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Global e-commerce sales have grown from a little over $1 trillion in revenue worldwide back in 2014 to a projected total this year of over $6 trillion – with that number expected to grow to over eight trillion in overall sales in the next three years.
Few industries have grown as rapidly or as steadily. Ecommerce sales have expanded yearly for the last decade and are forecasted to continue that rapid growth for at least the next several years.
Clearly, as an industry in which to establish a business, you’d be hard-pressed to find a willing option.
As with any industry, there are multiple ways to go about it.
When establishing an online business, one of the main things to consider is whether to do Amazon FBA vs dropshipping.
What’s the ideal business model for you?
Understanding Amazon FBA and Dropshipping
In online retail, the most crucial element that sets your business model is how you process order fulfillment.
How do you get your products to your customers?
Unlike real-world storefronts, when a customer purchases online they click buttons to make a decision and a purchase, then wait for the item they bought to be delivered.
Amazon has been the leader in this area for some time with its popular FBA option. Another known method, such as dropshipping – where products are shipped directly to the customer by the supplier or manufacturer, or another 3rd party – is still preferred and a very workable way to set up your Amazon fulfillment.
Let’s look at these two primary fulfillment models for Amazon sellers.
What is Amazon FBA?
In its simplest form:
Sellers sell, Amazon ships.
With Fulfillment By Amazon (FBA), Amazon:
- Warehouses your products
- Ships them when customers order
- Handles returns and customer service
Amazon launched FBA in 2006. There are now about 2 million active sellers who sell on Amazon, most of them using the FBA model.
What is Dropshipping?
Dropshipping is another fulfillment model where a third party handles the warehousing and shipping of products to the buyers.
This outsourced party could be:
- The manufacturer
- The supplier
- A dedicated 3rd-party shipper
This fulfillment model commonly appeals to entrepreneurs seeking efficiency and low overhead but, according to Amazon, “it can come at a cost, especially when it comes to customer experience.”
What we’re talking about here, primarily, is selling products that are then delivered directly by the supplier or manufacturer.
Pros and Cons of Amazon FBA
In life and business, there are rarely 100% perfect solutions.
As a seller, using either FBA or Dropshipping comes with tradeoffs.
Advantages of Amazon FBA
Time & Resources: by letting Amazon handle storage, packaging, shipping, returns, and customer service, it frees you up to focus on expansion.
Service: Amazon’s delivery and service are top-tier, becoming an industry standard. By using FBA you’re turning your fulfillment over to the best.
Trust: customers trust Amazon, leading to increased sales. With fulfillment centers in multiple key locations, Amazon can deliver to buyers quickly.
Prime: if you’re selling products on Amazon, customers with Prime memberships (roughly 200 million) can take advantage of free shipping, driving more sales.
Branding: you’re free to create and build your own, unique brand.
Disadvantages of Amazon FBA
Fees: comparing Amazon FBA to dropshipping, while FBA is convenient, it comes with long term storage fees, fulfillment, and other fees.
Control: since Amazon handles fulfillment, customer service, and returns according to their policies,, this cuts you out of the loop, removing many vital relationship-building opportunities with your customers and limiting your ability to establish a customer base.
Stockouts: running out of stock on Amazon can lead to problems, impacting your seller rating and causing you rankings to drop.
Pros and Cons of Dropshipping
Dropshipping has its own Pros and Cons.
Advantages of Dropshipping
Costs: Both the overhead and start-up costs are lower. With a dropshipping model, entrepreneurs don’t need to invest and maintain storage facilities, handle or process orders, etc.
Location: Dropshipping allows you to run your core operations in an area convenient for you, without the need to factor in warehousing or other infrastructure, and to ship products. You’re free to establish your business where you need it.
Scaling: The dropship provider is responsible for scaling when you expand.
Variety & Flexibility: Depending on your arrangement, you may not need to purchase inventory when selling a supplier’s stock. Likewise, you might be able to experiment with what sells best, selecting from their available inventory.
Disadvantages of Dropshipping
Quality: Because you’re not directly part of the order fulfillment process, you cannot monitor and guarantee the product quality.
