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Amazon Dropshipping vs FBA | Which business model earns more money?

September 19, 2022

Amazon absolutely dominates the Ecommerce world, with an analysis by global data leader PYMNTS showing that 56.7% of all online purchases in the USA occur through the platform. As such, it’s no surprise that thousands of new sellers signup to sell through the Ecommerce giant every day. When selling on Amazon, you can choose from a few different business models. Two of the most popular options for Ecommerce sellers who don’t want to worry about order fulfillment are dropshipping and Amazon FBA. When choosing between Amazon dropshipping vs FBA, there are many variables you should consider before committing to either of these business models. In the following article, we take a closer look at each of these business models and identify which will earn you more money long-term

Why choose Amazon for your online store?

Although selling on Amazon comes with the typical drawbacks of relying on a third party marketplace for your business, like strict rules, potential account suspension, increased returns, high competition, and expensive fees, many Amazon sellers would agree that using the Ecommerce platform is worth it. According to BigCommerce, Amazon draws over 197 million shoppers each month. Not only is that a lot of potential buyers to sell to, but these are people with high intent to make a purchase. Amazon, like Google or Bing, is a giant search engine that people use when they want or need something. In fact, a study by eMarketer found that over 60% of online shoppers in the US actually start their product search on Amazon. There’s no denying that Amazon is the king of Ecommerce and a brand name customers have high trust to buy from.

Search engine traffic is valuable

Just like we turn to Amazon to find products, nowadays, most of us go directly to Google to find local companies for services we need, like landscaping, plumbing, or window cleaning. Usually, if the reviews look good, we’ll choose one of the first search results that shows up on Google. Those top local business search results listed on Google are EXTREMELY valuable for businesses because they attract the most potential buyer traffic.

The local lead generation business model is a strategy that involves using SEO to rank a business website on the first page of Google for a specific location, and then sell the leads generated to a business in the area for hundreds to thousands of dollars per month depending on the business niche and location. If selling physical products on Amazon’s saturated marketplace doesn’t work out, local lead generation is a low competition service-based online business alternative worth considering.

Amazon Dropshipping vs FBA: What's the difference? 

Supplier handles shipping with dropshipping

Dropshipping is an Ecommerce business model where you have your supplier send your products directly to the customer. The strategy for Amazon works as follows: 

  1. Dropshipping product research to find a product that generates a profit after considering product cost, shipping and fees
  2. Use Amazon to list the product for sale
  3. Once a customer orders and pays for the product, you buy the product from your supplier and provide them with your customer’s address for shipping

Outsource shipping to Amazon FBA 

FBA stands for Fulfilled by Amazon. Amazon FBA is a program that Amazon offers to sellers to handle inventory storage, shipping, and customer service on your behalf. Amazons FBA program is the preferred selling method on the platform, as according to SellerApp, the majority 73% of sellers use it. Anyone with a seller account on Amazon can take advantage of the program by selecting FBA for the products on the Manage Inventory page, and sending those products to the Amazon fulfillment center where you store them until sale. Once a customer buys the product from you, Amazon promptly ships the order using their advanced logistics network.

Pros of dropshipping on Amazon

Minimal risk

When dropshipping, you don’t purchase any product inventory until after you’ve already made the sale. Therefore, you don't lose money on products like sellers who buy in bulk often do if their product idea doesn’t work out. For a risk adverse online seller or someone who just doesn't have the capital to lose at the moment, dropshipping allows for some profit potential at minimal risk. 

Avoid FBA fees

As a dropshipper on Amazon, you sell under FBM, or Fulfilled by Merchant. Amazon FBM sellers aren’t responsible for paying the same order fulfillment-related Amazon FBA fee that FBA sellers pay. Amazon FBM sellers just need to pay the $39.99/month sellers account fee (if selling over 40 products a month) and the 8% to 17% Amazon referral fee to list on the marketplace. The supplier handles shipping, and inventory storage is essentially free because the product sits at the supplier until you purchase it to send to your customer. 

Opportunity to start Ecommerce despite low capital 

According to JungleScout, 17% of Amazon sellers get started selling on the platform for $500 or less. Many of these sellers use the dropshipping model. Although some Amazon business models like wholesale and private label require thousands of dollars just get started, you can start dropshipping on Amazon with $50 - $100 dollars. 

Profit from the first sale

If you’re looking for a way to make money quickly, drop shipping can allow you to profit from the very first sale. As long as you find a dropshipping supplier with a product that leaves room for a healthy profit margin and you keep your advertising budget in check, you can start generating profitable sales right away.

