Drop Shipping vs Amazon FBA: Which Business Model is Best for You?
Drop shipping and Amazon FBA (Fulfilment by Amazon) are two online business models that seemingly have the same allure to those seeking a semi-automated, location independent, online income.
You’ve probably come across the countless drop shipping and Amazon FBA courses on the internet, with everyday headlines like “Learn the secrets of how this 5 year old kid made one million dollars drop shipping before finishing first grade”. Or similarly: “This 90 year old grandmother that can’t use a computer makes $100,000 a month on Amazon FBA with this secret niche product”.
With all these compelling stories of people making their fortunes from these business models, it can be difficult to get a clear idea on what to expect and decide which one to pursue.
In this article, we’ll take a look at the pros and cons of drop shipping and Amazon FBA to help you decide which one might be the right fit for you. They have some similarities between how they operate and what they can provide you when successful, but also some key differences that may help you decide upfront which one to ultimately go with.
Let’s get to it:
Table of Contents
What is Drop Shipping?
We’ll first explain drop shipping in the context of this article.
Drop shipping is simply an order fulfilment process whereby products are shipped directly from your supplier to your customers, AFTER the customer has placed an order on your website.
You advertise the products on your website to customers at a retail price and then when an order is placed, you would order the product from a supplier at a wholesale rate. The supplier then ships the product to the customer and your profit is the difference between the price the customer paid and the price you purchased from the supplier. The key benefit to this business model is that there is no inventory required; you don’t need to purchase the items before selling them to customers.
When we discuss drop shipping in this article, this is the definition we are referring to. We are not referring to drop shipping on Amazon which is essentially what FBM (Fulfilment by Merchant) can be. While Amazon allows drop shipping, it has strict rules that exclude most kinds of traditional drop shipping, and ultimately you are not selling on your own website.
We are also not referring to retail arbitrage, whereby products are purchased for example from Walmart at retail price and sold at a higher price on eBay. Our quick opinion on drop shipping vs arbitrage is that drop shipping with an actual supplier is more legit. With drop shipping you are working with a legitimate supplier that can give you a wholesale price that retail customers won’t have access to. With retail arbitrage you are essentially hoping that your customers won’t shop around and find where you yourself are “sourcing” your products. It can work of course, but which sounds more like a sustainable business to you?
Also just a quick note on Shopify, as a lot of people want a comparison of Amazon FBA vs Shopify or “Shopify Drop Shipping”. Understand that Shopify is simply an e-commerce platform that allows you to build an online shop, it is not in itself a business model. You could build a store with Shopify selling handmade crafts that you yourself ship from your own home. That wouldn’t be drop shipping. Equally, there are large online stores that use Shopify as their website platform but may have one or more warehouses with large quantities of stock stored and managed in bulk. That isn’t drop shipping if they are fulfilling all the orders themselves. And to really confuse you, you can technically build a store on Shopify and have all your stock managed and fulfilled by Amazon FBA if you wanted!
The key takeaway is to clarify the terminology that Shopify is simply an e-commerce platform – not a business model – and there are alternative store building platforms that may arguably be better.
This article will cover the standard business model of drop shipping which involves buying at wholesale from suppliers then selling at retail price to customers on your own website with the supplier fulfilling the orders.
Is Drop Shipping a Scam?
The next question people usually ask after learning about drop shipping, is whether or not it’s a scam.
If you search for “drop shipping” or “drop shipping courses” online, you’re bound to find lots of posts and articles about how drop shipping is a scam and to avoid it.
We can honestly say that drop shipping is not a scam, however, many people selling courses or writing articles about it will exaggerate the amount of money you can make from it and play down the amount of work required.
The way many people will advertise the business model essentially looks like:
Step 1: Buy this drop shipping course
Step 2: Move to a tropical island with a hammock and your laptop
Step 3: Become a millionaire
Some people buying drop shipping courses will be disappointed to find out there is actually a lot of work involved. This includes selecting the right niche, contacting suppliers, setting up a store and running paid ads to get traffic. You need to have correct bank accounts, credit cards and may even need to set up an LLC or company structure.
