Understanding the Differences Between Amazon FBA and Dropshipping for eCommerce

When deciding how to fulfill orders, you have two popular options: Amazon FBA and dropshipping.

Both are eCommerce business models that simplify order management and logistics. But they work differently and demand distinct levels of commitment and involvement.

We'll examine the key distinctions between Amazon FBA and dropshipping, touching on their processes, costs, and what sets them apart. This knowledge will help you choose the right option for your business.

What is Amazon FBA?

Fulfillment by Amazon (FBA) is a service that allows you to use Amazon to pack, store, and ship customer orders.

You just send your products to an Amazon warehouse and then list them for sale. When someone buys your item, Amazon handles the product shipment from packing to delivery on your behalf.

FBA is the preferred fulfillment method for many sellers—82% use it. And it works well whether you're into private labeling, retail arbitrage, or wholesaling.

Pros and cons of Amazon FBA

FBA offers a robust fulfillment service with numerous benefits for sellers. However, it also has its downsides. Let's start with the pros:

Pros of Amazon FBA

• Trusted by shoppers: Amazon is a renowned name in the online shopping space and trusted by millions worldwide. Selling your products on Amazon means customers are more likely to trust what you're offering. They feel secure buying from you because they know Amazon will help with any issues.
• Access to millions: Amazon has a huge customer base—310 million users globally. Listing your products on Amazon exposes them to a vast audience of active buyers.
• Prime advantage: There are over 200 million Amazon Prime members who get fast, free shipping. Use FBA, and your products are automatically eligible for Prime. This can make your listings more appealing and higher in search results.
• FBA seller preference: Although sellers can ship products themselves, Amazon seems to favor those using FBA. This likely comes down to FBA's reliability in shipping quickly, handling customer service, and managing returns and refunds efficiently.
• Hands-off operation: After sending your products to an Amazon warehouse, there's not much left for you to do. Amazon takes over the logistics, returns, refunds, and most customer service tasks. Running an FBA business requires less daily effort compared to traditional eCommerce or dropshipping.
• Effective advertising: Amazon's built-in ad platform makes it easy to promote your products to an audience that's ready to spend. Ads on Amazon tend to convert well, making it a valuable tool for sellers. 
• Multi-channel fulfillment (MCF): Even if you sell products on your own website, you can still use FBA for fulfillment. This allows you to manage inventory in one place while leveraging Amazon's shipping and customer service for orders placed outside of Amazon.

Cons of Amazon FBA

• Less control: Once your products are in Amazon's warehouse, you lose some control. Decisions about refunds or replacements aren't yours to make. You also can't inspect returned items to judge if they should be resold. And if something goes missing, you have to count on Amazon to sort it out.
• High fees: Amazon's fees are set in stone. You'll pay per item sold or choose an Amazon seller plan. Plus, there are referral and fulfillment fees on top of that.
• Bulk stock: With FBA, you need to buy lots of stock upfront and send it to Amazon. It's a big investment and a risk, as there's no promise everything will sell.
• Restock limits: Amazon limits how much stock you can send based on the type of storage. Sometimes, you can't send as much inventory as you’d like, which can slow down your sales.

What is Dropshipping?

Dropshipping is a way to sell products online without keeping them in stock yourself.

First, you create a store online and add products to sell. When someone buys something, you then order it from your supplier, who ships it directly to your customer.

To get started, you can use platforms like Shopify for your website. These platforms can connect to apps that help you find products for your store.

You can also sell on marketplaces—just be sure to follow their rules. An important rule is that your name must be on all shipping documents, with no mention of the supplier or manufacturer.

Pros and cons of dropshipping

Dropshipping is highly popular among new eCommerce entrepreneurs due to the low startup costs. However, it's important to weigh a few factors before choosing it over Amazon FBA. Let's look at the pros and cons.

