If you are just getting started in the e-commerce business and have a limited startup budget, you are likely facing some decisions about where to focus your resources.
This post will help you choose between two popular options: Shopify dropshipping vs FBA (fulfilled by Amazon).
Don't feel like reading? Watch the video above.
Inventory and Startup Costs
If you are new to ecommerce, you will need to decide where to invest your initial startup budget. Let’s compare the startup costs of each option.
First, it’s important to know that dropshipping and Amazon FBA operate on completely different business models, so this is going to be a point of great difference between the two.
Amazon FBA: Stock the Warehouse
Amazon FBA involves going out and finding suppliers to stock your inventory at the Amazon warehouse. Many people turn to Alibaba and find products from suppliers in China.
Suppliers are typically going to have a minimum order amount, which means that you need to be fairly confident in your product and its salability before committing to an order.
One of the consequences of the Amazon FBA business model is that many beginners are limited to low-ticket items because they don’t have the capital to invest in high-ticket inventory. That means that they are forced to buy cheap products that have a small profit margin.
You can make money through this model, but you really need to know what you’re doing, and you will probably need connections to manufacturers in China to make it work well.
It's all very do-able, but there's little room for error if you're on a low budget.
Dropshipping: No Inventory Needed
The main difference between the dropshipping model and the Amazon FBA model is who handles the inventory.
In dropshipping, you are acting as an intermediary between the customer and the supplier. You are helping connect the customers to suppliers and keeping a portion of the money for your work in helping facilitate the sale. However, you do not have to physically stock inventory or manage the logistics of shipping.
This means that you are free to pick more high-ticket items with higher profit margins. Since you do not have to sink your resources into the inventory itself, you can choose high-cost items. Many of these high-ticket products can get you $500 in profit on a single sale. It adds up much more quickly.
Getting Profitable Sales
Let’s take a look at the next step for each of these models: making your first sales.
For both of these business models, your success is dependent upon driving traffic to your site and converting that traffic to sales.
Driving traffic, though, looks very different for each model.
Amazon FBA: Organic Traffic and Keywords
You’ve created your product pages and are ready to start selling on Amazon. How do you get people on the page?
Amazon’s algorithm determines the traffic, and every effort you make to get higher page rankings is really just a guess that you hope will pay off.
While you can pay for traffic through Amazon, it’s really about driving up the rankings so that you will show up organically later.
You can be profitable through paid traffic, but the ultimate goal is to leverage the organic traffic of Amazon's huge customer base. That's where the real money is.
The pro of Amazon FBA is that you could start showing up in organic searches if you have done a good job of making great product pages and managing your keywords.
The con of Amazon FBA is that you don’t actually have much control over what works and what doesn’t to bring you up in the organic rankings. You are playing in Amazon’s playground, and the rules can change at any time. The top players in FBA have the budget and experience to adapt, but for beginners it could be harder.
Drop Shipping: Paid Advertising
You’ve made a drop shipping site, populated it with products, and have partnered with some high-ticket suppliers. How do you get people to it?
We get most of our traffic to drop shipping sites through paid advertising through Google Ads. The benefit of paying for direct traffic to your drop shipping site is that you’re making money right away.
The more people that you get to your page, the more likely they are to convert to a sale, and the profit margins are so high that you only need a handful of sales to see a return on your investment.
Paid advertisement for drop shipping is not so much an early stage in a long-term strategy. It is the strategy, and it pays off quickly. There's no need to wait for your organic rankings to rise.
How Much Control You Have
One of the big differences between these two methods is how much control you have over the process—and, ultimately, over your success.
The concept of control underlies all of the other items on this post, so let’s take a closer look at how much control you have over each process.
Amazon FBA: Algorithms and Reviews in Control
Even if you do paid advertising on Amazon and get people to your product page, you are not going to get any sales unless there are reviews on your products. Think about it. People don’t buy products without reviews. They don’t trust them.
This means that in addition to pumping time and money into the product page and traffic, you also have to find a way to get reviews, which can cost money as well. Often, you have to give product away to get initial reviews.
In addition, there is an element of “grey hat” strategies involved with getting reviews and ranking on Amazon’s site. The big sellers have a system in place to generate reviews. They may be using software, tapping into their private network, or using Facebook groups for this purpose. All of those methods are a little shady when it comes to Amazon’s terms of service, and the ultimately put you at risk.
This is the biggest difference between Amazon FBA and drop shipping. When Amazon has control, you never know when your site could be suspended or banned. Even if you aren’t doing anything wrong, Amazon could flag your page and cost you money while you get it sorted out. If Amazon suspends or removes you, you may not get your money back.
Here’s some background about our own experiences dealing with Amazon...
We publish books on Amazon Kindle. It’s like private labeling with FBA, but the inventory is unlimited. This allows us to use Amazon’s great resources for sales without having to stock a bunch of expensive inventory.
One day, we had our Amazon Kindle account suspended before even though we weren’t doing anything wrong. Just got an e-mail one day saying we had a duplicate account (we didn't) and they were suspending us.