People often don’t get to the point of setting up a drop shipping store or being approved by suppliers. And the ones that actually set up a store, find that sending traffic costs money on each ad click which might not even result in a sale. This leads to days, weeks or even months of spending money before even getting a sale in many cases.
The dream of making money online while drinking cocktails from a coconut on the beach is now just a dream for these new “drop shippers”. And it is at this point that many people give up and declare drop shipping a scam which is one of the reasons it gets a bad reputation online.
However, this would be like buying a course on how to open a coffee shop from the “coffee shop millionaire” website, then after seeing the steps involved deciding it’s more work than was advertised and declaring the coffee shop business model as being a scam.
The business method of drop shipping isn’t a scam, but the amount of work involved is a lot more than most people advertise it to be.
Having covered that, let’s get into the pros and cons of this business model and ultimately how it compares to Amazon FBA.
Pros and Cons of Drop Shipping
No upfront inventory costs
One of the most appealing aspects of drop shipping is that you don’t need to have your own products to start and there is no initial investment required of purchasing a lot of products in bulk to have them ready to sell.
You will find suppliers of existing products and sell their products directly to customers. When the customer places an order, you receive the money from them and you then place an order with the supplier. They then ship it out to the customer.
You receive the difference between what the customer pays and your cost of the product from the supplier. You are buying at wholesale price and selling at retail price; that difference in price is your margin.
If you don’t get any sales, you don’t need to purchase any items.
No shipping of products required
Since your supplier is in charge of shipping, you don’t need to ship the products to the customers.
You just manage the front end of your website and make sure the orders go through to the supplier. You don’t have to spend any time packaging products or making trips to the post office to send them; the supplier handles all that.
Low costs and requirements to get started
Along with not having to spend money on initial inventory, there are very low costs and requirements in other areas to get started.
Drop shipping only really requires a website to get started. Once you have the website set up and have been approved by suppliers, you can start listing and selling the products online.
Setting up a website might seem daunting to people with no experience in this area, but with services like Shopify, Bigcommerce and Woocommerce you can set up a website very easily with ready made templates to select from. If you need to hire someone to create the website for you, the cost of this can be under $500 and completed in a few days.
You can drop ship almost anything
If you search on eBay or Google for certain types of products, you’ll find a range of sellers for almost any product. Many of these sellers are drop shipping these products.
If you’ve got a passion for a certain area such as camping or golf, you can become a drop shipper of these products.
There are countless numbers of suppliers from all over the world providing an even greater number of products that you could select to drop ship, though the profit margin on any given product is something to consider which we will cover below.
It takes very little work once it’s running
Your supplier will handle the orders and shipping, so the only requirements of you are general website management, customer service and forwarding those orders to the supplier.
Customer service and forwarding orders may only be an hour or so a day, so it does take very little effort to operate a drop shipping store once it’s set up and running correctly. You will spend time on managing ads and potentially SEO too, but these ultimately can also be very hands off when they’re up and running.
You can build a customer list
When you sell on Amazon, you don’t get access to the customer’s email or contact details. You don’t even build rapport with the customer; they essentially just add your product to their cart on Amazon and checkout.
With drop shipping, you get the customers email address and contact details and can build rapport with them. Over time you may be able to build a customer list that generate worthwhile repeat purchases.
While many drop shipping stores are one off purchases, this doesn’t mean you can’t utilize that customer list for other stores, niches or products you have.
Knowing even one product a customer is interested in and having their contact details is very valuable in building a brand and sustaining a business over time.
You learn about many different aspects of online business
While it can be a steep learning curve and take a lot of time, when you are running a drop shipping store you are exposed to a wide range of different aspects of online business. You will ultimately get experience with Google ads, Facebook ads, social media, email marketing, creating a website, customer service, conversion optimization and more.
