Why Sell on Amazon?
With upwards of 300 million regular customers, Amazon offers access to more customers than any other eCommerce website in the world.
It is a huge marketplace and still growing. No wonder so many businesses sell on Amazon.
According to a Comscore report from 2020, upwards of 200 million people shop Amazon each month. Walmart comes up a distant second.
Many brands sell on Amazon to boost customer acquisition. When your brand is relatively unknown, you can piggyback off of a more established brand to jump-start things.
Even some bigger brands like The Children’s Place still find it worthwhile to sell on Amazon.
What Amazon FBA and Drop Shipping Entail
Dropshipping is a unique form of retail fulfillment that allows entrepreneurs to sell products without having to handle them directly. Drop shippers purchase items from third parties and ship them to customers directly.
With Amazon FBA, you own the inventory but Amazon’s fulfillment centers pick the inventory, pack it, ship it, and handle customer care including returns. The FBA program makes scaling your business so much easier.
Amazon FBA allows you to handover your inventory management to Amazon, while Dropshipping allows you to sell without having to hold any inventory at all.
There are reasons why 66% of the top Amazon sellers use Amazon FBA, and 34% of Amazon sales are fulfilled by Drop shippers. Each of these fulfillment methods has its unique advantages.
The initials FBA stand for ‘Fulfillment By Amazon.’ This is a program that allows companies to sell their products on Amazon without having
Amazon’s Prime membership subscription has attracted more than 90 million subscribers.
There are more Prime Subscribers outside the US, and Amazon’s FBA serves brands available to Prime Buyers.
This matters because even though Amazon Prime customers are fewer, they spend almost double the money that regular Amazon shoppers spend on the platform in a year.
While the average Amazon buyer spends $700 per year, Amazon Prime subscribers use a generous $1300 to shop on the website each year. These customers are a hell of a lot more valuable.
This makes it worthwhile to acquire Amazon Prime buyers who are on Amazon FBA.
Sellers on Amazon FBA ship their products in advance to Amazon where they remain in Amazon warehouses until a customer makes an order.
Because Amazon has approximately 100 warehouses located in different parts of the US, sellers on Amazon FBA have to go through a process to find the right warehouse to send their products to.
Dropshippers do not need warehousing because they don’t own any inventory. While this means that they never have to worry about having dead stock, it also leaves them vulnerable to things like sudden product shortages.
Sellers who have their inventory are cushioned from sudden shortages because they have their inventory.
If you are a seller on Amazon FBA, they will find out what type of products you are selling, and then tell you which warehouse to ship your merchandise to.
Amazon optimizes efficiency by storing products in the right warehouse. Amazon takes care of sorting the products, inventory, and storage. Amazon also takes responsibility for any products damaged within their warehouse.
Once again, Drop shippers don’t have to worry about warehousing because their sales are shipped directly from third parties to buyers. But this does not necessarily mean that they achieve higher profit margins.
Because drop shippers have no direct relationship with the manufacturers, they are likely to have lower gross margins than resellers who purchase stock from the manufacturers.
Most will probably get a margin of 20% which is low compared to what sellers who buy their inventory earn. To avoid being undercut by the competition, many resellers will put a markup even lower than that.
Drop shippers also pay more for stocking products, packing them for customers, and shipping them to buyers. This is because each fulfillment is priced individually.
The result is that drop shippers end up paying more as their sales numbers increase. But paying these costs individually is ideal when you are starting and selling less merchandise. As you grow, it makes less and less sense.
When a customer makes a purchase, Amazon becomes responsible for handling the entire transaction. Amazon accepts payment, updates your inventory, ships the product out to the customer, and takes care of customer service.
At the Amazon warehouse, it may be a human warehouse worker or a robot that retrieves your product from storage and boxes it before shipping it to customers.
For sellers who don’t already have a customer service system in place, Amazon FBA follows up to find out whether the buyer is satisfied with their purchase.
Should the buyer request a return or field questions, Amazon FBA will process that too.
Amazon will then pick the item, pack it, ship it, and take care of order tracking on your behalf.
Believe it or not, this might sometimes work against you. Your customers might be tempted to return goods more frequently when they see how easy it is.
Dropshipping seems easy because you don’t have to be involved in the grunt work of fulfilling orders. But it also means that you have little influence over the customer experience of buyers.
You cannot guarantee a customer anything because it is out of your hands. It takes you a lot longer to resolve complaints because you have to revert to third parties. You can’t respond to questions immediately.
Fulfillment by Amazon requires sellers to only work with Amazon warehouses. But drop shippers could be sourcing from any number of warehouses and they cannot keep up with daily fluctuations in inventory.
Sellers can take advantage of apps designed to help them sync with their suppliers, enabling them to conveniently pass an order on to a supplier in real-time while showing them the inventory the supplier has in stock.
Stuck in that no-man’s-land between customers and suppliers, dropshippers often find themselves pressured to make promises they can’t keep and trying to cope with delays in communication.
Because of the limited control over your customer experience, it is advisable to choose your suppliers carefully.
Amazon gives sellers on FBA the option of commingling their merchandise with that of other sellers who are dealing with the same things. This is risky because your merchandise might be mingled with merchandise from sellers not-so-honest who deal in substandard products.
