In eCommerce, Amazon FBA and dropshipping are two of the most common ways to run a business. There are many ways in which they are different. Because of this, people who want to start their own business never know which one to choose.
This article compares and contrasts Amazon FBA and dropshipping in great detail. You will understand how the two models are different, what their pros and cons are, and a lot more.
By the end of this article, you’ll know which business model is best for you if you want to start an eCommerce business.
What Is Amazon FBA?
FBA stands for “Fulfillment By Amazon”. Amazon FBA is a fulfillment service that is only available through Amazon.
If an Amazon customer chooses a product with the tag “FBA” on it, it means that Amazon will take care of the entire order.
In eCommerce, fulfillment means getting the product, packing it up, and sending it to the customer’s address. On top of that, fulfillment also includes services like returns, refunds, and customer service.
All of this is done by Amazon through a special service called “Amazon FBA.” This is so that their customers can trust that they will get the product on time and that it will be the same as described.
There are a lot of surprises in the online world. You may have had some bad experiences ordering things online as a customer.
In some cases, you might not have gotten your orders until many days after you agreed to do so. In the worst case, you might not have gotten anything from your online order at all.
There have also been bad things happen with Amazon. Amazon has a lot of different sellers, so it had to start Amazon FBA so that customers would trust it more.
At the end of the day, it’s easier to trust a brand than a person you’ve never met. This is the main idea behind what Amazon FBA is all about.
What Is Dropshipping?
Dropshipping is a way to run an online business in which you sell products from your online store even if you don’t have any of the products in your possession.
You just put pictures of products from another seller’s website on your online store and start selling them.
When you get an order for a product, you just put it on the website where you took pictures of it and give your customer’s information at the checkout.
In reality, you place the order on the source website on behalf of your customer, but your customer thinks you sent the product yourself.
In the dropshipping business model, the product’s price on your store needs to be higher than its price on the source website. This makes the business profitable.
Here is an example of how dropshipping works in general.
Whether you use dropshipping or FBA, selling pet supplies is a very popular niche. Let’s look at the dropshipping cycle for a product called “pets shoes.”
The next picture is from a Shopify store where pet shoes cost $45.59.
Shopify Shoes for Pets
If we look at the same item on AliExpress, we can find it for as little as $15.78 to $16.66. Look at the picture below.
Pet Shoes AliExpress
So, you might think that the Shopify seller makes $28.93 per sale ($45.59 – $16.66), right? Well, it’s not quite that easy.
In a different part of this article, we’ll figure out and compare the profit margins of both of these business models. So, keep an eye out.
We’ll also look at an example of one of the types of dropshipping we’ve already talked about.
Amazon FBA vs Dropshipping: What Are the Main Differences?
Amazon FBA and dropshipping are both ways to run an online business. But there are many things that make them different. Let’s look at the ways in which the two business models are different.
In Amazon FBA, you have to sell the products on Amazon. In dropshipping, you can sell the products on your own store.
In dropshipping, you don’t have to own the products. In the FBA business model, you have to buy the products and send them to the Amazon warehouse.
In dropshipping, you can try to sell almost any product, but in Amazon FBA, you can only sell certain products because you have to buy them all.
In the FBA model, you have to follow Amazon’s rules and regulations. In the dropshipping model, you can sell almost anything.
Because you have your own store, you can set your own terms and conditions for dropshipping. But if you use Amazon FBA, you have to follow Amazon’s rules about selling and shipping.
In dropshipping, you don’t have much control over how orders are filled because they come from a third party. When you use Amazon FBA, Amazon takes care of fulfillment.
So, you may now be able to tell the difference between dropshipping and the FBA business model. Read the pros and cons of each business to find out more about how they are different.
Amazon FBA vs Dropshipping: What Are the Pros and Cons of Each?
Both Amazon FBA and dropshipping through Shopify have their pros and cons. In the next paragraph, I’ll talk about the pros and cons of trying out both business models.
Pros of Amazon FBA
Huge Customer Base
Only in the US, 213 million people use Amazon every month. So, your store and its products will have a chance to be seen by a huge number of Amazon customers.
In the last 20 years, Amazon has been able to earn customers’ trust to the point where they don’t think twice about Amazon’s credibility and reliability when they shop there.
This helps Amazon suppliers make sales and money in the long run. Customers trust Amazon even more when they see the phrase “Fulfilled by Amazon.”
Even if you don’t pay for ads, Amazon shoppers will still be interested in what you have to offer. Your products will be easy for a lot of Amazon customers to find.
