Amazon FBA vs. dropshipping: which is better for beginners?

E-commerce has proven to be a profitable business niche. If you also want to profit from this huge market, the two most beneficial business models for this are dropshipping and Amazon FBA.

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

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

By the end of this guide, you'll also know which business model will make you the most money, which one will be easier to build without startup capital, and which one will help you generate passive income faster.

What is dropshipping?

Dropshipping is a great e-commerce solution where you as a retailer place an order directly with the wholesaler. After dropping the order with them and providing them with your customer's details, they will ship the items directly to your customer.

In other words, you sell products in your store that you don't even own yourself and only order from the wholesaler once a customer has placed an order with you.

The cool thing is: It does not require a large investment.

Therefore, beginners and smaller traders can also benefit from this business model.

What is Amazon FBA?

Many are now asking, "Amazon FBA, what is it"?

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

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

FBA stands for Fulfillment by Amazon.

This program offers 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 eligible for Amazon's shipping promotions, which include free shipping with Amazon Prime, for example, making FBA even more lucrative.

The real question now is:

Which of these two models is the better choice, for making money on the Internet?

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

Take a look!

Advantages & Disadvantages Of Dropshipping

First of all, let's get to the pros and cons of dropshipping.

Dropshipping advantages

Low start-up capital required

Dropshipping does not require a large amount of capital, nor does it require a specific location to start your own business.

This saves you huge initial investment, which can be a big burden for many beginners.

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

Little responsibility

When your customer places an order in your online store, you only need to place this order with the supplier.

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

Completely automated

One advantage of dropshipping is the total automation of your business.

Once you build it, it runs like a well-oiled machine that needs little maintenance. If you don't feel like building your store, you can even hire freelancers to reliably do the job for you.

Orders can be processed completely automatically with just one click. 

Low risk

As a dropshipping business owner you don't have to carry a gigantic inventory. If your products don't sell that well, there's hardly any loss either, since you didn't stock the products.

The only effort you have to deal with is setting up and maintaining your online store.

Diversity

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

If you start your online store with the task of buying your own stock, it would be almost impossible to sell a wide range of products. Why? Simply because you are more likely to buy a few products in large quantities.

Dropshipping allows you to, Trying new products and quickly deciding what works for you and what doesn't. 

At the same time it is not so risky, since you can do not have to buy a new product in large quantities in stock.

Time saving

This is a great aspect of dropshipping.

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

It is an ideal solution for entrepreneurs who want to save their precious time.

You can start immediately

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

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

No fixed location and geographical freedom

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

I, for example, live in the Caribbean and run all my businesses from the comfort of here. All I need is my laptop, although I could do it with just a smartphone because you can run your Shopifystore and Facebook Ads Manager from your phone.

This way, you can smoothly manage the operation of your online store over the Internet by simply staying in touch with your suppliers and customers, and work 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 the bestselling categories and try to sell them too.

That's your advantage because with the right product research strategy, you can be the first or second in a blue ocean to sell a highly profitable product.

Rapid and massive growth in target group ownership

Due to the fast growth and the top scalability, you quickly build up a large customer list with a good product.

Your customer list is your most valuable asset in your business. On average, a customer email address is worth €10 per month, while a newsletter reader's email address is worth only €1 per month.

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

Extremely high margins

Marge is King.

If you do everything right and list your products for at least 50€ in your online store, then you will never have problems with your margins. For this you can use my profit margin calculator, so that you are on the safe side.

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

Notice: Only poor dropshipper sells products under 50€ (except for consumable products or multiple purchase products)..

Extreme scalability

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

Sell online store

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

A good friend of mine just sold his online store in the dog accessories niche the other day for a multiple 6 figure amount.

If you get such a high one-time payment at almost 100% profit, you can go open champagne bottles!

Disadvantages of dropshipping

Little information about the products

There is a chance that your supplier has provided you with little, incorrect or no detailed product information. Therefore, there is also a high probability that you will not be able to answer all your customers' questions about the product they are interested in.

Customer service questions

With dropshipping, you enjoy a lot of freedom, but when it comes to responding to customer concerns, you rely on your supplier's information.

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

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

No special purchase discounts

As a dropshipper, you can't get amazing special offers or discounts since you don't buy a product in large quantities. Nevertheless, you can create offer packages from different products of your online store to get higher sales.

Myth: Dropshipping has long delivery times

Beginners who start with dropshipping always complain about delivery times of 8-12 weeks. This is not a good condition.

This is because they rely on low-cost dropshipping providers like AliExpress. AliExpress is only a stopgap solution and only offers acceptable delivery times to the USA. 

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

With the right suppliers you can get shipping times of 5-7 days. If you want fast shipping, read this advice about the current best dropshipping provider, distributor and wholesaler.

Advantages & Disadvantages Of Amazon FBA

Now we come to the Amazon FBA business. Here you can sell your products on Amazon. Here are the following advantages and disadvantages.

Amazon FBA Advantages

The best transactional search engine on the planet

People on Amazon are only on the platform to buy and this makes it easy for you to turn clicks into purchases. People who want to buy a blue Nike shoe just type this into the search and usually buy directly.

The customer comes to the platform with a desire to buy. If you enjoy a top ranking and your product has a good search volume you will make sales.

Amazon takes over parts of your marketing

If someone has looked at your product, Amazon will do the remarketing for you and show the customer your product more often to force a conversion. 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 and so you can sell your goods on Amazon without much worries.

So there's not much left for you to do. So you have enough time to focus on scaling your business effectively.