Branding is what differentiates your products, builds customer loyalty, and ultimately enables you to charge higher rates than the competition.
Without a brand, you can only compete by providing lower prices.
While sellers on Amazon FBA have the opportunity to build their brand, drop shippers cannot do so because they own no inventory. They are selling on behalf of someone else.
All the hard work you put into building a business will ultimately build other people’s brands.
Dropshipping is less capital intensive than selling on Amazon FBA. FBA sellers have to purchase inventory upfront. Amazon sets limits on how many units you can start with.
Dropshipping is relatively risk-free because you don’t have to buy inventory upfront. You don’t need to invest thousands of dollars. Purchases are made after the customer has already paid for the item.
Drop shippers also take on less risk, because they are not committing lots of capital upfront.
If you are looking into starting a drop shipping business, you may need to be realistic about the fact that the lower overhead costs mean there is a lower barrier of entry and therefore more competition.
Bigger companies that sell higher volumes will better afford to lower their margins and lure customers. For smaller drop shipping outfits, the reduced markups may not make sense.
Bigger companies are also more likely to enter into exclusive deals with suppliers.
When it comes to flexibility, Dropshipping wins hands down. You can operate your business from virtually any location as long as you have an internet connection. And you can easily pivot with changing trends without having to worry about dead stock or capital commitments.
When you are drop shipping, it doesn’t cost anything to add more items to your store or to remove nonperforming items.
Because of this flexibility, dropshipping is perfect for testing new products and markets. Scaling is also effortless because it does not require you to constantly keep an eye on your inventory.
Sellers on Amazon FBA have to purchase more inventory and work harder on keeping track of the movement of inventory as their business grows.
The downside is that scaling with drop shipping is costly because it costs more to fulfill the order.
Time is money. And selling your products via Amazon FBA frees up more of your valuable time. This allows you to devote more time to activities that grow and strengthen your business.
Both Amazon FBA and Dropshipping help sellers save time. Amazon FBA allows you to leave your inventory and customer care in Amazon’s hands, while Dropshipping takes your hands completely off fulfillment.
With Amazon FBA, you still have to keep track of your inventory and know when to purchase more stock, or whether you have too much dead stock. Dropshipping has no such demands.
If everything goes well, this arrangement should save you time. But if you need to handle complaints, it may take a lot longer because you have to rely on third parties.
Amazon FBA frees up storage space which is a major headache for smaller enterprises, working with Amazon through their FBA program allows you to use their warehouses to store your inventory as you sell it.
For a small business owner, it is a relief not having a garage full of boxes.
If you are completely unknown you stand to gain from Amazon’s larger-than-life brand name that is already known and trusted by some buyers. It is a lot easier to make a sale on Amazon than without it.
Dropshipping and selling through Amazon FBA are both fulfillment methods that allow sellers to access buyers without having to work as hard to differentiate themselves from the competition.
Storage and Fulfillment Fees
The customer enjoys customer service from Amazon 24/7, shipping, and the benefit of Amazon’s widely available, cutting-edge fulfillment network.
All that convenience is not free. It is going to cost you money. And the longer they have your merchandise, the more you will have to pay.
It is possible to manage storage costs effectively if you can accurately predict how fast your merchandise will move and stock up accordingly.
This makes it costly to hold on to slow-moving inventory. Any inventory that remains in Amazon’s stores for longer than six months will probably turn into dead weight as it will cost you to hold on to it.
Perhaps the most glaring disadvantage of dropshipping on Amazon is that your margins are going to be lower.
The ease of setting up and the low overhead costs often push competitors to lower their prices further and further down. They don’t mind the smaller margins because they haven’t put in a large investment in the first place.
When sellers find themselves in such a race to the bottom, the result is lower profit margins that can be quite costly for smaller niche sites.
Choosing the right niche that is ideal for dropshipping can be a lifesaver.
The Right Way to Sell on Amazon
Whether you opt for Amazon FBA or drop shipping, some rules are timeless:
- Understand your market and respond to consumer needs.
- Pay attention to SEO
- list correctly, and
- devote more attention to your more profitable offers.
Not all Products are Equal
Here is why your decision may depend on the products you are selling:
- Some products may be more expensive to store and ship than others because they are either so large, so heavy, so fragile, or so expensive that they cost more to store and secure.
- Larger items take up more storage space making it inefficient to store them for long. Fragile items need extra care when shipping and handling, and sometimes it makes more sense for the supplier to take care of that.
- If your product needs to storage in specific conditions: such as away from light or frozen, they may also be expensive to store.
It doesn’t have to be Either/Or
Sometimes, the best thing for you might be a combination of both. Dropshipping and Amazon FBA can also complement each other. Dropshipping can be a useful tool for market research and testing new product lines.
You can also use drop shipping if you have a small section of your business that deals in fragile, large, heavy, or high-value items.
Pick Suppliers Carefully
Because drop shippers rely on suppliers to provide customer experience, they must choose suppliers very carefully.
Always sample your supplier’s products before beginning a working relationship with them. Note the product quality, and the shipping to see that it satisfied your needs.
Find out how they deal with returns and damaged goods. Take note of how long it takes them to deliver orders after the sale,
Test their customer support, ask whether their orders are insured, ask if they have fraud protection, and look for reviews on the internet.
Start your search by looking at the most popular suppliers and take it from there.