Your products may also show up on Amazon’s “related products” and other pages.
Related Products on Amazon
So, if your prices are competitive, there will be a good chance of early sales with FBA.
Higher Profit Margins
When compared to other types of businesses, like dropshipping, Amazon sellers usually charge more for their products.
When you look into products for Amazon FBA, you will find that the profit margins are higher than you thought they would be.
Low Marketing Costs
As Amazon helps you bring in customers, you will need to spend less on marketing and advertising to get the word out about your products.
Increased Business Focus
To get started with Amazon FBA, you will need to know ahead of time what products you want to sell on Amazon. Once you get this business going, you can’t stop.
That’s because you would have already spent a fair amount on products and shipping them to Amazon.
So, this will let you know that your main goal is to sell the chosen products by any means.
Low Dependency on Social Media and Search Engines
Amazon has its own search engine to help customers find what they are looking for. You can still use other search engines and social media to promote your Amazon store and products, but you won’t feel like you have to use them all the time.
Benefits of Other Amazon Programs
You can also use Amazon programs like Free Super Saver Shipping and Amazon Prime when you do Amazon FBA. You only need to meet their requirements, and your business will grow quickly.
Cons of Amazon FBA
To start a business with Amazon FBA, you need a relatively larger amount of money to buy products and pay for operating costs, etc.
Limited Product Testing
With Amazon FBA, you can try out a small number of products. That’s because you can’t buy anything and send it to the Amazon warehouse for its FBA program. This would send your investment through the roof.
Critical Product Research
For Amazon FBA, product research is the most important thing. Choosing and finalizing products for Amazon FBA is a very hard, time-consuming, and careful process.
With Amazon FBA, you have very little power and freedom over how your store is run. Most of the things that Amazon does cannot be controlled by you.
Since you and other sellers of the same or similar products are all on Amazon, you are likely to face a lot of competition.
Once you’ve bought the items for Amazon FBA, you’ll have to sell them to keep from losing money.
When you start an Amazon FBA business, you take on more risk. Also, if you don’t follow Amazon’s rules, you will be held more accountable and face more penalties and consequences.
If you don’t follow Amazon’s rules, it’s easy for your account to lose its ranking and get banned.
FBA is only available to people who buy from Amazon. You can’t sell to places where Amazon doesn’t offer services.
Now that we’ve talked about what’s good and bad about Amazon FBA, let’s talk about what’s good and bad about dropshipping.
Pros of Dropshipping
You can choose and test whatever products you want. Since testing a number of products doesn’t require you to buy them, you are free to test a wide variety of products.
No Inventory Costs
You don’t need to buy and store inventory because you can just sell the inventory of other suppliers.
It’s not too hard to get started with dropshipping right away. With platforms like Shopify, it’s easy to set up a full store and start selling in just a few hours.
Larger Scope of Business
Dropshipping is a business model with a very large scale and range. You can go after any place on Earth.
Opportunity to Build a Brand
Amazon started out as just another online store. It began selling books online in 1994 and has grown to sell many other things. It is now worth $1.43 trillion.
If everything goes well, your online store could also become really big. Who can say?
With your own dropshipping store, you can let people know about seasonal and one-time sales and promotions. You can also change the prices of the products at any time without worrying about breaking any rules.
Promote Your Other Businesses
You can connect your other stores or websites to your dropshipping store, but you can’t do this on Amazon. Customers who come to your dropshipping store can also be sent to your other businesses.
Make Use of Apps
With dropshipping, you can use sales-boosting apps like Shopify’s countdown timer, hurrifier, etc. There are no choices like these at Amazon.
Access to Customers’ Details
With dropshipping, you will have full access to your customers’ names, phone numbers, addresses, email addresses, and other information. Only the sellers on Amazon FBA can see this kind of information.
You can increase your dropshipping sales through retargeting, new promotions, and email marketing.
Dropshipping is not a very likely way to go broke. You don’t need to worry if one of your dropshipping stores didn’t make money.
You can start a whole new dropshipping store with different products and strategies for less money up front.
Cons of Dropshipping
No Easy Traffic
Since your dropshipping store is new, it will take a lot of extra work to get people to visit it.
High Marketing Costs
Since your newly opened dropshipping store would probably have no customers or very few customers, you would have to pay more to market your store or products.
Loss of Product Focus
When you’re in the testing phase, it’s easy to lose focus on your business if you’re putting out a lot of products.
