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Blog-En, Dropshipping

Amazon FBA vs. Drop Shipping: Which Is Better for Beginners?

By  Sam Peiffer

E-commerce has proven to be a profitable business niche these days. If you want to benefit from this huge market, the two most advantageous business models are dropshipping and Amazon FBA.

In this free guide, I'll explain the concept of dropshipping versus the Amazon FBA business model.

This guide is designed to help you make an educated and meaningful decision as to which of the two models is better for you as a beginner.

At the end of this guide, you'll know which business model will bring you the most money, which you can build up more easily without start-up capital, and which you can use to generate a passive income more quickly.

What is Dropshipping?

Dropshipping is a great e-commerce solution where you, as a retailer, place an order directly with the wholesaler. Once you've dropped the order with him and given him your customer's details, he will send the items directly to your customer.

So you sell products in your shop that you don't yet own, and only order from the wholesaler as soon as a customer has placed an order with you.

What's cool about this is it doesn't require a large investment.

This means that beginners and smaller traders can also benefit from this business model.

Did you know?

On average, the conversion rate drops by around 50% for every step that leads to a sale. 8% of the visitors put products in the shopping cart, 4% go to the checkout page and only 2% of the total visitors actually buy something. 

What is Amazon FBA?

I'm sure many of you are probably wondering, "what is Amazon FBA?"

Amazon's FBA programme is an opportunity for entrepreneurs who are looking to target a large audience. It's another online business model and is known for its extreme transactional search engine and high conversion rate.

People on Amazon are on the platform to buy, not just to get information.

FBA stands for "Fulfilment by Amazon".

This programme provides both storage and shipping for your products so you can easily sell your goods on Amazon.

FBA has a unique approach because Amazon is a huge market for popular products.

These products are also suitable for Amazon's shipping promotions, for example, they also include free shipping with Amazon Prime, which makes FBA even more lucrative.

I guess the real question now is: 

Which of these two models is the better choice for making money online?

To help you make an informed decision, I've summarised the pros and cons of both.

Let's take a look!

Advantages & Disadvantages Of Dropshipping

First of all, let's take a look at the advantages and disadvantages of dropshipping.

Advantages Of Dropshipping

Low start-up capital required

Dropshipping doesn't require high capital requirements or a specific branch to set up your own company.

This saves you huge initial investments, which can often be a burden for many beginners.

The only thing you should invest in is in yourself in the form of education.

Little responsibility

When your customer places an order on your online shop, all you have to do is place the order with the supplier.

The wholesaler not only prepares the order, but also sends it directly to the customer and handles any returns for you.

Completely automated

Another great advantage of dropshipping is the total automation of your company.

Once you set it up, it runs like a well-oiled machine that requires very little maintenance. If you don't feel like building your shop, you can even hire freelancers who will reliably do this for you.

Orders can be processed fully automatically with just one click!

Low risk 

As a dropshipping business owner, you don't have to keep a huge inventory. If your products aren't selling well, there's hardly any loss because you didn't buy the products for stock.

The only real hassle you have to go through is setting up and maintaining your online store.

Diversity

I'm sure you understand that the greater the diversity of something, the better it gets.

If you started your online shop with the task of buying your own inventory, it would hardly be possible to sell a wide range of products. Why? Well, quite simply because you will then tend to buy a few products in large quantities.

Dropshipping allows you to try new products and quickly decide what works for you and what doesn't.

It's not that risky because you don't have to buy a new product in bulk.

Time saving

This is such a great aspect of dropshipping 

Although every business takes time and dedication, dropshipping mean you don't have to deal with product packaging, the shipping process, or managing your inventory.

It's an ideal solution for entrepreneurs who want to save their valuable time.

You can start right away 

You can set up an online shop in less than 24 hours thanks to tools like Shopify. The only thing you have to do is upload your product to your shop and start generating visitors.

Most dropshipping beginners in my coaching sessions earn good money after less than 6 weeks.

Here's proof from one of my participants:

No fixed location, but instead geographical freedom

Another amazing benefit of dropshipping is that you don't have to be in or near a specific area or city.