Experiment with niches and products

Dropshipping gives you the opportunity to experiment with different niches and products on Amazon’s marketplace. This business model essentially allows you to list anything on Amazon and see what works. You can even use it in your product research process for other Amazon business models to validate a product idea before ordering in bulk.

Learn basic Ecommerce skills

Although you’re not exposed to every aspect of Ecommerce, dropshippers on Amazon engage in and learn product research, communication with suppliers, advertising, and sometimes Amazon listing optimization. These are some of the most essential skills in Ecommerce that online entrepreneurs can leverage for future projects. 

Diversification

As a drop shipper, you’re not limited to selling just a few products. You can diversify your sales across a variety of product categories and niches. This protects you from losing the revenue of your entire business if a competitor were to come in and take sales from your best-selling product, as sellers who put all their eggs in one basket by ordering in bulk are susceptible too.

Cons of dropshipping on Amazon

Slow shipping

Dropshipping products are often sourced from international suppliers and shipping times can be quite long. Amazon FBA has set the standard of rapid delivery on customer orders, so long shipping times can cause dissatisfied customers who may leave poor reviews. If there are other sellers with the same product on Amazon that offer faster shipping than you, customers are likely to buy from the other seller to receive their product faster. 

Low profit margins

With dropshipping, you only buy one product at a time, so your per unit price is much higher than if you were to buy that same product in bulk. Also, you source products from dropshipping suppliers that are easily accessible to other online sellers. Therefore, you have little flexibility in pricing your products because other sellers can just lower the price to beat you out of a sale as long as they’re still making a profit. You settle for buying at the highest supplier price point and selling at the marketplace price, which usually leaves you with slim margins. 

Can’t differentiate yourself

Whereas some business models allow you to differentiate your product offer by working with a manufacturer to create an improved product or at least slapping some captivating branding on a generic product, as a drop shipper, you sell exactly what the supplier has available.

Reliance on advertising

Essentially, all types of Amazon sellers need to incorporate an Amazon PPC strategy for optimal success on the platform. However, dropshippers in particular require a healthy advertising budget because you can’t use Amazon SEO and product listing optimization to rank well organically. Furthermore, when you have your own brand, there is often a light at the end of the tunnel with Amazon advertising as you can slowly ween off reliance on ad spending as you move up the ranks and generate sales organically. Because dropshippers usually sell on shared listings and often adjust which products they sell based on the current opportunities, dropshippers need to spend on advertising indefinitely.

Lack of quality control

Dropshipping products go directly from the supplier to the customer, so there’s no ability to verify the product’s condition before your customer receives it. If you work with a reputable supplier, there shouldn’t be much of an issue here. However, everyone wants to work with reputable suppliers so their products are saturated on Amazon, and you may find a unique and tempting product opportunity to better differentiate yourself with a little-known supplier. If you choose the wrong supplier and they consistently send poor quality products to your customers, poor reviews will inhibit your sales ability. 

Strict rules around dropshipping

Because Amazon has a reputation to uphold, they have a strict dropshipping policy for Amazon sellers. If you break the rules, Amazon could restrict your account from using FBM, which means you won’t be able to dropship on Amazon anymore.

Pros of Amazon FBA

High value Amazon Prime members

As an Amazon FBA seller, you allow your customers to benefit from Amazon’s rapid shipping capabilities and receive free 2-day shipping if they’re Amazon Prime members. There are over 200 million Amazon Prime members, and they spend a lot more on the platform than your average customer. In fact, Amazon Prime members spend an average of nearly $2,000 on the platform every year! If you want to attract high-value customers, Amazon FBA’s free 2-day shipping is an easy method of doing so.

Many business models to choose from

There are multiple business models and strategies you can choose to employ with Amazon FBA. Although you can’t use Amazon FBA for dropshipping, you can do:

  • Retail/Online Arbitrage - Buying products from retail locations in store and online when there is an opportunity to profit because Amazon is selling the product for higher than the price you can purchase it for.
  • Wholesale - Buying products in bulk directly from a manufacturer.
  • Private Label - Creating branding for a generic product and having it manufactured in bulk.
  • Amazon Handmade - Hand crafting products for sale on Amazon.

Improved scalability

The ability to use business models where your per unit cost decreases with higher volumes makes it much easier to scale your Amazon store. As your business grows, your profit margins increase, which allows you more capital to reinvest back into your business to continue scaling.