Huge Dependence on Social Media and Search Engines
To get your share of traffic, you would have to rely a lot on social media sites and search engines.
In that case, you need to run ads on Facebook and Google, and you might also look into search engine optimization (SEO).
Short Lifecycle of Products
Dropshipping is a business that only lasts as long as the products it sells. The only things that tend to sell faster are the new ones.
Most likely, your sales will go down when there are too many of those products on the market or when they are easy to find in stores.
Higher Shipping Times
When you work with Chinese suppliers like those on AliExpress, you have to deal with longer shipping times. So, because you only ship within 20 to 60 days, you might get less business.
If your customers are upset because their orders are late, you may get more refunds and returns. This could hurt your business.
There is a higher chance that the products your customers get won’t be what the real seller said they would be. You can talk to the source website about it, but it will definitely hurt your business.
Amazon FBA vs Dropshipping: Which Is More Profitable?
Now that you know about the pros and cons of dropshipping and Amazon FBA, we’ll move on to the next section. That means to figure out how much money each of these businesses makes and compare them.
As making money and making as much money as possible is the main goal of any business, we will try to figure out which of Dropshipping and Amazon FBA is more profitable.
Profit Margins in Dropshipping
In general, the profit margins for dropshipping are lower than those for Amazon FBA. What’s going on?
Let’s analyze in detail.
You should already know that dropshipping is just reselling someone else’s products online while keeping your profit margins.
You won’t be able to make a lot of money because you aren’t the one who made the product. The real benefit for a manufacturer is making a lot of money on each product. You might not make a lot of money because of the following.
The person who sold the products to you may also be a retailer. He would have put his own profit margins on the source website where the products were shown.
When you try to sell the same things for more money, you may sound like you’re overcharging.
We don’t have much time to talk about a product’s “dropshipping age.” As soon as the products are sold in stores or go out of style, you will have to cut your margins down to ridiculously low levels.
When you figure out how much it costs to sell one product, you will also have to factor in the cost of promoting it. This will cut into your profits even more.
All of the things listed above are true only if you are doing traditional dropshipping to begin with. If your dropshipping store is well-known and you get a lot of repeat customers, the case might be cheaper for you.
The formula for dropshipping is easy to understand.
Retail price (on your store) = Purchase price from source + platform fees + marketing costs.
So, we saw that the dropshipping store sold the pet shoes for $45.59, but they cost around $16.66 to buy from AliExpress. The total amount of money made is $28.93. In percentage terms, it’s about 64%.
But if we add in the costs of marketing this product and other costs like platform fees, the net margin will definitely go down.
Let’s say that the total cost of marketing this product is about $10 per product, which includes a portion of the monthly cost of the platform (Shopify) that goes toward this product. Here’s how much the profit margin would be.
$45.59-($16.66+10)=$18.93 per product. That means that each item has a net profit margin of about 42%.
Profit Margins in Amazon FBA
Amazon FBA is a business model with a relatively high profit margin. Because you have to price your products in line with what your competitors are doing on Amazon, you will likely make more money. This is because every seller on Amazon has to do certain things.
Most Amazon sellers, especially those who use Amazon FBA, make between 15% and 25% profit on their sales. You might also find sellers on Amazon who make as little as 10% in profit.
But that’s not the point. It depends on the circumstances. We will look at one of the best examples of Amazon FBA, which is similar to how dropshipping works.
When you set your prices for Amazon FBA, you have to think about how much it will cost you. Most of these costs come from what you have to pay Amazon to store your goods and to keep the Amazon platform running.
You would have to pay for those costs in order to set the price of your products in a way that lets you make money.
As a general rule, you should set your Amazon FBA profit margins at least 25%. Setting the price of your products at 3 times what they cost is another easy and less complicated way to do it.
Pro Tip: To be realistic and competitive, you should only set the price of a product to three times its cost if it costs less than $50.
If you set the price of a product that costs you around $100 at $400, you probably won’t get many orders. But you can sell something for $45 that only costs you $15.
When compared to a profit margin of $200 per product, a product margin of $30 sounds reasonable.
Here’s an example of how Amazon FBA sellers can figure out what their profit margins are.
Let’s say you buy the items from Alibaba and sell them through Amazon FBA.
Here’s an example of something that’s selling well on Amazon. As you can see, Amazon ships this item, and right now, Amazon lists it as the #1 Best Seller.