For example, I live in the Caribbean and do all of my business from the comfort of this amazing island. All I need is my laptop, although it would also work with just a smartphone because you can operate your Shopify store and the Facebook Ad manager from your mobile phone. 

You can run your online shop smoothly over the Internet by simply staying in contact with your suppliers and customers, and working from anywhere in the world!

Hardly any competition 

When it comes to dropshipping, competition is only fierce if you don't know what you're doing. There are a large number of dropshippers, just browse through the bestseller categories and try to sell them.

This is a great advantage for you because, with the right product research strategy, you can be the first or second person to sell a highly profitable product in a big blue ocean.

Rapid and massive growth in target group ownership

Thanks to the rapid growth and top scalability, you can quickly build up a large customer list with a good product.

Your customer list is your most valuable asset in your company. A customer email address is worth an average of €10 per month, whereas the email address of a newsletter reader is only worth €1 per month.

With a massive customer list, you can earn thousands of euros with a single promo email (depending on the size of the list).

Extremely high margins 

Margins are the elite. 

If you do everything right and list your products for at least €50 in your online shop, then you'll never have any problems with your margins. The best way to do this is to use my profit margin calculator just to be on the safe side.

You determine your margin completely yourself because you manage the platform yourself. Whether you sell your product for €50 or €70 is entirely up to you.

Note: Only the economically disadvantaged dropshipper sells products under €50 (excluding consumables or multiple purchase products).

Extreme scalability 

There's no business model that you can scale like your own online shop that you start with dropshipping. I've seen it all before, but I'm always totally amazed when I see people making $1.2 million on a Black Friday sale.

Here's a 6-digit case study through an advertising strategy from my coaching programme for you to check out:

Selling your online shop 

You can get the biggest payday of your life by selling your working online shop that has served you well for a few years.

A good friend of mine recently sold his recent online shop in the niche market of dog accessories for 6 figures. 

When you get such a high one-time payment with almost 100% profit, you can crack open the champagne! 

Disadvantages Of Dropshipping

Little information about the products

Chances are that your supplier provided you with little, inaccurate, or no detailed product information. This means there's also a high chance that you will not be able to answer all of your customers' questions about the product they're interested in.

Questions concerning customer care

Dropshipping gives you a lot of freedom, but when it comes to responding to customer concerns, you have to rely on your supplier's information.

It's their product, and you don't really know if they accurately described the product or not.

You will only find out about all of this once you have ordered the product yourself. If you don't do this, you run the risk of customers complaining.

No special discounts

As a dropshipper, you can't get amazing offers or discounts because you're not buying a product in bulk. However, you can put together offer packages from different products in your online shop in order to achieve higher sales.

Myth: Dropshipping has long delivery times 

Beginners who start dropshipping always complain about delivery times of 8-12 weeks, which is just no good. 

That's because they rely on low-cost dropshipping providers like AliExpress. AliExpress is only a temporary solution and only offers acceptable delivery times to the US. 

I have found some good suppliers and dropshipping providers and only use the fastest and most reliable ones myself.

With the right suppliers, you can get delivery times of 5-7 days. If you want fast shipping, read this advice on the current best dropshipping companies, retailers, and wholesalers.

Advantages & Disadvantages Of Amazon FBA

Now we've come to the Amazon FBA Business. You can sell your products on Amazon. Let's take a look at the following advantages and disadvantages.

Advantages Of Amazon FBA 

The best transactional search engine on the planet

People on Amazon are only there to buy on the platform and this makes it easy for you to convert clicks into purchases. If you want to buy blue Nike shoes, just type it into the search and you can usually buy directly.

The customer comes to the platform with a desire to buy. If you get a top result and your product has a good search volume, there's absolutely no doubt that you're going to generate sales.

Amazon does part of your marketing

If someone has viewed your product, Amazon will take over the remarketing for you and show the customer your product more often in order to force a conversion. Kind of similar to Facebook ads.

Enough time to scale your business

Amazon takes care of both product packaging and shipping. The company also offers excellent customer support so you can sell your goods on Amazon without much worry.

