Amazon FBA VS Dropshipping For Startups: Which Is Less Risky For A Startup?
Both Amazon FBA and dropshipping can provide easy points of entry for new online sellers, but the best choice for you will depend on how much risk you're willing to take upfront.
|Amazon FBA is a vast marketplace that users can join||Dropshipping is a business model based on partnerships with manufacturers/suppliers|
|Amazon FBA includes transaction fees of 15% or more, plus fulfillment fees||Dropshippers negotiate discount rates with their products’ suppliers|
|Amazon FBA lets you add your products to an existing marketplace||Dropshippers build their own online store or join an existing marketplace|
|Amazon FBA sellers leave customer service to Amazon||Dropshippers don’t do shipping, but they do handle customer service|
|Amazon FBA users can use Amazon’s Multi-Channel Fulfillment to sell on marketplaces outside Amazon||Dropshippers don’t pay for or store inventory|
|Amazon FBA allows users to build a customized storefront||Dropshippers customize their product lines seasonally or as trends change|
Selling via Amazon FBA (Amazon’s fulfillment service) and selling through dropshipping can both be attractive options to people wanting to start an eCommerce business, and each business model has its own upfront costs and risks. Is one better than the other? How can you be sure which one is right for you?
Let’s dig into the details of dropshipping VS Amazon FBA to first understand how each works, and then make the best decision for your new business.
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Amazon FBA VS Dropshipping
Dropshipping and Amazon FBA both allow sellers to ship without storing products. There is one big difference, however. Dropshippers ship to customers directly from suppliers, without paying for items themselves. Amazon FBA stores products that a seller purchased or manufactured, fulfilling customers’ orders.
Which is a better business model? This dropshipping VS Amazon FBA comparison will help you decide.
Choose Amazon FBA If…
- You already use Amazon and want an easier way to fulfill orders.
- You sell products that are very small and/or very light.
- You already use unique barcodes on their products.
- Your high-volume businesses can pay additional fees and still stay profitable.
Choose Dropshipping If…
- You don’t have a big budget and don’t want to purchase inventory.
- You want to experiment with different products without investing in stock.
- You’d like to try adding products to an existing store without a lot of hassle.
- You want to build and maintain an independent online store.
The Key Differences Between Amazon FBA & Dropshipping
Amazon FBA and dropshipping have some key similarities, the most important of which is that you can use either one to sell merchandise without having to physically store the products you’re selling. That’s not to say these two eCommerce methods are interchangeable, though. Here are some key differences between them that can help you decide which business model will work best for your business:
1) Amazon FBA Handles Customer Service For You
Customers are an important part of your business model, too, and if you choose dropshipping instead of Amazon FBA you’ll have a different role in ensuring customer satisfaction.
- When your products ship via Amazon FBA, Amazon handles any and all customer service issues that may come up, including lost shipments and returns. In fact, Amazon FBA sellers are discouraged from communicating directly with customers.
- When you use dropshipping to deliver products, your supplier is responsible for shipping, but you’ll be on the hook for any problems that arise.
2) You’ll Have Fewer Product Limitations With Dropshipping
Amazon FBA may not be a cost-effective business model for all types of products.
- Amazon has a long list of restricted items. And the costs associated with using FBA can differ depending on what your product looks and feels like. Generally, large, heavy, and/or oversized products will cost more to store in the Amazon warehouse.
- Dropshippers won’t encounter those restrictions and extra costs.
3) You Can Begin Dropshipping Without Paying For Inventory Upfront
One of the most attractive factors with dropshipping is the very low cost of entry into doing business.
- A dropshipping business requires very little in the way of up-front costs, because you’re not paying for inventory upfront or paying to store items while you wait for them to sell. All you need is a good supplier and a way to reach interested customers.
- When you use Amazon FBA, you will need to purchase products before you can start selling them.
4) Amazon FBA Charges Several Fees For Use
When you use Amazon FBA, you can expect numerous fees as the cost of doing business.
- You’ll likely need a paid Amazon seller account, and you’ll definitely pay to purchase products as well as to ship them to the Amazon warehouse. You’ll also pay Amazon a fee for storing your products, and you’ll incur a fee every time a customer places an order and Amazon ship your products out.
- Most of those fees won’t apply to you when you’re running a dropshipping business, although your exact costs will depend on what type of platform you’re selling on.
5) You Have More Choices For Selling Platforms When Dropshipping
This can be a good thing or a limiting factor, depending on your goals and plans for your new business.
- When you start up a dropshipping business, you’re free to use whatever shopping cart or eCommerce platform you prefer.
- If you go with Amazon FBA, you’re basically locked in to selling on the Amazon marketplace itself or using a platform like Shopify that lets you integrate your online store with Amazon.