Easier to rank well

Amazon uses a complicated set of algorithms that consider a variety of factors to determine product ranking within the Amazon marketplace. Although Amazon doesn’t explicitly outline the different ranking factors and how they’re weighted, it’s pretty obvious a profit seeking company like Amazon would emphasize factors that contribute to its profitability. Amazon makes money on each purchase, especially when FBA fulfills those orders. It’s widely assumed by Amazon experts that FBA participation is a ranking factor in Amazon’s algorithm that helps products rank better organically. 

Better chance of positive review

It’s no secret customer reviews can make or break your Amazon business. Rapid delivery through Amazon FBA takes away one thing to complain about in slow delivery, and your customer is more likely to be happy with their purchase and write a positive review. 

Return processing

Ecommerce returns can be a headache for online sellers because they interfere with warehousing and inventory management. As an FBA seller, Amazon handles return processing and issues refunds to customers on your behalf, making your life easier as a seller. 

Investing in a high value asset

When you put time and effort in to starting a business, most people want more out of it than just a stable paycheck. Businesses are often sold for solid returns once the owner is ready to move on, and online businesses that can generate a healthy profit without the need to be tied down to a location are in high demand. In fact, Amazon FBA businesses with an established brand are selling for 4x to 8x the seller's yearly take home profit, according to Marketplace pulse. If you can create an Amazon FBA private label business that generates you $100,000 or more in profit, you could be looking at close to a million dollar sellout when you’re ready to move on.

Cons of Amazon FBA

Rising FBA fees

As a seller in the Amazon FBA program, you owe FBA-related selling fees for storage, shipping, and customer service of your products. Not only do these fees dig into your profit margins, but they also seem to be doing so at an increasing rate. According to Marketplace Pulse, Amazon FBA fees are up 30% in just the last two years! For small third-party Amazon sellers already operating on thin margins, continued FBA fees raises could make selling on the platform impossible. 

Complete dependence on third-party for business

It’s no question that Amazon FBA is extremely beneficial for many Ecommerce sellers. However, it also forces your business to rely heavily on Amazon just to operate. Instead of creating your own loyal customer base and logistics capabilities for your business, you essentially put all your eggs into one basket with Amazon. Anything could abruptly inhibit your business from continuing operations like Amazon suspending your seller account or FBA fees rising beyond your break-even point. 

Profitability can take a year or longer

According to JungleScout, only 63% of Amazon sellers achieve profitability in their first year. When you use a capital-intensive Amazon FBA business model, you have to consider both the upfront capital you will put into the business which will likely be around $6,000 to $10,000 for your first product, as well as the profits you should continually reinvest if you want to establish a stable business with multiple products ranking well. It’s essential to reinvest your profits until you have five or more products generating sales because if you have only a few products, anything could derail your business like a new competitor with the same product or a change in trend.

Product preparation requirements

Before setting up shipping in Amazon Seller Central and sending your products to an  Amazon warehouse, you’ll want to make sure you package your products according to the Amazon product and preparation requirements. Failing to correctly package your products could result in Amazon charging you a fee to repackage your products for you or Amazon outright denying your products. 

Restock limits

Even if you purchase large volumes of inventory in bulk, Amazon doesn’t always accommodate it all. Based on your past sales history and expected future performance, Amazon issues restock limits. Amazon sets restock limits per storage type and considers both the units you have already stored in Amazons warehouse and those in transit. You may find yourself having to store products yourself or paying a third-party service for temporary storage assistance if you order more products than your Amazon restock limits allows.

Higher upfront investment 

Although you can employ cheaper business models like retail arbitrage or Amazon Handmade for Amazon FBA, most FBA sellers use business models like wholesale or private label that require high amounts of upfront capital for bulk product orders and branding.

Which of these business models will earn you more money? 

If you want to start a small business online but don’t have money to invest or any experience, a dropshipping business is your best bet to get started. However, for those who are ready and financially capable of taking on the challenge, selling private label through Amazon FBA has the best factors for earning more money long term. With this business model, you can build your brand and scale your business on Amazon to earn a stable revenue. Beyond revenue, this type of business is extremely valuable and can allow you to exit your business for a large sum of money when you’re ready to move on. Therefore, your potential earnings are much higher with an Amazon FBA business than with a dropshipping business.

Conclusion

Selling on Amazon is just one of the many opportunities available in the world of online business. There are many other online businesses you can choose from, like affiliate marketing and local lead generation. Whether you decide to choose one of the Amazon business models discussed in this article or go with another option, it’s much easier to succeed when you have a high-quality mentor with proven results to guide you. 

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

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