Pros of dropshipping

• More control: In dropshipping, you're in charge. You set up your website, choose your order fulfillment method, and manage customer service. The way you run your business is entirely up to you.
• Low Risk: Since you don't purchase products until they're sold, starting a dropshipping business requires minimal upfront investment. This makes it a low-risk option compared to other e-commerce models.
• High growth potential: You can grow your dropshipping business quickly. A successful store might even attract buyers, giving you the option to sell if you choose.
• Suitable for beginners: With low startup costs and minimal risk, dropshipping serves as an excellent entry point for those new to eCommerce.
• Build a brand: Dropshipping allows you to establish your own brand. You can create a branded storefront, choose custom packaging, and directly manage customer service and interactions. All these elements contribute to a cohesive and recognizable brand.

Cons of dropshipping

• Hands-on management: Running a dropshipping business means a lot of oversight. You have to manage orders and customer service more than with models like FBA. Thankfully, there are tools to help automate and simplify these tasks.
• Slow shipping times: Many dropshipping products come from AliExpress, with suppliers mainly in China. Shipping to places like the US and Europe can take up to two weeks. This long wait can frustrate customers. However, choosing suppliers in the US, Europe, or those with local warehouses can speed things up.
• Lower profit margins: In dropshipping, you buy products one at a time. This often costs more than buying in bulk. To keep prices competitive, you might need to accept lower profits.

Amazon FBA vs. Dropshipping: A Head-to-Head Comparison

Dropshipping and Amazon FBA are similar in certain aspects. So it can be difficult to decide which is the right method for your business.  

To make it easier for you, we’ll highlight the key requirements of ecommerce businesses and see how the services compare.

Inventory management 

With Amazon FBA, you buy inventory upfront and send it to Amazon's warehouses. This approach means your products are ready to ship quickly. You control your stock levels but must predict demand to avoid over or under-stocking. Inventory management and upfront costs are the main challenges.

Dropshipping doesn't require holding any stock. You order from the supplier after making a sale, eliminating the need for inventory management. This saves on upfront costs but can lead to slower shipping times and potential stock issues with suppliers.

Brand control

Selling on Amazon via FBA means Amazon has a lot of control over your business. They can suspend your account or shut down listings without warning. This can lead to lost sales and affect your product ranking. Also, if there's a mix-up with inventory or if someone leaves an unfair review, fixing these issues through Amazon can be slow and frustrating.

Dropshipping gives you much more control over your business. The risk of account suspension or closure is lower than on Amazon, especially if you're using platforms like Shopify. You can also curate customer reviews on your website and work out inventory issues directly with suppliers.

Customer base

Choosing Amazon FBA puts your products in front of Amazon's vast audience, with over 310 million active users. These users already trust Amazon, so they're more likely to trust and buy your products too. Selling on Amazon often leads to quicker sales than trying to build a customer base for a new website.

With dropshipping, you're responsible for finding your customers. This usually involves running ads on platforms like Facebook and Instagram . Building up your sales and customer base this way can be slower and more costly in advertising compared to selling on Amazon.

Order fulfillment

Amazon FBA takes care of packaging and shipping for you. You don't have to do anything once a customer places an order. Products sold through FBA automatically qualify for Prime shipping—Amazon's fast delivery service for eCommerce merchants. However, using FBA means losing some control over the packaging and shipping process.

Dropshipping involves your supplier shipping products directly to customers. This method gives you more control over the customer experience and allows for personalized packaging and branding opportunities. However, it also means you're responsible for managing the relationship with your suppliers and ensuring they meet shipping standards. 

Customer trust and reputation

Selling with Amazon FBA means your products can have the Prime logo. This tells customers they will get their orders fast and can trust the quality. This helps your brand grow faster.

Dropshipping doesn't come with Amazon's trust. So, making a strong brand takes extra steps. But with quality service and clear communication, dropshippers can also build a trusted brand over time.

Costs

For Amazon FBA, you have to buy your products and send them to Amazon's warehouse. This usually means ordering at least 100 pieces because of supplier minimums.. This step can be pretty expensive, and there's always the chance your items won't sell. If they do sell, getting back your initial money and keeping your stock filled can take around six months.

