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Drop Shipping Vs FBA

If you are looking to get started making money online as a retailer, then perhaps you are already familiar with the terms like Dropshipping, Affiliate marketing, and FBA (fulfillment by Amazon). This is known in retail marketing as Order Fulfillment. The ultimate result is getting the product to the customer while making a profit or commission, also called referral marketing. These methods have great benefits but they also carry risks.  It is imperative to study each process, and decide what is going to work best for your business vision.

What Is FBA?

fbaNow, let’s take a look at FBA, which is ‘Fulfillment by Amazon’. To make it easy, it is basically a service which allows sellers to store their product in the Amazon fulfillment centers. When your product is sold, Amazon will handle the shipping as well as customer service. FBA is often preferred because it relieves the seller the hassle of order fulfillment.

There are three things to remember when using FBA as your business choice to avoid money mistakes:

Always update the price when you change your listing from merchant-fulfilled to FBA.  The list price on an FBA should always be higher than your original merchant-fulfilled list price due to shipping costs.  This is an easy way to eat the original shipping costs and other Amazon’s listing commissions. Double-check to avoid losing money.

Keep you inventory clear to avoid distributed inventory displacements. Amazon services allow you to ship standard-size products to a single warehouse. Depending on weight, you may pay a fee and have more of your heavier inventory sent to yet another warehouse. This is called distributed inventory placement.  Product movement in this option requires more time and work on part, but for some is work it where fees are concerned. Understand how product movement works with Amazon to avoid losing money on fees. Commingled inventory means your products will be stored alongside identical products from other sellers. This is the least expensive of choices, with the least control of storage.

Keep an eye on quality control. Personally verify the contents; you don’t want customers to lose faith in your products through sloppy business tactics.  Learn all you can about how to optimize and use the Amazon FBA store program, to see if it a optimal choice for your business vision.

There are many methods to getting products into the hands of your customers. Dropshipping, and Order Fulfillment are two ways which are similar but each with pros and cons. So how do you know which method is right for you?  Let’s break this down in a simple way of understanding the process.

 Order Fulfillment and Dropshipping Explained

Order fulfillment is the actual merchant who controls the inventory (such as Amazon FBA ). If you are a retailer with your own products, then you have the responsibility of inventory, packing and shipping an order to an end buyer. You can however outsource this function to a manufacturer. This is when it becomes ‘dropshipping’.

Dropshipping is a different type of product fulfillment because the retailer does not hold the merchandise in stock. Basically, the retailer (you) will receive buyers orders and sent them straight to the manufacturer. The manufacturer has the responsibility to ship the product to the buyer once the purchase has been completed. This is a good method if you do not wish to invest in inventory.

Many suppliers or manufacturers may offer what is called “manufacture drop shipping” to make it available to retailers to sell the product without investing in any inventory.

Here are the Pros and Cons for each method:

Order Fulfillment

PROS

  • Inventory Control— you have control over your own inventory, and are aware of what you have to ship on demand.
  • Increased Margin— by holding your own inventory this could mean increased profit margins due to investing through a wholesale or bulk price.
  • Fewer Stock-Outs— suppliers don’t always tell their drop shippers when the inventory is low. This leaves the retailer to discover the supplier no longer has the item. Purchasing a small wholesale amount can prevent this and get the product to your buyer on time.

CONS

  • Inventory Investment— buying inventory is the biggest investment, and some retailers do not have disposable means to invest, especially if they are holding onto products that are not moving fast enough.
  • Storing Inventory— as a retailer you are going to need adequate, safe storage to hold your inventory. Partnering with a third party warehouse, such as using Amazons FBA, can be a win-win situation. It can also involve much learning and effort to keep on top of your inventory, and profits. Many retailers master this successfully though.

Drop Shipping

drop

PROS

  • No inventory– means taking on no additional risk.
  • Given the lack of inventory– you are afforded huge flexibility with drop shipping.
  • You have endless options– to test new product lines on Amazon, EBay or in your online store.
  • Since you don’t have the shipping hassles– inventory concerns (other than the retailer not letting you know a product is out), you can focus on your core business in other ways. The supplier carries the responsibility for all the hands on tasks.

CONS

  • Deep wholesale discounts—you really have to do your research here to dig deep to find those wholesale discounts as costs are harder to come by for buyers who drop ship.
  • Growing Online Competition– If you are drop shipping a manufacturer’s product, count on others doing the same thing, meaning lower profit margins for you. This is when you need to focus on how you will compete with your business to rank as preferred choice.
  • A return means you are customer service—you are the middleman between the supplier and the buyer. Any problematic concerns come to you by the customer for you to resolve.
  • Product Availability—as mentioned above, this can become a serious issue. You always run the risk of a buyer purchasing a product which is no longer available
  • Drop ship suppliers conditions to retailers – Always investigate the terms by drop ship suppliers like minimum price controls, sales conditions, and return conditions.

Whether you decide to partner up with FBA or drop ship, the best advice is to research all your options thoroughly and understand the terms behind outsourcing, agreements, and costs.  Any of these methods when approached and executed correctly will provide an alternative opportunity for income.

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