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Amazon holds the largest market share among eCommerce companies, amounting to 37.8% of all ecommerce sales. One contributing factor to its success is the availability of different fulfillment business models for its sellers.
These business models encompass the procedures of storing, packaging, and delivering products to customers on behalf of their sellers. Amazon provides two main options: Fulfillment by Amazon (FBA) and Fulfillment by Merchant (FBM). Dropshipping, which operates as a distinctive business model, falls under the FBM category.
If you're selling on Amazon, it's important to pick the right way to deliver your products. This is true whether you're selling used products or new ones to make extra money. Deciding the best option depends on factors like your business's status, finances, and desired level of control.
Either way, you can assign the responsibilities of storing goods and fulfilling orders. This enables you to concentrate on other aspects of your business.
This article will talk about the importance of fulfillment, comparing dropshipping vs Amazon FBA. It will list the pros and cons of each. It will also explain the main differences between the two to help you decide which is best for your online store.
Fulfillment plays a crucial role in the success of your business. Do you know that 56% of abandoned ecommerce shopping carts are linked to delivery concerns? By selecting the right order fulfillment service, you can gain a competitive advantage. Such a service assists you in various ways:
Reliable fulfillment services are essential as they help establish trust with customers and ensure their satisfaction. If products are not delivered on time or get damaged during shipping, it can harm your business and disappoint customers. These fulfillment issues can lead to the loss of customers and hinder growth.
Fulfillment by Amazon (FBA) is a convenient service that lets you delegate order fulfillment to Amazon. FBA enables you to ship products to an Amazon warehouse at a competitive rate. When a customer buys your product, Amazon takes care of picking, packing, and shipping the order. Amazon will even handle customer service and returns.
However, sellers should consider Amazon fees when setting prices. As an Amazon seller, you will incur a few fees, particularly if you use FBA to fulfill orders. These are the main Amazon FBA fees:
When the fulfillment center receives your products, they’ll be available for sale.
Amazon FBA has helped countless eCommerce entrepreneurs improve and scale their businesses with Amazon's logistics, infrastructure, and customer support. However, while FBA offers many benefits, it also has some challenges. Let's delve into a detailed examination of what you can expect when using FBA.
By utilizing Amazon's fulfillment services, they take care of all aspects of order fulfillment. The manual and time-consuming task of packaging and shipping orders every day becomes a thing of the past.
FBA provides you with a dedicated team of warehouse employees who handle every step of the process. This enables effortless business expansion without worrying about warehouse space or hiring additional staff. This is particularly significant as your order volume increases.
When you use FBA to list your products, they become eligible for free shipping. FBA listings with the Prime logo show Amazon handles packaging, delivery, customer service, and returns for customers. Using FBA, your listings can reach Amazon's extensive Prime member base, which consists of nearly 200 million members.
Using FBA means the customer service team of Amazon takes care of addressing your buyers' inquiries. Customers have the convenience of reaching out to Amazon at any time. This service is free, but there is a Returns Processing Fee for certain product categories.
With Amazon's FBA program, customers can access a user-friendly return center to initiate various processes, including returns, refunds, replacements, and reimbursements. This customer-centric approach ensures easy assistance for clients seeking to return their purchased products.
The Prime logo assures customers of quick shipping and convenient access to Amazon's customer service for support. Furthermore, Amazon will typically deliver your products in an Amazon-branded package, enhancing their perceived value for your customers. This instills trust and confidence in their purchase experience.
Amazon FBA enables you to expand your business by accessing a global market. For instance, the FBA Pan-EU program facilitates swift delivery across European countries. Additionally, leveraging FBA Export allows you to broaden your online business presence in over 100 countries.
Amazon's warehouses can store your items without requiring a minimum amount for shipping. With FBA's specialized services, you can expand your business without the need for additional capital or hiring more workers.
Provide quick shipping choices to your customers on various platforms. These platforms include your website, online marketplaces, social media shops, and direct-to-customer sites. This will give them a delivery experience similar to Prime. Easily send orders to customers outside of Amazon using multiple channels, expanding your customer base beyond Amazon.
One major drawback of FBA is its substantial fees, which can reach 30–40% of your product price, depending on item size and weight. Calculating these fees in advance is vital for profitability assessments. In addition to the fees mentioned, you should also think about selling plan fees and occasional long-term storage fees.
Threecolts' SellerBench tracks fees daily, corrects errors with Amazon, and gets money back for any past overcharges
Amazon has introduced a storage capacity system for FBA to prevent sellers from exceeding inventory limits. Your Inventory Performance Index (IPI) score and sales history will determine the quantity you can send in.