With dropshipping, starting up costs way less. You avoid the bulk purchases required by Amazon FBA, plus pay for products only after customers order them. Starting a Shopify store is cheap too—you can begin for $1 per month for the first three months. The main expense you’ll have is for running marketing campaigns, but you get to decide how much to spend.

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Profits

Profit with Amazon FBA is usually higher per item sold because you can set a higher price. But, costs are also higher. You pay for shipping to Amazon, various Amazon fees, and storage if your items don't sell. Buying in bulk might lower your cost per item, helping increase your profit margin.

Profit with dropshipping depends on how you manage costs. At first, you might manage orders on your own to save money. Later, using software to help with orders can make things easier but will cost a bit each month. 

The way you decide to ship items also affects your profit. Many people choose to offer free shipping and add the shipping cost into the product price. If you work well with your suppliers over time, you might get lower prices from them, which can increase how much profit you make.

Risk

Dropshipping and Amazon FBA both can lead to success, but dropshipping often comes with less risk.

In Amazon FBA, you buy your products first. This means you spend money before you sell anything. You take a risk, hoping that your products will sell so you can make back your money and earn a profit.

Dropshipping is less risky. You don't buy products until a customer has already paid you. As such, you don't lose money because you're not buying stock without having a sale first.

Scalability

Scaling an Amazon FBA business suits those with more to invest. Once you discover products that sell well, you can use Amazon's resources to grow quickly, as long as you're ready to invest in more inventory. The typical aim for FBA sellers is to increase the store's value and sell it, with the cycle of reinvesting profits into new stock driving growth. The sale of the business is where many FBA sellers see significant earnings.

Dropshipping's scalability is closely tied to your skills in managing supply and fulfilling orders. If you establish a smooth process for passing orders to suppliers and they ship quickly, you can easily handle a surge in sales. Furthermore, dropshipping supports rapid expansion by enabling you to scale operations up or down based on demand without worrying about inventory costs or storage space. This agility in adjusting to market changes or customer preferences is crucial for scaling your business efficiently.

Additional features

Amazon FBA gives sellers benefits like an easy way for customers to return items. This helps customers trust buying from you. You also get to track how many items you have left with Amazon's tools. Plus, Amazon offers fast shipping deals like Prime to help you attract more buyers.

Dropshipping doesn't come with these added features. If you sell this way and use Amazon's platform, you handle returns and talk to customers yourself. Returns cannot go back to your supplier. You need to take care of customer problems and manage your stock on your own.

Amazon FBA vs. Dropshipping: Which Should You Choose?

As you can see, there are some. differences between Amazon FBA and dropshipping. The better option for your business comes down to your priorities, resources, and goals.

Choose Amazon FBA if you have a larger budget to start, prefer a hands-off fulfillment process, and want to leverage Amazon's massive customer base and fast shipping.

Choose dropshipping if you're starting with a smaller budget, value direct control over your brand and customer service, and are prepared to actively manage marketing and order fulfillment.

Here's a table to help illustrate when each option might be better suited to your needs:

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Ultimately, your choice should align with what you're looking to achieve with your online business and how involved you want to be in the day-to-day operations.

Amazon FBA vs. Dropshipping FAQ

Is dropshipping better than Amazon FBA?

If you're just starting your online business, dropshipping could be the way to go. It needs less money to start and keeps startup costs low. Working with suppliers who know what they're doing makes things easier too. But, if you already have a business and want to grow it, think about using Amazon FBA. It's a good choice for expanding your business.

Is Amazon FBA or dropship more profitable?

Dropshipping often brings in more profit than Amazon FBA because of the lower costs. Amazon FBA has fees for selling, storing, and shipping, which can reduce what you earn. But, selling with FBA might lead to more sales because of Amazon's large number of customers and fast shipping.

Can I dropship on Amazon?

Yes, Amazon allows you to dropship on its platform. However, you must ensure your name appears as the seller on all packing slips, invoices, and external packaging. You're also tasked with managing returns from your customers. To avoid any issues, it's wise to check Amazon's most recent dropshipping policy before you begin.