Branding: Because you have no control over branding, there won’t be any product differentiation among competition, especially if selling the products from a supplier’s inventory.
Timelines & Management: Fulfillment timelines and inventory management are not within your control, and shipping issues can lead to unfair reviews. While you can get negative reviews removed, it can take extra time and effort on your part to detect them and file removal requests with Amazon.
Options: You are limited in the types of offers, product bundling, promotions, and so forth that you can run.
Layers of Complexity: Though your reputation is on the line, there will be a layer of complexity (the dropshipper) between the customer and you.
Key Differences Between Amazon FBA and Dropshipping
Let’s weigh the differences between the two.
Inventory Management
Both dropshipping and FBA offload the seller with things like inventory storage and shipping. But with FBA, you’re responsible for seeing that you have enough stock in the Amazon warehouses available to fulfill orders.
With dropshipping, the supplier stores and manages the inventory on their property. Depending on your arrangement, dropshipping suppliers will likely ensure enough inventory is on hand as you expand your business.
In both cases you are not technically holding inventory.
Would it be better if you directly oversee your shipping and inventory?
Costs and Profit Margins
Dropshipping has:
- A lower financial barrier, requiring minimal upfront investment since you don’t typically need to purchase inventory
- A thin profit margin as competition and reliance on supplier pricing can be intense
Amazon FBA has:
- Higher operating costs like fees for storage, shipping, and other services, along with an initial investment in inventory
- Potentially higher profit margins, as Amazon’s services, including faster shipping, can lead to better margins per sale.
Dropshipping offers a lower barrier to entry but thinner margins, while FBA can see higher profits but also comes with higher costs.
Control and Branding
Branding may be one of the key differentiators between the two models and the most significant. Depending on whether or not your goal is to create and grow your brand, you must consider the ramifications.
Either dropshipping or FBA will work if your goal is only to sell.
However, if you want control over branding, packaging, and the customer experience, you should source your own products, provide your own inventory, and use FBA to fulfill.
Customer Service and Returns
With FBA, Amazon handles returns and customer service, saving time and resources, as noted. The one drawback is that Amazon controls access to customer info, meaning you’re severely limited in your ability to interact with the people who purchase your product.
With dropshipping, on the other hand, you have full access to the customer info, providing that to the shipper to handle fulfillment.
How involved you want to be with customer service and returns will determine which of these models is best for you.
Choosing the Right Model for Your Business
There are a few things to look at when making your choice.
Assessing Your Business Goals
First and foremost, the model you choose needs to align with your business goals.
- How do you plan to build your brand?
- How much control do you want?
- What are your desired shipping timeframes?
- How much capital do you have to invest?
- Are you ready/able to handle inventory?
Dropshipping gives you control over your customers but little over your brand. Amazon is the opposite, providing you total control over your brand but limited control over your customers.
Evaluating Your Resources and Capabilities
You’ll want to make similar evaluations of your available resources, including time, money, and expertise.
Look at how each business model aligns with your strengths and weaknesses.
To FBA or Not to FBA
Hopefully, the above has given you a thorough insight into these two models and what might be best for you.
Are you looking to build a brand?
In this case, Amazon FBA will be the way to go.
Are you simply looking to sell products online?
For this goal, either option would work. Your choice comes down to your evaluation of the Pros and Cons of each.
Whatever you decide, take the next steps and continue your journey to either start selling, join the massive community of online sellers, or fortify your presence there. You’ll be glad you put your plans into action.
As we always say:
May you never be the same.
The TraceFuse Factor
Whether you choose FBA, dropshipping, or even both, you’ll be selling from an Amazon storefront – which means customer reviews will factor heavily into your sales.
TraceFuse helps handle the negative ones.
As you go, you’ll spot reviews that are bogus, that violate Amazon’s Terms of Service and community guidelines, and any other review violations that make them eligible for removal.
Removing those illegitimate negative reviews is a big part of maintaining your star rating, influencing everything from sales rank to customer perception to conversions.
TraceFuse can help. We remove the Amazon product reviews that are adversely impacting your bottom line.
For an overview of how we do it, watch this 6-minute video explaining our process:
See how it works, what you can do to handle your reviews, and how we can help.