We got our account back, and we do make money there to this day, but we definitely don’t want it to be our sole source of sales since Amazon can and has taken it away at the drop of a hat.
Ultimately, Amazon has almost all of the control over the process and they don't care about you.
Dropshipping: You’re in Control
When you operate a drop shipping site, the only thing controlling you is yourself. Even if Google suspends you for some reason, you can just make a new email or start a new store. There’s no inventory that gets caught up and there’s no one to hold back your money.
Shopify CAN hold a portion of your payments if it's a new stripe account, but it's usually very minimal.
Dropshipping is a much better way to get started with ecommerce in terms of risk. If you don’t have other sources of income in your online portfolio, Amazon FBA is not the best place to start.
Time Needed to Profit
You’re in business to make money, right? So let’s compare how long it will take to make your first profitable dollar with each method.
Note that we’re not talking about your first sale. We’re talking about how long it will take to get a return on your investment, recoup your startup costs, and actually turn a profit.
Amazon FBA: 3-6 Months to Profit
Using private labels on Amazon FBA will usually require a few months of work before you see a profit. After all, you have to recoup the cost of your initial inventory before you will start seeing a return on investment, and the profit margin for each sale is usually low.
We’ve also run into issues where Amazon loses the product in the warehouse. While they’ve eventually found it, these logistical issues can delay your profit and impact future sales.
Overall, you can expect for it to take 3-6 months before you are really making a profit.
Then the question is: how much of you profits do you want to actually keep? After all, you'll need to invest for more inventory.
Dropshipping: Profit from First Sale
The startup costs for drop shipping are so low that you are usually profitable from your very first sale. Your time to profit is mostly dependent upon how quickly you can get a website up and running.
Since you get a 30-day free trial period with Shopify, you can even work hard enough to make your first sale before your trial expires. If you do that, your only expense is a little paid traffic advertising, which means you’ll make a return on your investment right away.
One of the goals of any business is to continue to grow once you have it established. Let’s see how scalability compares between these two methods.
Amazon FBA: Can Scale Exponentially
One of the primary benefits of Amazon FBA is that Amazon handles so much of the process that it is easily scalable.
If you have deep pockets, connections to suppliers in China, and a system of getting reviews, you can easily grow your business quickly and effectively.
With Amazon, once you get the ball rolling (and it does take a little longer initially), it’s very easy to generate consistent sales without much extra effort on your part. It becomes extremely passive income and you can go huge quickly if you have the funds and experience.
Dropshipping: Scales linearly
Dropshipping operates on a more linear trend. Once you get off the ground with your website, you will have to either take over the market share for that supplier or work with new suppliers to scale up.
The work of connecting with your third, tenth, or hundredth supplier isn’t really different from the work of connecting with the first one.
Your degree of passivity is really dependent on how well you can effectively outsource the tasks as you grow your pool of resources.
If you have an unlimited budget, Amazon FBA probably has more potential. However, if you are looking to build up from $0 or from a small startup budget, dropshipping is the better bet.
A lot of the profitability for ecommerce sites comes from selling the site itself down the line.
At the moment, both dropshipping and Amazon FBA are in the same range. You can expect to sell either one for about 20-40 times your monthly profit.
Right now, Amazon FBA is really hot, and the overall multiples might go down a little over time as the market gets flooded.
Consequences for Failure
If you are just starting out, there’s a good chance you’re going to make some mistakes. Starting a business requires trial and error to build a successful model.
With that in mind, it’s important to consider the consequences for failure of each approach.
Amazon FBA: High Risk for First Timers
Amazon FBA is a great way to expand your portfolio, but it’s just not a good bet for someone just starting out.
If you really want to start with Amazon FBA, it’s better to buy an already-established business than it is to build up your own product pages from scratch. Buying an established business removes the risk of finding suppliers and getting reviews. The product is already verified and set up.
The cost of buying an established Amazon FBA business is much higher than starting from scratch, but if you start from scratch, choosing the wrong product or failing to get established reviews can bankrupt you. You’ll be out the cost of the inventory with no way to recoup your investment.
Drop Shipping: Low Risk for First Timers
If you fail with your first attempt at drop shipping, you aren’t really out anything. You can just connect with more suppliers, pivot to a different product niche, and copy the theme of your Shopify store to start over.
The initial investment is low enough that you don’t take a big financial hit, and the process is replicable enough that the work you put in isn’t time lost.
If it seemed like this post was biased towards getting started with dropshipping, it's because it is.
In our free course on how to build an online business portfolio, you'll learn how starting with a dropshipping store will allow you to safely fund other online business ventures while allowing you to live the life you want and quit your 9-5.
Once you've got the dropshipping cash flow, please do funnel into an FBA business so you can grow it quickly and not rely on it as your sole source of income.
If you are ready to started started with dropshipping, then also check out Instant E-Commerce Asset where we show you how to be profitable in as little as 2-weeks.