Starting a drop shipping store can be good first step into the world of online business. You may like certain areas and decide to become a specialist in those areas and others you may prefer to outsource.
There are many people that have failed at creating a successful drop shipping store, however, they have gone on to get a remote job they loved or create successful businesses based on the skills they learned while trying to create a drop shipping store.
Even if your drop shipping store doesn’t work out, you might learn something valuable that helps you in the future.
You can sell your business
One of the major benefits of a drop shipping business that is not always considered is that you can potentially sell it for many multiples of the monthly profit.
It’s not uncommon for drop shipping stores to sell for as much as 2 years their monthly profit or more, which means even if you’re store only makes $1,000 profit a month, you could sell it for around $24,000.
Many people are able to get a store to make around $1,000 a month, but then close the store down as it’s too much effort for the money. $1,000 a month might not be a life changing amount of money but it’s a different story when it’s $24,000.
Starting a drop shipping store can be a good entry into the online business world that requires very little investment to get started. If you can make a few hundred dollars a month from drop shipping, you may have built an asset that you could sell for a substantial amount of money and invest that into Amazon FBA or other business opportunities.
Drop shipping involves forwarding orders, website management, running ads and customer service which can all be done over the internet. There are no requirements to be in a set location or handle any physical orders or products yourself.
As long as you have an internet connection, you can run your drop shipping store from anywhere in the world.
The dream of running your business from a hammock might actually become a reality. Just don’t expect it to happen overnight, as it will take a lot of work before it gets to that point. And beaches don’t typically have good WiFi. 😉
It takes more time and effort than people advertise
Running a drop shipping store is a real business and as such you will often (not always) need to set up a company structure or LLC along with a business bank account and payment provider. You will obviously also need to set up the e-commerce website itself site plus a range of other requirements just to get started.
After setting all of that up, you will then need to make calls to suppliers and convince them to work with you. This can be a difficult and many suppliers will refuse to work with you.
It can be especially disheartening if you spent weeks or months trying to find the perfect niche, only to find that no suppliers in that niche will work with you.
Once you have convinced a few suppliers to work with you, the next steps involve setting the products up on your website and then running traffic (typically paid ads) to your store. This daily ad spend starts to cost you money before you even make a sale.
At this point, you may have spent weeks finding a niche and spent all the money to set up your store, and now you are spending money each day to drive traffic to your store to get a sale and provide customer service to people that visit your site.
If you’re looking to make quick, easy money from the internet then drop shipping is not for you; it’s a business and should be treated that way. There are probably much easier ways to make money online than drop shipping.
No existing customer base
One of the massive benefits of Amazon FBA is that you can tap into Amazon’s customer base to sell products. There are customers already searching for products to buy on Amazon, you just have to supply them with that product.
You don’t need to build trust with customers as a seller, just with the product you are selling. They already have an Amazon account and so buying your product is as easy as pressing “Add to cart”.
With drop shipping, there is no existing customer base; you have to pay to get customers to go to your website. Once they’re on your website you have to convince them to trust your website and ultimately give you their credit card details. You don’t have an existing relationship with them and you don’t have a brand name they recognize.
Low profit margin
The profit margins on products with drop shipping are typically quite low and are quickly eaten away by fees and costs involved in running a store and making transactions.
If you get a 20% margin on a $1,000 product, then you’ll make $200 per sale. You only need 5 sales a month to make $1,000 a month, right? Sounds great.
However, when you take into account the various costs and fees, your margins are much smaller than estimated.
You’ll typically pay around 3% in transaction fees.
3% of $1,000 = $30
You’ll also need to spend money to get people to your store.
If 1 out of every 100 people that go to your store buy a product, then you have a 1% conversion rate, which is pretty good for a $1,000 product.
If it costs you $1 per click, then your ad spend per sale is 100 visitors x $1 = $100.
