FBA vs. Dropshipping: Pros and Cons
There are many different order fulfillment options available to an online seller. The challenge is, which will be most successful? Amazon’s FBA program and dropshipping are arguably the two most popular ways to enter (and succeed in) the world of e-commerce.
In this article, we break down the definitions of both, as well as comparing the pros and cons of FBA vs. dropshipping, so you can make a decision that will best work for your online business.
What Is FBA?
Amazon has two seller programs that allow anyone to sell inventory on the Amazon marketplace. These include Fulfillment by Merchant (FBM), as well as the more frequently used option, Fulfillment by Amazon (FBA). Choosing to operate as an FBA seller means merchants ship their inventory to Amazon to be stored in an Amazon warehouse. Amazon then takes over the shipping process, from picking, packing, and sending shipments to customers. Plus, they take care of all exchanges and customer requests!
Due to Amazon’s worldwide brand recognition and convenience of setting up an account, many sellers, from entrepreneurs to well-known brands, use FBA to grow and scale their e-commerce business.
What Is Dropshipping?
Alternatively, dropshipping ships directly from the third-party supplier where you purchase your products. When a customer buys a product from your online store, you contact the dropshipping supplier who will then ship directly from their warehouse/facility to the customer.
Comparing Amazon FBA vs. Dropshipping
On the surface, these two selling methods seem similar because a third party is responsible for logistics management; however, there are significant differences to consider when choosing between Amazon FBA vs. dropshipping.
Benefits and Drawbacks of Amazon FBA
Amazon FBA provides you with more control over your online store than dropshipping. Other benefits include:
- Instant brand recognition through Amazon
- Large customer base of online merchants
- Fast delivery with Prime shipping
- Customer service management
- Low inventory notifications
- Ease of growing and scaling your business
Some of the drawbacks of Amazon FBA might include:
- High competition
- Product packaging differentiation
- Single-channel selling
- Lack of customer contact information
In addition to competing with millions of FBA sellers, Amazon FBA sellers must also follow strict receiving guidelines when it comes to how the product should arrive at the fulfillment center. The branding applied must be in compliance with Amazon’s regulations versus being customized by each brand’s preference.
Also, Amazon FBA allows you to fulfill orders placed on Amazon only. Although, there is the Multi-Channel Fulfillment (MCF) option, which allows you to fulfill orders on any of your channels, including your own website, through your Amazon Seller Central account.
Lastly, every step of the process from order placement to customer delivery is handled through Amazon’s platform rather than capturing customer data, such as email addresses, through marketing initiatives such as newsletter signups or social media. However, the benefits largely outweigh any hurdles or challenges a business might face using FBA but should be factored in when deciding which method works best.
Benefits and Drawbacks of Dropshipping
Although there is typically less risk and higher reward with Amazon FBA, there are several benefits to dropshipping as well. First, dropshipping involves low overhead. Since there’s no need to store products, it immediately eliminates maintenance costs, such as monthly storage and fulfillment fees. Additionally, as with MCF, you can use dropshipping for multi-channel selling. Plus, this method allows you to partner with multiple suppliers to scale more effectively based on customer demand.
On the other hand, with dropshipping, drawbacks often include product quality, inaccurate inventory management, and potential policy violations. Since dropshipping reduces your direct involvement with the order fulfillment process, it limits your ability to oversee the products being sourced from different suppliers.
Also, real-time updates on available inventory may not be possible when working with multiple vendors at once. Having to list a product as out of stock often leads a customer to immediately shop elsewhere and may discourage future orders from your brand. Furthemore, keep in mind, the dropshipping model on Amazon isn’t allowed unless it’s clear to the customer that you’re the seller of record. Any policy violations will result in restrictions in the ability to sell on Amazon’s network.
The goal of this analysis is to help you weigh the costs and benefits of each method in order to determine the impact it will have on the long-term success of your business.
Which Is Better for My Business?
Depending on your sales goals and forecasted growth, there is opportunity in both options. However, Amazon's FBA program is specifically designed to allow your business to scale effectively. Amazon FBA takes care of storage and order fulfillment and allows you to maintain more control over product quality and delivery times.
These are essential in e-commerce, as this is where customers have the most complaints. When customer expectations aren’t met, either by product quality or delivery delays, it immediately tarnishes the customer experience and could result in bad reviews.
There is also greater oversight under Amazon FBA since you are responsible for supplying and preparing all inventory to be stored at the Amazon fulfillment center before it’s sent to customers. Also, products shipped through Amazon FBA are those you’ve already inspected and sent to Amazon’s warehouse. This additional level of quality control is not available with dropshipping.
You also do not have control over final package aesthetics or the delivery experience when choosing the dropshipping business route. Alternatively, with dropshipping, the dropshipping supplier sources, packages, and ships all orders placed, meaning it bypasses your physical review altogether. Amazon FBA provides fast delivery with Prime shipping, as well as takes care of returns and customer service requests.
Essentially, dropshipping can be a profitable option for those just getting started in ecommerce. However, in order to create and sustain a reputable brand with consistently profitable results, Amazon FBA is the way to go.
Turning a Profit Through Amazon FBA
If selling your e-commerce business is part of the long-term plan, you’ll want to set a strong foundation from the start. Choosing the order fulfillment method that is right for your business is part of what allows an online seller to succeed. Keep in mind that when it comes time to sell your business, buyers may consider your fulfillment method before making you an offer.
At Forum, we look for entrepreneurs who sell products consumers love in categories that are sustainable. We also require 70% or more of sales to be made through Amazon FBA with over $200K in net profit as part of the criteria. Though dropshipping has its own benefits, it doesn’t give you the quality control, brand development, or fast and accurate shipping times that result in a favorable profit margin necessary to eventually sell your business.