There's not much left for you to do. So you have plenty of time to focus on effectively scaling your business.

Amazon's reputation 

Amazon FBA allows you to rely on Amazon's brand name instead of establishing your own. Thanks to Amazon's excellent reputation, you will get the brand awareness you need. Yes, this is very convenient, and you will be able to scale your online shop significantly.

Large customer base 

Building a customer base is one of the toughest tasks any business owner faces. However, with Amazon's FBA programme, you'll be able to capitalise on Amazon's large customer base and get great results.

Return and exchange policy

This is one of my favorite aspects of the FBA business model. You don't have to worry about anything. Whether it's about packaging, shipping or returns, customer service is the primary role of Amazon FBA. It enables you to attract loyal customers and keep them.

Good profit margin

The products that cannot be sold on your website for a good profit margin can be sold on Amazon at good prices. This is once again due to Amazon and its brand image.

Did you know?

66% of users prefer to buy from retailers who offer more shipping options. Many sellers only offer one shipping option (free shipping or shipping fee).

But all customers have different needs and therefore want different shipping options.

Tip: Stand out from the competition and offer at least one free and one express option.

Disadvantages Of Amazon FBA 

No target group ownership 

Every company makes customers and is defined by the value of the customer list. If you have a large customer list, your company is worth a lot.

Since Amazon doesn't give you access to your own customer data, you're only expanding Amazon's customer list, not your own.

There are a few tactics that can be used to build up this target group with Amazon FBA, but these are very slow and almost all of them are deeply in the legal grey areas.

You may make money, but you're not an entrepreneur with a real business. You're more of a cash flow investor if you use Amazon FBA.

No record of inventory

Amazon stores your products for you and manages everything. Unfortunately, your unsold products will also accumulate on Amazon. It can get so cluttered that you will no longer be able to properly track your inventory.

High competition 

Without a doubt, Amazon's FBA program is a large pool with many competitors. This means you alone will not be able to take advantage of the FBA programme. 

There are many other companies out there who want to sell the same products as you.

So it could be difficult to compete with experienced entrepreneurs and you may have a bad experience with Amazon FBA.

"A Race to the bottom"

The first thing I had to learn painfully in my online marketing career is the fact that you should never go over the price. There's no point in giving discounts and being cheaper than the competition because everyone offers the same.

Instead, it makes a lot more sense to go over the added value that only you can offer. With Amazon FBA this is very difficult because hundreds of retailers in the same niche undercut each other in price instead of adding value for the customers by, for example, increasing free bonuses.

No winnings are guaranteed 

When selling on Amazon, you have the disadvantage that you can't test your product on a small scale. You can't just list products for free and see if they sell.

Total dependency on Amazon

If Amazon decides to change its policies and remove your store from its platform, there's nothing you can do about it . All of the hard work will have been in vain.

No direct contact with customers

Amazon has the influence on all of your customers, but unfortunately you don't. What if you want to break away from Amazon and open your own shop?

That will be difficult because you can't make yourself a big name as a manufacturer on Amazon and you cannot retain customers.

Start-up capital and high risk

You need start-up capital for the Amazon FBA model, and not just a little. This is because you have to buy the products yourself first before you can sell them on Amazon.

If you wanted to save time and your research was not that important to you or you just don't have the necessary experience, you'll likely be sitting on your products.

Remember that you also have to pay fees to Amazon FBA in order to use their services.

FAQs:

Which business model requires less start-up capital?

A big advantage of the dropshipping model is that you don't have to buy any inventory in advance. Only after the customer has bought it do you buy the item from the supplier.

Instead, the creation of the online shop and the placement of advertising require the most capital.

On average, it costs you €45 to set up an online shop and buy a domain with Shopify.

Advertising costs you around €20 per product to try out through Facebook advertising. You can also use search engine optimisation or other free ways to bring visitors to your online shop.

With Amazon FBA, on the other hand, you have to buy the products you offer in bulk first, which means you have a much higher startup cost. On average, it will cost you at least  €5,000 to start and grow an average Amazon FBA business.

Which business model is better suited for passive income?

Once you've built a dropshipping business, you still have to grapple with daily chores.