6) Amazon FBA Requires Barcodes
When you sell via Amazon FBA, you will need to comply with Amazon’s terms.
- That means, for one thing, that you’ll have to add a unique barcode to each item, so that Amazon can track inventory through its system. You’ll also have to sell most items in their original packaging and follow some additional rules, depending on what you’re selling.
- If you’re dropshipping, you won’t have to worry about requirement like that.
Amazon FBA VS Dropship Pricing Comparison
When it comes to pricing, dropshipping might deliver a knockout blow to Amazon. The only cost associated with dropshipping is the subscription fee you can expect to pay for the shopping cart or eCommerce platform you use for your online store. And as we discussed in the dropshipping overview above, it’s definitely possible to find a good platform that lets you build and operate an online store for free.
Because as a dropshipper you’ll hold no inventory, you won’t even have to come up with a budget to purchase products to sell. You’ll place orders with your dropshipping suppliers only after customers order from you. So it might seem that dropshipping is a clear winner in this comparison, since we’ve already mentioned that Amazon FBA includes numerous unavoidable fees.
Not so fast. While it’s true that Amazon FBA does take a bite out of each seller’s profits, you do gain something valuable in exchange: access to Amazon’s vast customer base. Remember, FBA works best with high-margin, low-cost products, where you keep a relatively high percentage of each item sold.
So what about Amazon’s fees? Here’s a breakdown of what you can expect to pay:
Amazon FBA Fees
- Professional Seller Account: $39.99/month
- Referral Fee: 15% on most products
- Inventory Storage Fees: vary based on average daily volume of inventory, measured in cubic feet, and billed monthly
- Fulfillment Fees: vary depending on the product’s category, size and weight. As an example, a small standard package weighing 6 ounces or less incurs $2.70 in fulfillment fees.
- Long-Term Storage Fees: If items remain unsold in the Amazon warehouse for longer than 365 days, you’ll incur an additional storage fee of $6.90 per cubic foot or $0.15 per unit, whichever is greater.
Which Is Best For My Business Needs: Amazon FBA Or Dropshipping?
A dropshipping VS Amazon FBA comparison reveals some differences between the two business models. So how do you decide which is right for your goals? Let’s take a look at the details. How does selling on Amazon FBA work, and how much does it cost? Is dropshipping a risky gamble, or a sure moneymaker? Read on!
Amazon FBA Overview
Nearly everyone knows about Amazon, but fewer may be familiar with its fulfillment network, Amazon FBA. Before you start selling on Amazon FBA, you’ll want to have a clear picture of how the service works and what it costs. As with any fulfillment network, Amazon FBA users pay warehouse fees, for product storage, and fulfillment fees, for picking and packing orders as they come in. Those fees are in addition to shipping costs. For most eCommerce businesses, using FBA or any fulfillment service is worthwhile only when selling high-margin products in high enough volume that the extra fees don’t eat all the profit.
To use Amazon FBA, users first must sign up to be an Amazon seller. That means applying and being approved to add your products to Amazon’s online marketplace. Once you’re approved to sell your products, adding fulfillment services through FBA is straightforward. You’ll need to estimate sales numbers in order to determine how much product you should ship to the nearest Amazon warehouse. You’ll find answers to all your questions and detailed instructions in Amazon’s Seller Central. You can even have your products shipped directly from the manufacturer to the FBA warehouse.
When customers buy from you on Amazon’s platform, Amazon fulfillment handles the entire process of fulfilling each order, including any problems that may arise after shipping. That takes a lot off your plate, but you’ll pay for the convenience of not having to pack up orders and take them to the post office yourself. (See the Pricing Comparison section below for details on costs and fees.)
Amazon FBA delivers one benefit that’s difficult to overstate in terms of its effect on sales. FBA sellers are able to offer free Prime shipping to customers, which is a key factor driving Amazon purchasing decisions. FBA sellers can also use Amazon’s Multi-Channel Fulfillment (MCF) tool to deliver orders received through any of your sales channels, including your own website. You can also connect your Shopify store to Amazon. That means you can use FBA to effortlessly fulfill all your orders, no matter where they come in from.
- Products are eligible for Prime two-day shipping
- Effortless fulfillment and product storage
- Access to Amazon’s customer base
- Multi-channel selling
- Numerous fees
- Not cost-effective for oversized or heavy products
- Warehouse requires bulk stock
As with Amazon FBA, a dropshipping business model puts the business owner outside the fulfillment process. With dropshipping, though, there’s a key difference. Dropshippers don’t pay for the products themselves before they sell them. Instead, when customers place an order through your online store, you collect payment from them and only then order the product from your supplier. Upon receiving the order from you, your dropshipping partner collects payment from you and ships the item to your customer. You will be the one to handle any problems that might arise in the shipping process or after the customer receives the order.