Now your margins of $200 are reduced by $30 on transaction fees and $100 on ad spend leaving you with a margin of only $70 per sale.
If you spend just 10 hours a week on your store and you’re making 1 sale a week, then you’re working for about $7 an hour.
If you’re aim is to just to make money online then you can probably get a remote job that pays more than $7 an hour with a lot less hassle.
Being aware of the costs of running a dropshipping store is important to understand how much work is required to make money from it.
Remember, revenue is not profit. If you made 20 sales in a month, you would have $20,000 revenue for the month, however, with the above figures, you’d only have $1,400 profit on $20,000 worth of revenue.
People will happily show you their revenue figures and show screenshots of their Shopify stores with $20,000 worth of sales for the month. Don’t be fooled by drop shipping revenue figures, only pay attention to profits.
It’s highly competitive
Not only are the margins low but drop shipping can be highly competitive. The suppliers you deal with may be working with many other drop shippers as well.
All of those drop shippers are competing for the same customers using the same strategies. Your competitors are also spending money to drive traffic to their stores targeting the same keywords and search terms that you are. This competition on ad spend, drives up the cost of ads leading to even lower margins.
Customer service issues
In order to make sales, you really have to provide customer service on your store. Customers want someone they can call, chat to on live chat or send an email to. All of this takes time and you (or someone you pay) will be handling all the customer service.
You are also relying on your supplier to provide you answers a lot of the time, when starting out. This means for most customer enquiries, you then need to contact the supplier to get an answer. If the customer has a lot of questions about a product, this can be time consuming and lead to issues if your supplier doesn’t provide you with accurate or timely responses.
Customers may send the same enquiry to several stores and by the time you get back to them, you’ve lost the sale because they got a faster response from another store.
You don’t control the inventory or products
With drop shipping, you don’t control the inventory or products. You are relying on your supplier to provide you accurate and timely information about the products and current availability.
Every person that has done drop shipping has likely encountered getting a sale from a customer, only to find when they go to place that order with the supplier, the product is out of stock.
You then need to contact the customer, explain the situation and usually issue a refund.
You handle returns and complaints
Suppliers may also send out the wrong product or missing pieces from the product. It’s often your responsibility to handle the returns from the customer (at least the communication side of it) and arrange for the correct or new product to be shipped out.
In some cases the customers might not want to go to the hassle of sending the product back because it’s your mistake. The supplier won’t send a new product until they receive the old product back. You are then stuck in the middle of resolving this situation.
Some customers may flat out refuse to return the product then threaten to declare fraud on the transaction because they didn’t get the product they ordered. If the bank reverses the charge then you are out of pocket for the product purchase which could erase your entire profit for the month.
Suppliers control the channels you can sell on
You may have found a great product to drop ship and think you could make a lot of money selling it on Amazon or eBay too. Only you contact the supplier and they tell you that you can’t sell their products on Amazon on eBay.
When customers are looking to purchase products, they will most likely be looking on channels such as Amazon and eBay. If your supplier is selling on this marketplaces and you can’t sell on them, then you are essentially competing with your supplier for sales.
You should now have a good understanding of the pros and cons of drop shipping, so let’s now take a look at the pros and cons of Amazon FBA and how that compares.
What is Amazon FBA?
Is Amazon FBA the same as drop shipping? Well, there are some similarities in that you are not physically fulfilling the orders, but beyond that, there are some key differences. Fulfilment by Amazon, popularly known as FBA, basically works by allowing you to send your products in bulk to Amazon’s warehouse, either directly or through an international manufacturer of your choice. Amazon provides the space in their warehouses for your inventory and takes care of the picking, packing and shipping to your customers after an order is received.
You don’t need to start a website, collect the money for the purchase, pass the orders onto suppliers or handle customer service and returns. When a customer orders your product on Amazon, it’s Amazon’s role to take care of the entire order and shipping process.
