

28-35%

Homemade

52% of sellers make between 11% and 25% profit margins

Merch by Amazon

Earn at least 13% of the cost of the shirt sold

Kindle Direct Publishing

Fixed 60% royalty rate on paperbacks

Which Type of Business is Easier to Run: Amazon FBA or Dropshipping?

Wondering which kind of eCommerce store to choose? Dropshipping has a lower barrier of entry than other Amazon FBA models, like wholesale and private label. However, drop shipping requires much more management of customer complaints. This is because of late shipping times, lack of tracking numbers, relying on different suppliers with their own logistics, lack of automated systems, and more. 

Automation is the only way to remain free of your Amazon seller account for an extended period. With Amazon FBA, there are fewer issues and fewer customer complaints because Amazon takes care of the packaging, shipping, and handling. Plus, you’ll be able to have Amazon prime eligible products. These are the only products that can win the Amazon Buy Box, and without the Buy Box your profit margins will significantly drop.

Amazon private label & wholesale is a lot more work to set everything up but becomes more passive later. Dropshipping requires more ongoing attention but much fewer hurdles to get started.

Which Offers Better Control, Dropshipping or Amazon FBA?

While Amazon FBA is easier to run, the Amazon dropshipper has more control over their dropshipping business. This is because a large pre-purchased inventory won't tie you down.

But, as long as you’re on Amazon’s platform, they have ultimate control of your Amazon store. If you break their Terms of Service, they can suspend your Amazon seller central account. When this happens, they can also withhold your money for months. Learn the Terms of Service and follow it for changes. If you are a drop shipper, follow your Amazon metrics closely.

Top Reasons Amazon Dropshippers are getting their accounts suspended in 2022

Few years ago, sellers could dropship much easier on Amazon but in 2022, they're cracking down and requiring more verification, here's what's needed now.

  • Upload a letter of authorization - a piece of paper that says that you have the right sell that product from the manufacturer or wholesaler that you're dropshipping from.

If you cannot get a letter of authorization, there are few ways around it.

  • Buy an aged Amazon sellers account that's got trust and authority with Amazon. Amazon trusts these accounts already so they do not ask for this letter of authorization. These accounts may cost $5K or so.
  • There are companies out there (not retailers like Walmart) that have express authorization and they can give you the letter of authorization. However, most of the money in dropshipping is made from selling from retailers, and its very difficult to earn profit from wholesalers.
  • Do Amazon FBA for 3-6 months+ to season and warm up. FBA is buying some products in bulk, shipping it to Amazon's fulfillment center and you have them fulfill the orders. Obviously, this is not dropshipping. You're doing it to season the new account. List 3-5 products in 3-6 months and then switching to dropshipping from retailers like Wal-Mart and Home Depot becomes significantly safer. Amazon is much less likely to ask for the letter of authorization.

How Much Does it Cost to Start a Dropshipping Business in 2022?

Costs to expect:

  • $39.99 OR $0.99/product to Amazon
  • 15% of each sale to Amazon
  • Cost of product (have a cushion for ordering- explained below)
  • Optional costs: automation software and/or virtual assistants

In other Amazon FBA business models, the purchase of bulk products makes up a large initial investment. But, with dropshipping, you won’t need to pay anything until a customer orders a product. When they do, you will need to purchase that product from your third party supplier. This cost, if you created your product listing correctly, will be less than your sales price.

To optimize sales, you will conduct research to find a profitable product. This costs nothing. And, there are many tools you can use to help you out, like Google Trends. 

You can also hire a virtual assistant or purchase software to complete these tasks for your online store. Often, virtual assistants work for $2-$7 per hour. Cost of software is typically subscription. MerchantWords runs from $35/month to $1490/year.

Remember: Amazon won’t release your funds for 2-3 weeks. So, you will either need capital or credit to purchase more goods to fulfill your orders or push your Amazon ads. Some automation agencies suggest this amount should be between $15,000-$30,000. 

How Much Investment is Required to Start Dropshipping on eBay or Amazon?

eBay has fewer costs than running an Amazon business. For your first 200 listings, you won’t have to pay anything. But, if you continue past 200, you will pay an insertion fee of $0.35/listing/category. If you choose to list a single item in various categories, pay this fee per product category.  

You will pay a final value fee of 10%. This final value fee takes a cut from the final value of your sale, including the shipping. 

When choosing between dropshipping on Amazon or eBay, also consider: selling on eBay successfully requires much more time on keyword and product research. But, eBay is more forgiving than Amazon with dropshipping and their dropshipping policy.

Does Anyone Really Make Money through Dropshipping on Shopify?

Yes. Some sellers make up to $100,000/year in revenue. Dropshipping on Shopify has similar profit margins to dropshipping on Amazon… without the 15% Amazon fee.

