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Amazon FBA vs. Dropshipping: Which Model is Best for Your Business?

When sellers start out selling products on Amazon, their journey usually starts with choosing between two popular ways of selling products: FBA (Fulfillment by Amazon) and dropshipping. In this article, we’re going to review these two methods in detail, look at what makes them different, and how to begin with each model.

Amazon FBA vs. Dropshipping

Each of these two methods comes with its own set of rules and benefits. Let’s discuss and compare them.
Amazon FBA is a service from Amazon that takes care of all aspects of storing, packing, and shipping your products for you. FBA is often used by sellers who create their own brand of products and also by wholesalers. The best thing about FBA is that Amazon handles a lot of the heavy work, letting sellers focus more on marketing efforts and searching for customers.

Dropshipping is a business model where you sell products without keeping them in stock. You just list a product on Amazon, a customer buys it from you, you order the product from a supplier, and the supplier sends it straight to the customer. This method is allowed per the Amazon Dropshipping Policy, but you are still required to place your brand name on all products.
Now we’ll explore the advantages offered by these two popular business models on Amazon further.

What Are the Benefits of Amazon FBA?

Let's dive into the reasons that make FBA an attractive choice for many sellers.
  • Everything is handled for you: With Amazon FBA, you don't have to worry about the details of customer service or storing and shopping products. Amazon does it all, which makes it easier for you to grow your business. If you prefer to have more control over your business operations and want to avoid FBA fees, FBM may be better than FBA for your needs.
  • Better chance to stand out: Using FBA might give you a higher chance of being the main seller shown on Amazon's product pages (and winning the Buy Box/Featured Offer), which can really increase your sales.
  • Potentially higher profits: Even though you have to pay fees for FBA, you might end up making more money in the end. FBA facilitates business expansion and enables sellers to boost their sales volume, thereby increasing their profits.

What Are the Benefits of Dropshipping?

Here's a closer look at the key advantages that make dropshipping appealing to entrepreneurs.
  • Lower initial budget: Since you don’t need to purchase inventory in advance, and you’re not involved in storing and shipping products, your costs might be lower with dropshipping than Amazon FBA. You don't need to invest a lot of money to dropship items, making it a great option for new entrepreneurs.
  • Lower fees: Dropshipping on Amazon can have lower upfront fees compared to traditional retail models or Amazon FBA, mainly because you don't need to pay for storage in Amazon's warehouses. However, it's important to consider other costs, such as Amazon referral fees, which account for a percentage of each sale.
  • Low risk: Dropshipping is considered to be less risky because you only buy a product after a customer has placed an order from you. Also, selling products that are already popular might lead to more steady sales.
Both dropshipping and FBA provide unique advantages to entrepreneurs, particularly concerning initial investments and profit potential. Sellers should select their Amazon business model based on their goals and business scaling plans.

The Difference Between FBA and Dropshipping Business Models

The journey to starting an eCommerce business via Amazon FBA or dropshipping involves several key steps. Let’s highlight the main differences between the two models for each one.

Step 1: Create an Account

This initial step is similar for both models, involving the setup of an Amazon Seller account. This step is straightforward and invariable.

Step 2: Product Research

The process of selecting a product varies significantly between these two models. For FBA businesses (including private label, online arbitrage, and wholesale), sellers employ different metrics and strategies to identify profitable products. Even for FBA, criteria are different, and sellers can pick from utilizing online arbitrage or wholesale, or creating their own branded products (private labeling).

In this article, we'll talk about private labeling, since it's one of the most common and simple ways to start. Here are the main metrics you should consider when choosing a profitable product idea.
Criteria for Private Label Products on Amazon FBA
  • Profit margin: This is a key factor for private label sellers, as they need to account for production, shipping, and Amazon fees to ensure a healthy margin.
  • Brand potential: Evaluate the long-term growth and differentiation potential of a given brand and its products. Choose a less competitive niche and create a compelling brand story.
  • Market demand: Sellers need to analyze customer demand for a specific type of product, often using keyword research and market trends. Conduct keyword research to find high-volume searches and check the Best Seller Rank for similar products.
These aren't all of the criteria you need to consider; many additional metrics should also be taken into account.
Find a Product for Amazon FBA the Easy Way
If the process of analyzing products to ensure they meet both demand and profitability criteria seems too complex, services like Sellerhook can simplify your search. Just place an order for a product research report, and experts with years of Amazon experience and background will help you choose FBA product ideas on the basis of your criteria.

The process of ordering a report is simple - here are the steps:
1. Place your order. Visit the Sellerhook website, select the number of products you're interested in, and complete your purchase. You can also request a free sample report by providing your email address.

2. Select your business model. Choose the "Private Label" option if that's your business model. (Sellerhook also caters to those in the Wholesale and Online Arbitrage sectors.)
3. Pick product categories. Specify your interest areas, such as electronics, kitchenware, or any other category you're targeting.