In this section, we’ll cover the pros and cons of Amazon FBA compared to traditional drop shipping. If you’ve already decided to sell on Amazon, check out our in-depth comparison of the differences between Amazon FBA and Amazon FBM.
Pros and Cons of Amazon FBA
A strong customer base
When you sell on Amazon, you already have a ready customer base of millions of people ready to buy products.
If your product ranks for keywords that customers are searching for, you will have a steady stream of customers looking to buy your product. You don’t have to drive traffic to your store or convince people to trust you quite the same. Of course, driving external traffic to your product listings will make you less reliant on the Amazon platform and take back some control, something we will discuss below.
The point is, getting customers is the difficult part of running an e-commerce store but Amazon already has millions of customers looking to buy products each day.
You benefit from Amazon’s premium brand image
When you sell through Amazon FBA, you are carrying Amazon’s goodwill and reputation with you.
Many Amazon customers don’t realize that it is third party sellers that have listed their products on Amazon to sell.
The customers trust Amazon and know that whatever they want to buy, they can buy it on Amazon. They type what they are looking for, buy the product they want and it comes in a few days in an Amazon box with other products they purchased from Amazon.
Their entire interaction was with Amazon, without needing to trust another website or provide their credit card details and personal information to another store.
You benefit from Amazon’s algorithms and expertise
Amazon wants customers to search for a product, find the exact product they’re looking for and buy it as quickly as possible. Amazon has some of the most advanced shopping algorithms and technology constantly looking for ways to improve customer experience and get customers to buy more products.
Have you ever viewed a product or searched for a product on Amazon and then later received an email about those products? Imagine if that was your product that Amazon was emailing to potential customers looking for your product.
Amazon is constantly working to improve the customer experience and increase sales so just by having a product on Amazon, you benefit from Amazon’s expertise.
This is much easier than setting up Facebook pixels, doing email marketing and constantly working on optimizing your drop shipping store to get more sales. Let Amazon do all the work and figure out how to get more sales for you.
With a drop shipping store, you might find yourself answering emails, chatting to customers on live chat or talking to customers on the phone just to get a sale. You also have to deal with refunds, returns and complaints as the middleman between the supplier and the customer.
Customer service can be a time consuming, daily task that either you need to do or hire someone to do for you.
With FBA, Amazon handles all the customer service for you. There may be the occasional message about an issue within Amazon that you have to respond to but you’re not spending your days on live chat or phone calls to customers during the sale or returns process.
Higher profit margins
Amazon FBA provides significantly higher profit margins than drop shipping. These profit margins are dependent on the product, however, it’s not uncommon to buy a product from a supplier in China for under $5 that you can sell for $20 on Amazon U.S.A. That provides you with a 300% profit margin, compared to perhaps 30% with drop shipping.
Higher profit margins mean you have much more flexibility with your product pricing and can more easily recover your initial investment.
If you buy a product for $5 and it isn’t selling well at $20, then you can drop the price to $10, which is still double what you paid for it and recover your investment with profit. If you want to stop selling the product because you are getting no sales, then you could price it at $5 and clear out your inventory to recover your initial investment.
Profit margins also increase with volume; if you buy 500 products from a supplier in China it might cost $5 a unit ($2,500 total cost), however if you buy 2,000 units, the price might drop to $2.5 ($5,000 total cost). In this example, it takes your profit margin from 300% to 700% just by increasing your order size by $2,500.
You can sell almost anything
There are millions of products on Amazon and almost anything you can find on the platform you can also sell yourself.
Want to sell a stegosaurus dinosaur costume for dogs? You can find it on Amazon.
For almost any niche or product that you see on Amazon, you can find a manufacturer on Alibaba in China and private label them to sell.
Very little work to maintain
It takes very little ongoing work to maintain your FBA business. Once your products are in Amazon’s warehouse, they handle almost everything for you.
The main requirement is to keep your inventory stocked; other than that there is very little work on a daily basis to run the business.
