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 blog post will help you choose between two popular options: Shopify dropshipping vs FBA (fulfilled by Amazon).
Don’t feel like reading? Watch the video below comparing dropshipping vs Amazon FBA.
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, Amazon FBA vs dropshipping:
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.
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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.
That’s why when it comes to comparing Amazon FBA vs other business models, it’s much higher risk. With the dropshipping model, you don’t need that much capital at all!
Dropshipping: No Inventory Needed
The main difference between the dropshipping model vs Amazon FBA 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.
If you’re not sure which high-cost items to pick, it can be easy to give into the temptation of searching for lists of niches online. However, high ticket dropshipping niche lists are useless because they’ve probably already been picked over by the time you see them.
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. Another reason why Amazon FBA vs other business models carries more risk.
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 a dropshipping store 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.
Read Also: Influencer Marketing for Shopify Dropshipping Doesn’t Work (Do This Instead)
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. When you compare Amazon FBA vs other online businesses to start with, this is a major consideration.
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. If you make sure that you get the proper documentation from your suppliers, it’s not that likely. But even if they do, there are other payment processors that you can use.
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.
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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 the private label strategy with FBA Amazon 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 a dropshipping store 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.
We discuss our dropshipping profit margin in greater detail right here if you’d like to see some actual numbers.
Read Also: Dropshipping Advertising Strategy – Why We Never Use Facebook Ads
Scalability
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 Amazon FBA pros is that Amazon handles so much of the process that it is easily scalable because of the Amazon Fulfillment network.
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
A Dropshipping store 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. In our podcast, we have an episode dedicated to a discussion on outsourcing high ticket dropshipping Shopify eCommerce stores.
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.
Read Also: Ezra Firestone Told Us to Stop Dropshipping – Podcast
Salability
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.
Read All: Is Buying a Shopify Store Worth It? Dropshipping Store Case Study
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 ecommerce 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 a dropshipping store, 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. That’s what makes it such a low risk e-commerce business compared to others.
Read Also: Dropshipping vs Affiliate Marketing – What’s Better for Beginners?
Frequently Asked Questions
Is Dropshipping Good in 2020? Will it Still Work in 2021?
Dropshipping is an open ended business model that will still work as long as the internet is around. Remember, we aren’t talking about the gimmicky type of dropshipping where we’re taking products from AliExpress or directly from China shipping them to a customer. The way we do dropshipping is by partnering with brands in our home country and developing business relationships.
These brands want to spend their time on things like supply chain and don’t want to put the resources into marketing or customer service. That is where we come in.
As dropshippers we market the products that these brands have to offer and provide high quality customer service. This makes it a win-win in the end.
What’s better dropshipping vs Amazon FBA?
We think that dropshipping is by far the better business model for 3 main reasons:
- FBA is becoming way more difficult as time goes on because Amazon is private labeling products themselves kicking 3rd party sellers out of the market. It’s easy to see this yourself when you’re shopping on Amazon: just look for how many products are labeled under Amazon Basics.
- Dropshipping requires no upfront inventory cost whereas Amazon FBA requires you to spend money up front. After you’ve spent on money on inventory, you have to wait for it to get to you from China. During this time, the entire market for the product you’re selling online can change which can render your initial investment useless.
- Because you don’t have to invest much money, dropshipping will allow you to become profitable much quicker if you do things correctly. When you sell products on Amazon FBA you still have to recoup your inventory costs, ad costs and more. With dropshipping, your main overhead is the cost of your site and your ads which usually ends up being much cheaper than all of the investments you need to make to get started with FBA.
What Should I Not Dropship?
You should not dropship anything that you won’t be able to sell over and over again.
In other words, don’t waste your time using Facebook ads to sell a “trending” product. After that trend dies, so does your income.
Instead, focus on selling items that will bring in revenue month after month. You can do this by focusing on search traffic whether it be from Google Ads or SEO.
In any given month there will be a set number of people searching for keywords like “kitchen island”. So long as you can capture a percentage of these people each month, you’ll be bringing in sales over and over again to your ecommerce business.
Repeat this process for more keywords and you’ll have yourself a healthy business and customer base.
Who is the Most Successful Dropshipper?
The most successful dropshippers of all time are Steve Conine and Niraj Shah. If these names look familiar, that’s because they are the founders of Wayfair.com a large publicly traded company that now sells many brand name products.
What many people don’t know about these two, is that they started as humble dropshippers selling things like racks and stands using the same methods we’re talking about here. They eventually scaled up to selling almost everything home related.
We use the same methods that Steve and Niraj use to grow our stores, although we have no desire to grow them to Wayfair size. Instead, we prefer to treat our dropshipping stores a lifestyle business model that we can sell.
So next time anyone tells you about some random YouTuber or Instagram star who’s the best dropshipper in the world you can tell them that they’re lying.
Why Do Most Dropshippers Fail?
Simply put, they fail because they are doing it wrong. Most dropshippers do the hyped up methods pushed by YouTube gurus where they try to sell trending products with social media traffic instead of slowly building a solid foundation and a real business.
By focusing on search traffic instead of social media, we can create mini income streams that pay us month after month rather than “chasing the dragon” as we like to say.
What’s the Catch with Dropshipping?
There is no catch with dropshipping. Just like any other business model you need to get products in front of people who are looking to buy those products. If you don’t do this correctly, you can end up spending too much on advertising and ultimately lose money. It doesn’t matter if you’re stocking these products with FBA or dropshipping them on you’re own site. The same principles apply.
The key is getting cheap or free traffic and selling products that make you at least a few hundred dollars profit per sale, preferably a few thousand!
Dropshipping vs FBA Wrap Up
If it seemed like this post was biased towards getting started with dropshipping, it’s because it is. It’s simply the better business model in our opinion. Period.
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. It really is totally free – we only ask for your email address! We’ll clue you in to other amazing online business models outside of Amazon FBA and dropshipping.
Once you’ve got the dropshipping cash flow, you can consider funneling it into an FBA business so you can grow it quickly and not rely on Amazon FBA as your sole source of income, but rather as a bonus.
If you are ready to start 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.