Returning items on Amazon is simple for customers, but it can result in more returns than other online stores.
Dropshipping is when sellers have a third party supplier handle acquiring, storing, and delivering products for them in business. With dropshipping, you can sell products online without buying inventory beforehand. Many sellers on websites such as Amazon, eBay, and Shopify prefer this option. It is popular because it is user-friendly and does not need a large initial investment.
Amazon dropshipping falls under the Fulfilled by Merchant (FBM) business model. With Amazon dropshipping, you can showcase products and run an online store. After a customer makes a purchase, you send the order to the dropshipper. Then, you notify the customer that their items are on the way.
The dropshipper takes care of sending out orders, but you might still need to handle customer service in some cases. In contrast, the dropshipping service handles the physical aspects and delivery.
Knowing Amazon's rules for dropshipping is important to avoid getting in trouble. Breaking these rules can lead to losing the ability to sell through FBM and possibly having your account suspended.
To fulfill orders using a dropshipper, keep the following guidelines in mind:
Amazon dropshipping involves three key players: the seller of record (SoR), manufacturers, and wholesalers. As the SoR, you're responsible for selling products to end consumers, setting prices, recording revenue, and handling sales tax.
Manufacturers produce goods, and while buying from them can require bulk purchases, some offer dropshipping services. Wholesalers act as middlemen, buying from manufacturers and selling to retailers with a slight markup. Though their primary role is serving retailers, wholesalers may also provide dropshipping services.
The dropshipping process may differ based on the arrangements in place. Generally, the system starts with a formal agreement between the seller and the dropshipper.
When a customer places an order online, the seller receives and acknowledges it. The system sends a confirmation message to the customer for reassurance. The seller tells the dropshipper what to send, then the dropshipper packs and ships it to the customer.
Around 20–30% of all Amazon sellers use dropshipping as a side hustle and still make a decent profit. You should be prepared for the benefits and drawbacks of this straightforward and low-risk business model.
Dropshipping requires minimal investment compared to private labeling and wholesaling. You can even operate without inventory. Upon receiving payment for a sale, you can use some of the funds to acquire the product from your supplier, who handles shipping. This eliminates the need for an upfront inventory investment.
Dropshipping can reduce overhead expenses because you are not responsible for storing or shipping the products.
The dropshipping model allows you to run your eCommerce store from anywhere. It's important to check if your dropshipping supplier is legit and reliable to avoid issues with product deliveries.
Running a fully automated dropshipping business on Amazon is possible with tools like Threecolts, Jungle Scout, and ChannelAdvisor. These platforms enable you to automate most aspects of your business, allowing you to be hands-off for the most part.
Researching for dropshipping is simpler with existing products from manufacturers on Amazon. Various software options like Threecolts' SellerRunning can help expand your Amazon reach and assess the competition.
Competition is intense in the dropshipping industry due to low entry barriers. With other Amazon sellers offering identical products, it's hard to stand out. As a result, price becomes a critical factor in determining whether a product stands out.
Dropshipping businesses often have slim profit margins. Suppliers require a fixed payment, and upselling may not be effective as customers look for better value elsewhere.
Your control over the order fulfillment process is limited, impacting your ability to oversee and ensure product quality.
In dropshipping, you rely on supplier information for customer inquiries, as you don't own the products. However, there is a risk of inaccurate shipping details from suppliers. Also, verifying detailed product information with suppliers takes extra time.
Both Amazon FBA and dropshipping offer hands-free order fulfillment. However, there are key differences:
What Factors Must be Considered When Choosing Between FBA and Dropshipping?
Think about these factors when choosing a fulfillment model for your eCommerce store:
Consider the following parameters and questions to determine the most suitable model for your business:
By answering these questions, you can determine which model aligns best with your business targets and matches your resources.
Both FBA and dropshipping offer opportunities for success in eCommerce. Amazon FBA provides global fulfillment networks and reliable customer support but requires an upfront investment. With dropshipping, you manage the product catalog while suppliers handle order management and logistics, but product quality control is limited.
If you're a risk-taker aiming to build your brand, Amazon FBA is a good choice. If you're a cautious entrepreneur, dropshipping is a suitable option. You can also consider both models if it is financially feasible; just make sure to assess the pros and cons and use tools to expound on your research before deciding. Whether you choose Amazon FBA or dropshipping, manage your business through an Amazon seller management platform like ThreeColts so you can leverage valuable tools, resources, and insights and grow successfully.
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