There’s no need to quit your day job to run an Amazon business. In fact, having the income from a job could be a massive advantage as you don’t need to take the money out of your business and can reinvest that money to build your income up further.
Amazon FBA allows you to generate an income online with very little work each week while still being able to work a job until you build your business income up enough. Then you can quit your job in a dramatic Jerry McGuire style exit taking the company goldfish with you, yelling “who’s coming with me to financial freedom and Amazon riches” as they escort you out of the building. 😉
You can sell your business
Selling on Amazon allows you to not only create an income stream but also a sellable asset that you can sell for over 2 years’ worth of monthly profits, much like a drop shipping store.
It’s very possible to make $5,000 to $10,000 a month profit selling on Amazon within 12 months. Even an Amazon product that achieves moderate success can make $1,000 to $3,000 a month.
As mentioned in the drop shipping section, $1,000 a month might not change your life, but if you can create that in your spare time with very little work and sell it for $24,000 after 12 months, that could provide capital for even more profitable Amazon products or business opportunities.
After you’ve quit your job and are living off your Amazon income, you can send your co-workers postcards from all the places in the world you’ve been traveling.
Amazon FBA allows to run your business from anywhere in the world, there is no need to live in one location or handle any physical products yourself.
You don’t need to visit factories in China to check your products and you don’t need to be in the U.S.A or wherever your home country is to receive or handle any of your products. There are companies and services in those countries that can handle every part of the process for you. As long as you have an internet connection, you can run your business from anywhere in the world.
High initial costs
One of the biggest hurdles in getting started with Amazon FBA is the initial cost of getting started. It requires a moderately large amount of capital to first buy enough inventory of your first product.
Your first product may not succeed or could take a long time to make money. If your product does start to become successful, you are also faced with the need to reorder your product so you don’t run out of inventory.
If you don’t have $5,000 to $10,000 to invest initially, then it can be very difficult to get started and succeed on Amazon.
You are reliant on one platform
When you sell on Amazon, you are relying entirely on Amazon for your business and your income. If you break their rules, then you could get your account banned and lose your entire income.
It’s not just a matter of breaking the rules; you are at the mercy of Amazon’s algorithms and systems. If all of your income is coming from Amazon and you make a mistake such as run out inventory, causing your rankings to drop, then you could also lose all of your income.
There may be more competition that sells similar products in your niche and you lose out to the increased competition.
There are range of possible problems that could occur relying on one platform for all your sales and the next two points cover two common issues that Amazon sellers face.
You can lose your business if you run out of inventory
One of the cardinal sins of selling on Amazon is running out of inventory. If you run out of inventory, you will no longer get any sales. Amazon ranks products based on sales, so if you’re not getting any sales, your rankings will decrease until your product is ultimately ranking behind other products that are getting sales and have inventory in stock.
When you restock your inventory, you then have to earn your product ranking back again, so you are essentially starting from scratch, trying to build up sales from a ranking that might be on page 10 instead of page 1.
It can be difficult to build your product sales back up to the level they were at before you lost your rankings. Many times the product will never reach the previous levels it was at and sometimes this will completely kill the product completely.
You can be punished by Amazon’s algorithms
Amazon’s algorithms are designed to give customers exactly what they want as quickly as possible. They don’t want customers to spend hours researching products and comparing products from Amazon to other platforms.
When a customer types in “Giant inflatable T-Rex pool float with drink holder” Amazon doesn’t want the customer to see unicorn pool floats or a stegosaurus pool float. They want that customer to see the giant inflatable dinosaur of their choice and be floating around at a pool party on the king of the dinosaurs with a beer as quickly as possible.
If you’re providing customers what they want, then you’ll be rewarded but if you’re not providing a customer exactly what they want, Amazon will punish you in the rankings.
How does Amazon determine what a customer wants? Well if the customer wants a product, they will buy it. If they don’t want it, then they won’t buy it.