4. Define your price. Let Sellerhook's experts know your intended selling price for these products on Amazon.

5. Provide additional details. Fill out a form with extra information, like your target audience, desired product size, initial budget, and if you're aiming for high-volume products with over 1,000 monthly sales.
6. Receive your report. After submitting all of the necessary information, you can expect to receive a product report tailored to your criteria within 10 business days.
See what your research report would look like.
Criteria for Amazon Dropshipping Products
When selecting products for your dropshipping business, these are the key metrics you should monitor closely:
  • Product profit margins: You need to consider the cost of the products, shipping fees (which you might pay to the supplier), and any other Amazon fees, all while making sure you can still make a good profit.
  • Market demand and trends: Knowing which products are hot right now and any new trends can help you choose the right items to sell that people are interested in.
  • Availability for reselling: If you choose to join an existing listing, it's important to make sure the product is not part of a Private Label, and if it's permissible to sell it under the same listing.
  • Competition: If you want to sell an existing product already listed on Amazon, check how many sellers are already on the listing; the more there are, the higher the competition.
These criteria can be challenging and time-consuming to analyze. Dropshippers have to compare a lot of different metrics, which are not all easily found on Amazon. To simplify and automate the process of searching for the perfect dropshipping product idea, use the AMZScout Dropshipping, Arbitrage, and Wholesale Product Research Software.
Research Products for Amazon Dropshipping
The AMZScout Extension will help you find excellent products that match various client needs and market demands specifically for dropshipping.

Here’s how it works:
1. Install the Dropshipping, Arbitrage, and Wholesale Extension in Google Chrome. Explore the extension's capabilities with a trial, free of charge.
2. Enter the name of the niche you are interested in. Begin by going to the search page. Type in keywords associated with the product you wish to sell.
3. Check product data. Review the sales figures to understand how well the product is selling, and check additional information provided below each listing, such as the seller type and number of sellers.
4. Calculate your potential profits. Open a product page and enter the costs in the calculator. See how much you can potentially earn if you choose that particular product.
5. Check for any restrictions. Avoid products that have restrictions that can potentially prevent sales, such as items exclusive to private label sellers, hazardous materials (HAZMAT), or those with Prime Delivery.
6. Explore market trends. Keep an eye on product ranks and price history to anticipate market trends and demand fluctuations. Also, check the minimum price offered by all sellers to assess your chances of winning the Buy Box.
7. Decide on a product idea. Select a product that has strong sales, higher profitability, and no selling restrictions to enhance your likelihood of success on Amazon.
Analyzing these criteria will help you select the right dropshipping products in just a few minutes. This will allow you to dedicate the time you save to marketing and promoting your products.

Step 3: Source Product

The approach you use for sourcing products will vary significantly depending on your business model. Here's a brief overview of some common sourcing methods for FBA and dropshipping.

For an FBA business:
  • Alibaba: A popular choice for sourcing private label products, Alibaba connects you with manufacturers (mainly in China). You can find a vast range of products that can be branded with your label.
  • Wholesale Distributors: Partnering with these kinds of distributors allows you to purchase products in bulk at a discounted rate. This requires some research to find reliable distributors who offer products that align with your niche.
For dropshipping:
  • Dropshipping Suppliers: Platforms like AliExpress or SaleHoo provide access to a multitude of dropshipping suppliers. These suppliers handle inventory and shipping directly to your customers. The key here is to find suppliers who work with Amazon, and those who offer high-quality products and reliable shipping times, to maintain customer satisfaction.
For Amazon sellers, choosing which is better (finding products on Alibaba, among wholesale distributors, or dropshipping suppliers) is an important component that will determine whether you can make money. It's all about finding a good mix of price, quality, and efficiency in order to meet customers’ demands.

Step 4: Shipping Products

Fulfillment by Amazon (FBA) involves sending products to Amazon's warehouses. Once they get there, Amazon takes care of storing the products, packing, and shipping. Sellers tend to like this business model because it makes shipping easy and they don't have to deal with the hassle of sending each order on their own. Keep in mind, they do need to have their products ready and send them to Amazon ahead of time.

With dropshipping, things work a bit differently. Sellers don't keep the products they sell in a warehouse or at home. Instead, when a customer buys something, the seller orders it from a supplier, who then sends it straight to the customer. This way, the seller doesn't have to worry about storing lots of products or sending packages.

Step 5: List and Sell

Both the FBA and dropshipping business models follow the same process for listing products on Amazon. Sellers can either create a new listing or add their product to an existing one.
  1. Go to the inventory section and select “Add a Product”. From there, you can search for your product in Amazon's catalog.
  2. If it's a new product that’s not currently listed, create a new product listing. Provide detailed information, including the product's title, description, and images. Add other relevant data such as price, quantity, and shipping options.
  3. If a product listing already exists, join it. You can add your offer to the existing listing. This means you won't need to create a new product page from scratch. Instead, you'll simply provide your pricing and stock availability, and choose whether you'll fulfill orders yourself or use Fulfillment by Amazon (FBA). This approach simplifies the process since the product details, images, and descriptions are already set up by the initial listing creator.
It's crucial to ensure that all of your information is accurate and complies with Amazon's listing guidelines to avoid any issues with your listing being approved. Once completed, your product will be live on Amazon, ready for customers to discover and purchase.

Conclusion

Comparing dropshipping vs. Amazon FBA involves weighing each model's benefits and shortcomings against your business goals, budget, and risk tolerance. While FBA offers a more hands-off approach with potentially higher margins, dropshipping requires less capital and carries lower risk.

Understanding the nuances of each step—from account creation to product sourcing and shipping—can guide entrepreneurs toward the model that best fits their vision for success in the competitive world of eCommerce. Either way, starting your own business on Amazon is definitely worth it, and if you use special tools or services, you’ll be able to do it more easily than ever before.
See what your research report would look like.
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