Unlike when using Amazon to sell, you won’t have a ready-made marketplace to join when you launch a dropshipping business. You’ll have choices for how you want to structure your sales efforts. You can join an existing marketplace, like Walmart Marketplace or Amazon, although you won’t necessarily have access to Prime status on Amazon. You can also choose to set up an independent storefront. If you choose that route, be sure to look into what dropshipping integrations are available for the platform or shopping cart you’re considering using to build your store. For example, Shopify makes it easy for dropshippers, with apps available for some of the most popular dropshipping partners, such as AliExpress, Oberlo, and Sprocket.
As a dropshipper, your business profit lies in the difference between the discounts you can negotiate with your partner and what you’re able to charge your customers. The good news is that you won’t have any fees for storing product or fulfilling orders, although you can expect your dropshipping suppliers to pass the cost of shipping products to you. And, because you’re not paying upfront to manufacture or purchase the products, you won’t need to come up with a large initial investment to get your business off the ground. Keep in mind that you’ll probably have to spend some time and money setting up an online store, although you can get by with one of several good free eCommerce platforms available. If you don’t have a large online presence already, you may need to invest in building your customer base, too.
That sounds pretty attractive, especially for someone looking to launch a business without eCommerce experience or a lot of cash. However, dropshipping is not a risk-free business model. For one thing, if you’re selling a popular product, you’ll face stiff competition that may force you to keep your prices low. You won’t have your eye on the products, so you can’t always be certain that customers will find the items they order to be satisfactory. And if something goes wrong, you won’t have a lot of control over your products or the shipping process. For those reasons, we urge you to take it slow. Do your research, pick a reliable partner, and learn all you can about dropshipping to increase your odds of success.
- Low initial costs
- No need to pay for or store inventory
- Integrations available with many eCommerce platforms
- Order fulfillment is outsources
- Lots of competition
- Can be hard to find a unique product
- Difficult to find reliable partners
Dropshipping VS FBA Features
|Additional Fees On Every Sale||X||✔|
|Includes Online Store||X||✔|
|Monthly Subscription Required||X||✔|
|Can Sell On Amazon||✔||✔|
|All Types & Sizes Of Products||✔||✔|
|Appropriate For Low Or High Volume||✔||✔|
When you use Amazon FBA, you unlock all the features available to Amazon sellers in Amazon’s Seller Central. That includes inventory management, multi-channel selling, automatic tax and shipping calculations, SEO tools, and analytics. You’ll find some FBA-specific features, too, like customer service, global selling, fulfillment, labeling and prep services, and more.
If you build a dropshipping business, your selection of features will depend on the platform you use to build your store. Most major eCommerce platforms include some support or have available integrations to facilitate dropshipping. So as you’re investigating your choices, definitely check to make sure you’ll have the resources your new business will need to survive, but don’t limit yourself. Look into a few of the best eCommerce platforms available, comparing their features and integrations, and find the one that works best for you.
We find that Amazon FBA lacks a couple of key features that you might find essential. Keep in mind that when you consider dropshipping VS Amazon FBA, you’ll need to choose your eCommerce platform in order to make a fair comparison of the two options. Not every platform includes all of these, though most make them available as add-ons. That said, here are a few notable items missing from Amazon’s feature set:
Amazon FBA VS Dropshipping
This comparison of dropshipping VS Amazon FBA has highlighted some important differences between these two sales models. Have you seen enough to make up your mind about which will suit your business better?
Amazon FBA takes much of the work out of online selling. If you use FBA, you won’t have to search for customers, because your products will be listed on the world’s biggest online marketplace. You will be able to create a standalone store, however, if you want to attract additional customers, and you can link your store so that FBA can fill all your orders. FBA takes almost all the work out of filling customers’ orders, too. Amazon’s Seller Central contains all the tools you’ll need to track orders and your inventory. You can use those tools to know when it’s time to ship more of your products to Amazon’s warehouse.
In exchange for this convenience, you will pay a number of fees to Amazon. If you’re considering using Amazon FBA for your eCommerce business, make sure you understand what percentage of each sale you’ll be signing over to Amazon. The best FBA products are small, lightweight fast sellers with a high enough margin to insulate your profits from fees.
Dropshipping is a good option for many sellers, particularly those who don’t have a lot of money to invest in getting an eCommerce business off the ground. Beware of anyone who tells you that dropshipping is risk-free, however. You’ll need to spend time finding good products and good partners to supply them to your customers. If you choose dropshipping, you won’t see or handle those products, since your dropshipping partners will send each order to customers as it comes in. That’s why it’s so important to choose reliable partners with quality products.