However on Amazon you can get free organic traffic if there's not as much competition for that product. If you're dropshipping on Shopify chances are you need to buy traffic using paid ads which can get expensive. And requires a completely different skill-set of knowing how to create great Facebook ads.

Is Shopify Dropshipping profitable? It can be if you become a great marketer that can create viral ads.

How Much Time Does it Take to Start a Profitable Business on Amazon Dropshipping?

Unlike private label where you're creating your own product and brand which can take 6 months or more. With dropshipping, you're selling other company's products that are already ready to ship. As long as you find the right deals, you can start making money right away. But, it can take longer, if Amazon suspends your account. 

Plus, Amazon withholds your funds for 2-3 weeks. So, even if you make a sale, you can’t access your funds right away.

Many dropshippers use different software to automate aspects of their business, like purchase order creation and inventory listing management. Some use virtual assistants to handle these tasks. Otherwise, popular software options include:

Can I Do Dropshipping as a Side Hustle?

Dropshipping on Amazon can provide passive income. Some sellers make thousands in profits while only spending an hour or two on their business a week. However, you must automate certain aspects of your business if you wish to make your Amazon dropshipping business passive income. 

Amazon has strict customer service rules which essentially require the seller to be available 24/7. Because you need to order an individual product every time a sale comes in, the seller can become overwhelmed quickly.

Amazon has strict dropshipping rules. One seller took a vacation after starting to sell. He came back to find countless customer complaints. This led to a snowball effect, ultimately leading to lower metrics and a strong chance that he would be suspended. Without automation, this seller could not take a vacation without risking his entire business.

How Do You Make Your Dropshipping Store Profitable in 2022?

  • Find a good wholesaler to dropship on Amazon. Suppliers earn 18.33% more profit if they sell to drop shippers, so they should want to work with you.
  • Vet merchants to see if they follow your terms before sending anything to a customer. Find these merchants by contacting the customer directly or going to wholesale trade shows.
  • Do not use another retailer like Walmart or Home Depot. Unless you have a seasoned Amazon seller account.
  • Do not use other common dropshipping suppliers, like Aliexpress. If you must use Aliexpress, you will need to rework the shipping and packaging before it goes to the Amazon customer.
  • Do not dropship on Amazon with products from eBay.
  • Try to find a supplier that will send products to customers quickly.
  • Budget money for refunds and returns.
  • Pay close attention to metrics. Keep your order defect rate below 1%, your cancellation rate below 2.5%, and your late shipment rate below 4%.
  • Purchase your seller’s permit and follow the Amazon dropshipping policy.
  • Spend a lot of time conducting quality keyword research for your products. Continue to optimize this.
  • Lean on the side of excellent customer service. Often, a full refund may be more beneficial for you than seeing your metrics plunge.
  • Pay close attention to product research. 
  • Invest in an Amazon dropshipping course.

Conclusion

Dropshipping with Amazon can become profitable because other retailers are trying to compete with lower prices because they do not have the traffic & user base of Amazon. Or some retailers might run a clearance. So by finding these deals, you can make the difference by listing those products for higher on Amazon and have those other companies ship the products direct to the customer.

The problem is Amazon has been cracking down on this practice by asking for letter of authorization which says you may sell this product on Amazon, but big retailers like Wal-Mart or Home Depot will not provide this.

So to get around this, dropshippers are using seasoned or older Amazon seller accounts, because these accounts face less scrutiny from Amazon. AKA less likely for Amazon to ask for the letter of authorization.

You also have to be on top of your metrics and keep up with customer issues & handle order fulfillment quickly. This can turn into a lot of work when you have 5+ products listed. This is when it becomes a smart idea to hire virtual assistants to help you. 

Despite these tricks, Amazon dropshipping is still bit risky long-term because you're playing in the grey area of Amazon's terms of service. However, if you're willing to play in the grey zone, there are some easy, fast money opportunities.

My Online Business Portfolio in 2022

Amazon FBA: $15K NET per month (After 50% split with a partner)

Local Lead Generation: $52K NET per month

Amazon FBA is a great business model but like all businesses it has its challenges, particularly how competitive it's becoming as more big brands & suppliers began selling on FBA themselves 2-3 years ago.

Another business model I've had a lot of success with is local lead generation. It's simple and less competitive. It might be a better fit for some people.

Click here to learn all about it: Local Lead Generation vs. Amazon FBA

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Ippei Kanehara
Founder/CEO

$52K per month providing lead generation services to small businesses

Ippei.com is for digital hustlers, industry leaders and online business owners.

His #1 online business recommendation in 2022, is to build your own lead generation business.

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