Amazon image

Amazon's FBA allows you to rely on Amazon's brand name instead of establishing your own. Thanks to Amazon's reputation, you'll get the brand recognition you need. Yes, it's very convenient, and you'll be able to scale your online store significantly.

Large customer base

Building a customer base is one of the most difficult tasks that any entrepreneur has to face. Nevertheless, with Amazon's FBA program you'll be able to benefit from Amazon's large customer base and achieve great results.

Return and replacement policy

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

Good profit margin

The products that don't sell for a good profit margin on your website, you can sell at good prices on Amazon. Once again, this is due to Amazon and its brand image.

Amazon FBA Disadvantages

No target group ownership

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

Since Amazon is nice enough not to give you access to your own customer data, you are only growing Amazon's customer list, but not your own.

There are a few tactics you can use to build audience ownership with Amazon FBA but they are very slow and almost all are deep in legal gray areas. 

You may be making money but you are not an entrepreneur with a real business. You're more like a cash flow investor when you do Amazon FBA. 

No record of the inventory

Amazon stores your products for you and manages everything. Unfortunately, Amazon will also accumulate your unsold products. It can get so cluttered that you won't be able to properly keep track of your inventory.

High competition

Undoubtedly, Amazon's FBA program is a large pool with many competitors. You won't be able to take advantage of the FBA program on your own.

There are many other companies that want to sell the same products as you.

So, it might be difficult to compete with experienced entrepreneurs and you might 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. It makes no sense to give discounts and be cheaper than the competition because everyone offers the same thing. 

Instead, it makes much more sense to go over the added value that only you can provide. With Amazon FBA this is very difficult because hundreds of merchants in the same niche undercut each other in price instead of adding value for the customers by e.g. free bonuses.

No winnings are guaranteed

The disadvantage of selling on Amazon is that you can't test your product on a small scale. You can't just list products for free and see if they really sell. 

Complete dependence on Amazon

There is nothing you can do about it if Amazon decides to change its terms and removes your store from its platform. All that hard work will have been for nothing.

No direct contact with customers

Amazon has the influence on your entire clientele, you unfortunately do not. What if you want to break away from Amazon and open your own store?

It's going to be difficult because you can't make a big name for yourself as a manufacturer on Amazon and keep customers loyal.

Start-up capital and high risk

You need start-up capital for the Amazon FBA model, and not a little of it. Because you have to buy the products yourself before you can sell them on Amazon.

If you wanted to save time and your research work was not that important to you or you simply do not have the necessary experience yet, you will most likely be stuck with your products.

Also, with Amazon FBA, you have to pay fees to use their services.

Frequently asked questions:

Which business model requires less start-up capital?

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

Moreover, the fulfillment costs are low (usually about 10 euros per item). This means that you don't have to spend a lot of money for the sale.

Instead, the creation of the online store and the advertising placed require the most capital.

On average, it will cost you 45 euros to create an online store and buy a domain with Shopify.

And advertising will cost you about $20 per product to test via Facebook ads. You can also go search engine optimization or other free ways to bring visitors to your online store.

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

Which business model is better for passive income?

Once you've built a dropshipping business, you still have to deal with daily tasks.

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

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

A common mistake is to do these tasks yourself because you want to save money. I'm telling you, never do this virtual assistant work yourself. It will only distract you from your core business.

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

With Amazon FBA, all the work is up front. 

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

Once your products are delivered to the Amazon FBA warehouse, it does most of the work for you, including fulfillment. And that's what makes the Amazon model so passive.

All that is required is to keep track of your inventory so you know when to replenish your stock.

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

In this aspect, I find both equally good. 

What makes more money online, Amazon FBA or dropshipping?

Dropshipping allows you to scale large and fast. The fact that you don't need an inventory means that you can test several products in a short time.

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

In addition, there are more Flexibility in the way you market the products in your store.

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

The Amazon FBA scaling takes longer and hits revenue limit fasterbecause you are limited to the placement in the Amazon search. Also, you must first make / order your stock in advance every time.

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

In addition, with Amazon, you are limited in how you market your product to customers.

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

Limited access to customers means you lose the ability to market more products to customers who have previously purchased from you.

And this is a decisive disadvantage compared to dropshipping, because remarketing is so extremely profitable.

Where do I bear less risk?

Part of the success of dropshipping is testing many different products until you find a winner. But in finding a winner, there is a risk of losing money, since not every product will be a winner.

As a general rule of thumb, for every twenty products you test, you will find one winning product. But again, there's no guarantee.

If you're lucky, you might only need four products to test. On the other hand, you may need to test over twenty products before you find a winner.

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

Based on this data, you choose a product to sell as a private label on Amazon. If you have done the right research, your product should sell successfully on the market.

But again, as with dropshipping, there is no guarantee. And there's also the possibility that your product won't sell as you imagined, so you end up losing money.

And since you'll be stuck with useless inventory, now you have to figure out how to get rid of it anyway!

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

Dropshipping allows you to build your own store. You keep customer lists and collect data from everyone who buys products in your store.

And that's the really valuable thing about a business. So you can sell more products to these customers or resell the customer lists.

You can build a valuable brand over time and create high customer loyalty.

With Amazon FBA, you have no way to build a brand with audience ownership. Because Amazon handles all customer service for you, you have no contact with your customer at all.

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

Even if you are a successful seller on Amazon, you have no way to profit outside of it, because customers there are not interested in your store, but in 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 startup capital, carry less risk and enjoy extreme scalability.

So dropshipping is definitely the better choice for your e-commerce. How do you see the topic? Write me your opinion in the comments!