I’ve talked at length about the different business models Amazon offers. Fulfillment by merchant (FBM), dropshipping, retail arbitrage, and of course my personal favorite, fulfillment by Amazon (FBA).
Each model has unique pros and cons, but today’s focus is all about dropshipping.
Dropshipping has become increasingly popular in recent years, and is a popular starting point for those looking to start an online business in 2023.
However, it can be a lot to unpack.
In this guide, I’ll strip down how it works, the pros and cons, and give my opinion on how it stacks against other Amazon business models.
How Does Dropshipping Work?
The dropshipping model requires an agreement between you, the seller, and a third-party drop shipper (most often the supplier).
Imagine this scenario.
You sell toothbrushes through your Amazon storefront. You control the listing, including the A+ content, photography, marketing, etc. Customers can purchase from your storefront like any other Amazon product.
However, you don’t own the product per say.
Instead, you’ve agreed with a wholesale supplier that they’ll supply and ship the product when purchased by a customer through Amazon.
The advantages are twofold.
One, suppliers aren’t required to sell items.
Two, sellers avoid the hassle of storing and shipping products. Rather, this is done by the drop shipper.
| Did You Know? Amazon FBM stands for Fulfiment by Merchant. In this model, the seller, or merchant, is in charge of inventory management and shipping. |
What’s the Difference Between Amazon FBA and Dropshipping?
The big difference between the two methods is the lack of an Amazon FBA warehouse.
For Amazon FBA, suppliers ship products directly to an Amazon warehouse. Once a customer orders a product, Amazon automatically ships the products.
Dropshipping is a bit more hands-on and requires coordination between the seller and the drop-shipper.
Without Amazon’s automated ordering system, additional action is required by both the seller and the dropshipper once an order is placed.
This also means that returns and exchanges are handled differently than they would be if using Amazon FBA, for example. Using dropshipping, sellers are also responsible for returns and paying sales tax. For Amazon FBA sellers, these are automated.
What Are Profit Differences Between Amazon FBA and Dropshipping?
It’s first important to understand that contract specifics will vary between each seller and drop shipper; profit margins will vary widely as a result.
This is in contrast to Amazon FBA, which has fixed fees and prices depending on the size and category of the product (although these often change).
That means there are simply more variables to consider when working with the dropshipper.
But generally speaking, dropshipping requires less upfront costs, but profits margins will be less than Amazon FBA.
One can expect between 10%-30% ROI with dropshipping, whereas with Amazon FBA, it varies based on the business model retail arbitrage (10% margins), wholesaling (10% margins), or private label (20-40% margins).
The reason? Dropshipping requires no upfront inventory purchases because products are bought-on demand. This gives the supplier more leverage than an individual seller because they own the product. The result is lower profit margins than if sellers purchased items wholesale and owned the products outright.
Of course, specific margins will depend on the agreement between the seller and dropshipper.
In stark contrast, Amazon FBA orders typically require an initial product investment of between $3,000-$8,000.
Is Dropshipping Oversaturated?
In my opinion, we’re just seeing the e-commerce tip of the iceberg. And because I firmly believe more and more of the world’s retail sales will happen online, I do not think dropshipping is over-saturated.
But here’s food for thought.
Amazon isn’t the only e-commerce platform that offers a dropshipping option.
Shopify, WooCommerce, Big Commerce, etc. are great starting points for aspiring drop shippers.
But the truth is, you don’t need a middle platform to run this business model. All you really need is a website, or even simpler, a QR code or link. It’s even completely possible to run a dropshipping business entirely through an email campaign so long as you can get an audience to your listing or website.
But that doesn’t mean you should.
There are good reasons why Amazon is the world’s most used e-commerce platform, and leveraging its technology and delivery system is a no-brainer to stay competitive in the e-commerce space.
So while there’s without a doubt market opportunity in the dropshipping space, I recommend taking full advantage of Amazon’s platform to simplify the process and reach financial goals more quickly.
Dropshipping Pros
- Low startup costs
- Test products and niches
- Low risk
- A great way to understand the market
Dropshipping Cons
- Slow shipping times (most suppliers are located overseas)
- Difficult finding a drop shipper with a good reputation
- Low profits
- Difficult to build a brand
- Lack of product customization since the products are pre-manufactured.
| Did You Know? What is a ‘seller of record?’ On Amazon, the seller of record is the person who registered the Amazon account. |
My Honest Thoughts…
The initial product investment is the big variable between the two business models. If you’re serious about investing in an e-commerce business and have the money to do so, then I wholeheartedly recommend Amazon FBA.
But not everyone has the capital needed, and some folks are looking for a business with lower cost of entry.
But when it comes to my honest thoughts on drop shipping, I’d honestly steer away from it. It’s way too complex, with extremely little room for error. It also takes a lot of the control out of your hands, and into the hands of your supplier.
Here’s what I’d do instead.
I’d test the waters by starting with retail/online arbitrage or wholesaling.
These are great starting points for e-commerce newcomers and will help in understanding the ins and outs of Amazon Seller Central.
And just like drop shipping, retail, and online arbitrage will have lower startup costs than AmazonFBA.
Ready to start your Amazon FBA Business?
My Amazon Wealth Accelerator (AWA) mentorship guides you through the entire Amazon FBA process and provides a community of support with others on the exact same journey.
AWA gives you a much-needed safeguard from costly mistakes, dead ends, and failed product investments.
So whether it’s solving issues with your Seller Central account, creative approaches to product research, scaling to new markets and niches, validating product ideas, customer service issues, and more, we’ve got you covered.
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