When a customer makes a purchase, it increases the ranking for the product they purchased. If the potential customer doesn’t buy your product, Amazon will decrease your rankings. Talk about kicking someone when they’re down. The less sales you get, the less Amazon will show your product to potential customers which will further decrease your sales.
This can make it difficult to launch a product and can be a vicious cycle if you don’t get initial sales and traction for your product. You may have the best product for a particular niche, but if you’re not getting sales then you won’t rank, and because you won’t rank on Amazon, potential customers won’t see your product and you won’t get sales.
More sales = higher ranking
Higher ranking = even more sales
Fewer sales = lower ranking
Lower ranking = Even fewer sales
The competition is tough
Amazon is no longer a new marketplace to sell on. The early mover advantage is gone which means there are hundreds or thousands of sellers for each product on Amazon. (That said, Amazon Australia has only recently launched.)
When selecting a product to sell, it can be difficult to find a product with low competition and you need to figure out effective strategies that other sellers aren’t fully using to their advantage yet.
If you don’t have some sort of competitive advantage in your product niche, then it can be very difficult to achieve success on Amazon.
The customers belong to Amazon
Amazon controls the platform along with the customers. When you sell to a customer, you don’t get their email address or details.
You don’t know who your customers are, you can’t contact them outside of Amazon and even through the Amazon messaging platform you can’t easily communicate with them.
This further ties you to the Amazon platform for your income and makes it difficult to build a brand, generate repeat customers or create an income that isn’t dependant on Amazon.
You can’t sell everything
When looking to sell on Amazon, there are millions of products that you could choose from. While you can sell almost anything on Amazon, that doesn’t mean absolutely everything. Just because a product can be sold on Amazon, doesn’t mean YOU are allowed to sell it.
You might not be aware you are selling a product that isn’t allowed until you send your products to Amazon’s warehouse. You may have already put in a large order for products, only to find that you can’t sell those products on Amazon and now you are stuck with thousands of dollars worth of product trying to figure out where to sell it.
Needless to say, make sure you do your research to ensure you can actually sell the products on Amazon before you place an order for them.
Cash flow constraints
You can make a lot of money selling on Amazon, however, you need to have the free cash flow to constantly reinvest into the business to build it up.
The more sales you make, the more inventory you will have to buy. This doesn’t seem like an issue except that you don’t receive the money for the sale immediately and the wait time to restock products can be weeks or months.
For example, if you have a product that costs $5 and you can sell it for $20, then it costs you $5,000 for an order of 1,000 units and you then make $20,000 on that inventory.
It takes 6 weeks to restock inventory and you won’t receive the money for the sales for 4 weeks.
If you will sell all your inventory in 8 weeks, then you would need to order in 2 weeks to restock inventory in time. This leaves a 2 week gap between receiving the money from Amazon and reordering your inventory.
If you run out of inventory then you will lose your product ranking and it will kill your product, so you can’t wait to receive the money from Amazon to reorder. You need another $5,000 to order inventory before you receive your payment from Amazon.
The more popular your product becomes, the more inventory you need to order and the faster you need to order it.
Instead of a $5,000 order, your next order might be $10,000 or $15,000 every month. The more sales you get, the more you need to order and the greater the amount of money you need on hand to cover each order.
This leads to many Amazon sellers making a lot of money in revenue but very little profit because it is all reinvested in their business to buy new inventory. A quality problem to have, perhaps, but never the less a problem.
So, What’s it Going to Be?
You should now have all the information you need to know about getting started with drop shipping or Amazon FBA. Both methods are good options for making money online and depending on your circumstance one will be better than the other for you.
Drop shipping suits people new to online business that have a small initial budget when getting started. It also benefits people that want to get exposed to a range of different areas of e-commerce and digital marketing, which is not to be understated.
Amazon FBA offers amazing opportunities to generate significant income online with very little work, however, it requires at least $5,000 to get started.
Whichever one you choose, just be aware that either will take work and capital to get started and you need to treat them like a serious business in order to succeed.