The entrepreneurial landscape has always been a dynamic beast, shape-shifting according to the trends and technologies of the day. Today, we find ourselves in the midst of the 'dropshipping' era - a term that may sound foreign to the uninitiated, but is a familiar part of the lexicon for those of us in the e-commerce realm.
It's fascinating to observe the nuanced dance of profit and loss in this business model. Dropshipping, a methodology that relies on a third party to manage inventory, presents a remarkably low barrier of entry, especially in terms of upfront costs. This is a boon for small businesses that are often strapped for cash.
However, the seemingly lucrative nature of dropshipping is not without its pitfalls. The heart of the matter lies in the intricate details of the product lifecycle - the journey from manufacturer to eventual consumer. As a dropshipper, your role in this lifecycle is relatively minor, which inherently limits your profitability.
The manufacturer, the storing facility, and other players in the chain all claim their share of the profit pie, slices that, in a different situation, could have been yours. The implications of this extend beyond just reduced profits. It directly impacts your ability to offer competitive prices, a crucial factor for success in marketplaces like Amazon.
The challenge, then, lies in striking a balance. How do we leverage the advantages of dropshipping without falling prey to its limitations? How do we navigate the fine lines of profitability and competition? These are the questions that keep me up at night, and they are the questions that we aim to explore in the coming pages.
Welcome to this journey of discovery. Here's to finding the answers, one page at a time.
The Double-Edged Sword o Dropshipping
Dropshipping is an economic model which allows you to sell to a client without handling the products or inventory in any way. The buyer buys from you, but the order goes directly to the manufacturer or a storing facility that sends the product to the buyer. This is regarded as the easiest e-commerce business a seller can create hence it is a very popular method.
What is dropshipping?
The most obvious advantage is that you don’t handle the products. You are in charge of selling them and handling the user, but you are not part of the manufacturing, the storage or the shipment of the products.
This means you have much less to handle and you can focus on selling.
It also means that your time to market is significantly lower. You can find a product to dropship, set up a listing and start selling it today. Compare this to preparing a backlog of products, handling storage and so on.
Another often overlooked parameter is the upfront costs that can be critical for many small businesses. Such costs are greatly reduced for dropshippers creating their e-commerce business
The advantages of dropshipping
This business model of using a third party supplier that manages inventory, has it’s shortcomings. Since you are only a charge of a small part of the product lifecycle, this automatically effects your profitability. Since everyone makes a profit on their end, profits that theoretically could have been yours go to the manufacturer, the storing facility and so on. This may also mean you will not be able to offer competitive prices which will drag you down in the Amazon marketplace.
Another shortcoming of the dropshipping model is that you have limited influence and limited understanding of the product. This might make you a less than ideal seller which will effect your ability to communicate with the customers, differentiate the product from a sales perspective and so on.
The last disadvantage we will discuss might be the biggest, especially for Amazon sellers. Who is the point of contact for the buyer. The communication will be with you, of course, but you need to be able to supply good enough answers, answers that sometimes only the manufacturer knows.
In Amazon’s case, it is strictly forbidden to involve anyone other than you in the eyes of the buyer, making things a bit more challenging. We will refer to that in detail in the next paragraph.
The disadvantages of dropshipping
As an Amazon seller you must comply with Amazon’s specific guidelines, and the issue of dropshipping makes no exception.
Before becoming a drop shipper, make sure you understand and closely follow Amazon’s [drop shipping](sourcing-and-supply-chain-management.html#inventory-management-mastery) policy . The main point you must understand is that you must be recognized as the sole seller in the eyes of the buyer. All the invoices, product inserts, slips and even the packaging must indicate you as the seller. A violation of this rule can get your account suspended. There are other stipulations (e.g. you must assume responsibiliy of returns, must have an adequate seller agreement) so make sure you carefully read the policy.
Is dropshipping allowed in Amazon
As mentioned above drop shipping has its advantages and disadvantages. It is a very useful method for some sellers, and an excellent starting point since it takes a lot of the load off from selling on Amazon. If you are looking to start selling on Amazon and don’t have a product of your own, drop shipping is definitely a smart way to go to get your first sale as soon as possible. .
Should I drop ship on Amazon
Good chances you’ve already heard of FBA, but how does it connect to selling with no inventory?
While you still have inventory, as an Amazon FBA seller many of the inventory related tasks are being handled by Amazon and not yourself. This makes inventory management a whole lot easier.
The way it works is that you are in charge of shipping products to one of the Amazon fulfillment centers (Amazon’s warehouse facilities). From that point on, Amazon is taken care of all logistics.
Amazon FBA and how it works
FBA stands for Fulfillment by Amazon, a practice where you are in charge of delivering the products to an Amazon fulfillment center but from that moment, they are the ones who handle it. All storage, shipping and returns are done by Amazon. Think of the time saved when Amazon ship orders or handle their return.
A good example of the depth of the responsibility assumed by Amazon is that if a buyer gives you a negative feedback that deals with shipment, Amazon will remove it.
Another big advantage is that FBA products are often promoted in the Amazon markeplace and get higher sales rank. This means, all else being equal, you are likely to get more product sales for an FBA item than a FBM (Fulfillment be Merchant) product.
The advantages of FBA
The main disadvantage of being an Amazon FBA seller is that you are subject to FBA related fees and payments. These payments obviously effect your bottom line so it’s advised to crunch the numbers before making a decision
The disadvantages of FBA
There are obviously a million parameters to weigh in but in our perspective, FBA is very worthwhile. The extra costs are easily offset by the extra sales and the reduction of time spent on managing your inventory, can do wonders to your Amazon business and to maximize profits.
To FBA or not to FBA
As they open their professional seller account, Amazon sellers sometimes contemplate between these options. The answer to the question is simple, it depends.
Drop shipping can be a great option for some sellers while FBA can do wonders to others.
The decision depends on many factors, such as your product, the competition and your personal preferences.
As a rule of thumb we would say that drop shipping is ideal when you are starting out in Amazon or when your idea for a product is not robust.
FBA is a great option as you scale and want to increase your sales and customer base.