You still need to fulfill customer orders, reply to customer emails, and monitor your ad campaigns. There are still a ton of manual processes that you have to do!

To save time, most dropshippers outsource these small tasks to virtual assistants, like Upwork.

A well-known mistake is to do these tasks yourself because you want to save money. A word of advice: never do this virtual assistant work yourself. It only distracts you from your core business.

With dropshipping, you place advertisements and simply focus on marketing. Usually you only control how your ads perform and how you can scale them for more sales. With an optimised dropshipping business, you'll have no more than 60 minutes of daily work.

At Amazon FBA, all of the work is in advance.

This includes product research, manufacturing the product, and preparing for market launch.

Once your products have been delivered to the Amazon FBA warehouse, they will do most of the work for you, including handling. And that's what makes the Amazon model so passive.

All that is required is to monitor inventory so you know when to replenish your inventory.

And when you're spending money on advertising, you need to monitor your ads' performance. But overall, an Amazon business is very low-maintenance compared to dropshipping.

In this aspect, I think both are equally good.

Will you make more money online with Amazon FBA or dropshipping?

Dropshipping allows you to scale big and fast. Since you don't need an inventory, you can test several products in a short time.

That makes it easy to quickly find winning products that can produce huge profits in the short and long term.

There is also more flexibility in the way you can market the products in your store.

Strategies like up-sells, cross-sells, and email marketing can dramatically increase your profit margins.

The scaling of Amazon FBA takes longer and hits the sales limit faster because you are limited to placement in the Amazon search. You also have to produce and order your stock in advance each time.

Secondly, without the ability to test products, there is no guarantee that your product will sell successfully before it hits the market.

You are also limited on Amazon in the ways you market your product to the customer.

Remember, it's still Amazon's customers that you're selling to, not yours. 

Limited access to customers means that you lose the ability to market additional products to customers who have previously bought from you.

And that's a major disadvantage compared to dropshipping because remarketing is extremely profitable.

Where do I carry less risk?

Part of being successful in dropshipping is testing many different products until you find a winner. But there's a risk of losing money when looking for a winner as not every product will be one.

As a general rule of thumb, for every twenty products you test, you will find one winning product. But there is no guarantee here either.

If you're lucky, you might only need four products to test. On the flip side, you might even have to test over twenty products before you find a winner.

At Amazon FBA, you choose a product to sell based on market research. Thanks to tools like Jungle Scout, you can gain real-time insights into a product on Amazon, i.e. sales, sales rank, competition, etc.

Based on this data, you choose a product that you want to sell as a private label on Amazon. If you've done the right research, your product should sell well in the marketplace.

However, as with dropshipping, there's no guarantee here. And there's also the possibility that your product will not sell the way you imagined it, so you end up losing money.

And since you're stuck on useless inventory, you now have to figure out how to get rid of it!

Where do I build a brand with target group ownership and a customer list?

With dropshipping you can build your own store. You keep customer lists and collect data from everyone who buys products in your store.

And that's what is really valuable about a company. You can sell further products to these customers or resell the customer lists.

Over time, you can build a valuable brand and create high customer loyalty.

With Amazon FBA, you have no way of building a brand with a target group ownership. Since Amazon takes over the entire customer service for you, you have no contact with your customer at all.

Technically, it's not even your customers, but Amazon's customers who only buy your products there.

Even if you're a super successful seller on Amazon, you have no way of benefiting from it outside of Amazon as the customers there are not interested in your store, but in the products on Amazon.

Outside of Amazon, no one will be interested in you.

My Conclusion: What Should You Start With As A Beginner?

In my opinion, dropshipping is the clear winner of this comparison, as you hardly need any start-up capital, you carry less risk and you can enjoy extreme scalability.

Dropshipping is definitely the better choice for your e-commerce. What do you think? Give me your opinion in the comments below!

Oh, you don't have an online store yet?

Get a free Shopify account now and start your own online shop today

About the author

I'm the author of the Ecom Black Book. My passion is to help you make money by building a successful online business. In my free time, I share my valuable insights on my podcast and on YouTube.

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