Pet Shoes Amazon FBA
This item costs $28.99 per pair. It is similar to an item we talked about in the dropshipping section, but this seller puts its brand name on it. We call this “private labeling.”
Let’s find out how much this item will cost if you look for it on Alibaba.
This is an exact match to the product we just saw on Amazon from Alibaba.
Pet Shoes Alibaba
Don’t worry that the brand name “QUMY PETS” isn’t on the package. This Amazon seller may have asked the Alibaba seller to print the name on the package. Check out the area in the above screenshot that is circled. This is where customers can change how the products look.
As you can see, this product on Alibaba really costs between $5.40 and $7.40. You can even get this price down if you talk to the seller on Alibaba and tell them you want to sell more of this product.
Taking the worst case scenario into account, you can get this product for $7.40 per piece if you order at least 50 pieces.
If you sell this item on Amazon for $28.99, you will make a straight $21.59 per item. That means that about 75% of what you sell will be profit.
Sounds pretty big, doesn’t it? But, just like with dropshipping, you have to add up all the costs of the goods you sell to figure out the true or net profit margin.
You have to buy a certain number of these products and put them in Amazon’s warehouse in order to sell them on Amazon FBA. Then, Amazon will charge you storage fees for each product, whether or not you sell it.
In addition to that, you will have to pay other fees if you use the Amazon platform.
Here is a list of the fees that come with Amazon FBA.
Monthly Inventory Storage Fee
This is measured by the cubic foot and costs between $0.48 and $2.40. The price goes up as the size of the product goes up. We use the size of our product, which is 1 cubic foot, to make the math easier. So, the fee for each product would be $0.48.
FBA Fulfillment Fees
FBA fulfillment costs are figured out per unit sold and range from $2.41 to $4.71 per unit. In this case, we also look at the minimum fee, which is $2.41 per item.
Pro Tip: Since Amazon FBA’s minimum charge per product is $2.41, you can’t launch a product with less than a $2.41 profit margin.
Selling Plan Fee
A plan for an individual seller costs $0.99 per item sold, while a plan for a professional seller costs $39.99 per month. So that it’s easier to figure out, we use the fee of $0.99 per item.
From 8% to 15% of the price of the product is paid as a referral fee. A 15% referral fee is charged for pet supplies. So, the referral fee for our example product, the Qumy Pets Shoe, which sells for $28.99, would be about $4.4 per product.
Amazon also charges for things like refunds and returns when you buy a case. But we think we don’t have any returns or refunds. So, we don’t add anything to the other charges.
When we add up all of the fees we’ve talked about so far, we get an operating cost of $8.28 per product. ($0.48+$2.41+$0.99+$4.4=$8.28)
We finally found out that the least amount Amazon would have to pay to sell these Qumy Pets Shoes would be $8.28. The price of this item on Alibaba was $7.40. The total cost for each item was $7.40 + $8.28, or $15.68.
So, in the case of Qumy Pets Shoes, the profit margin is ($28.99-$15.68) = $13.11 per item. So, the net profit margin for each product goes down from 75% to about 45%.
Still a pretty good margin, but if we had to pay for things like refunds, returns, long-term storage, etc., the net profit percentage would go down even more.
So, which is a better way to make money: dropshipping or Amazon FBA? We’ve looked at the best dropshipping and Amazon FBA examples. Both are pretty close, but as we said before, Amazon FBA turned out to be slightly more profitable.
Pro tip: Want to learn more about dropshipping’s twists and turns? In the screenshot below, you can see how much the same Qumy Pets shoes cost at Walmart.
Walmart has pet shoes.
Does someone list this product’s pictures on Walmart for $54.97 and have it shipped from Amazon for $28.99? A very big MAY BE. This is why online businesses are so great.
Amazon FBA vs Dropshipping: Which Is More Cost-friendly?
We think that by now you may have figured out the answer to this question. Dropshipping is much cheaper than using Amazon FBA. In fact, it’s great for beginners.
Literally, you can start a dropshipping store with as little as $500.
But for Amazon FBA, you need more than just money to buy the product. You also need money to pay Amazon to store your goods, even if you haven’t started making money yet.
Dropshipping and Amazon FBA are both beautiful and interesting businesses. Which business is right for you will depend on how much you know and how focused you are.
Comparing dropshipping and FBA in a few words, if you want to go slow and steady with less money, dropshipping is the way to go. Amazon FBA is for you if you want to go big and start an aggressive eCommerce business.
We have gone into detail about both business models. We really hope that you learned something from this article.