What is Amazon Dropshipping?—A Guide For 2023
Updated · Mar 06, 2023
You may have heard of dropshipping before. It’s a business model that cuts out a lot of the effort usually involved in selling so that you can focus on your branding and customer service. It comes with a number of benefits, but a fair share of risks too.
It’s best for new ecommerce entrepreneurs because it requires a low entry cost and allows for a lot of experimentation in the early stages. To make things even easier, Amazon allows for it, but what is Amazon dropshipping exactly?
In this article, we’re going to give you an overview of the practice on Amazon and discuss the balancing of its risks and benefits. Let’s get into it
What Is Dropshipping?
Dropshipping is a way to sell products without having to carry any inventory. It works like this:
Someone orders a product from your store. You then contact your supplier. The supplier then ships that product directly to your customer.
This process completely removes the need to maintain an inventory or have to deal with shipping.
Sound simple, right?
That’s because it is, but setting it up takes a little more effort than that. Next, we’ll discuss the benefits of dropshipping, but first a quick word on “Fulfillment by Amazon” (FBA).
What Is “Fulfillment by Amazon” (FBA)?
When hearing about dropshipping with Amazon and FBA, many people think these are basically the same, but that the latter is being performed by Amazon rather than another platform.
That’s not the case.
They are similar in that both dropshipping and FBA eliminate the need for you to keep an inventory and deal with shipping. However, FBA sees you sending your inventory to an Amazon warehouse from which it can be dispatched.
This means that FBA requires a higher initial investment, and therefore more risk.
Dropshipping through Amazon will give you greater control of your brand, and the costs will come as you receive orders.
The Benefits of an Amazon Dropship Store
To answer the question “What is Amazon dropshipping”, we need to go deeper and talk about the benefits, but here we’ll discuss each one in more detail.
Dropshipping is cheaper to start because you don't have to buy inventory upfront. You'll only buy inventory as your customers order products and pay for them.
Moreover, you won’t have to invest in the usual infrastructure such as shipping companies, packing materials, or physical storage and preparation spaces.
All you really need is an internet connection and a working plan.
Shipping and Inventory Management
As stated, with Amazon dropshipping, shipping and inventory are handled by your supplier. This will save you a lot of time and effort. You’ll only have to deal with the logistics of making sure the supplier receives the orders with the correct addresses and so on.
Note that you’ll still be responsible for customer service in the case of any issues. While it will be more complicated due to the modular nature of your business, the time you’re saving will make up for that.
We discuss this in greater detail below.
Dropshipping through Amazon offers great scalability precisely because you aren’t manufacturing things or holding inventory. Your only constant costs will be your advertising, and your Amazon seller fees.
As orders naturally ebb and flow, you’ll be able to match it easily because you’ll be ordering case by case. You’ll just have to order more or less from your suppliers.
You also won’t have to worry about acquiring more space or hiring new staff.
Easy Product Testing
One of the often-overlooked benefits of dropshipping with Amazon is that it’s very easy to test different products. You don’t have to make any changes to your core business, you simply have to source and list different products.
Using Amazon keyword research tools makes it even easier by indicating what people are looking for.
This makes it a great way to find out what sells well without having to invest a lot of money upfront. If something sells, you can prioritize that. If something doesn’t you haven’t lost money on it.
Work From Anywhere
As we’ve already alluded to, you can truly work anywhere. You don’t have to be in one place. This means that you can greatly expand the range of products you offer, or the niches you target.
You don’t even have to sell in your own country. Note though that because your dropship store is on Amazon, you’ll only be able to target the markets it reaches, but this has the extra benefit of giving you an existing customer base—which numbers 310 million users.
Of course, you can always dropship through other entities, but they’ll all have particularities that differ from those in this article.
Risks of Dropshipping
Despite the fact that dropshipping comes with a lot of advantages, it's not without its risks.
Here we'll discuss some of those risks so you can be aware of them before starting your own dropshipping business.
No matter the market, competition is always an issue, but when dropshipping with Amazon, it takes on a different character. Remember, the products you’re selling aren’t unique.
You’ve identified a set of items from a supplier. A supplier that others can buy from too. That means that the products you’re offering are most likely being offered by others.
You have to then distinguish your offering through price and marketing. You can also mitigate competition by choosing the right products. We’ll get into all of this soon.
Lack of Control Over Products
You won’t have control over the creation of products. It's important to be aware of this when you're sourcing products from different suppliers.
Ultimately, you’ll be responsible for any issues that your Amazon dropshipping suppliers could cause. You must trust the supplier and vet that they have a good track record.
If something goes wrong, it's going to reflect badly on your business.
You’ll be selling generic products, although later once you’ve established a good relationship with suppliers, you may be able to work out a private-labeling deal.
Potentially Slim Profit Margins
Dropshipping can have lower profit margins than other types of ecommerce because you are buying directly from suppliers who are selling premade products at already near market value.
Because you’re in competition with others when you dropship on Amazon, this means that there is less room to mark up the prices of these products before selling them to your customers.
In order to make a higher profit margin on dropshipped products, you will need to find a niche market with less competition where you can charge slightly higher prices.
You should also look for suppliers who offer discounts or other incentives for volume orders so that you can increase your margins by buying in bulk.
Finally, remember to always factor in the cost of shipping when calculating your profits, as this can eat into your margins if not accounted for.
With a business that holds inventory, you could ship a product the day it’s ordered, but this isn’t usually possible with an Amazon dropshipping business. Instead, there is some delay between when the customer orders the product, when you order it from the supplier, and when the order is finally shipped.
In our experience, the extra time can sometimes be as much as two weeks, depending on where your supplier and customers are based. This feeds into the next part.
Complicated Return Process
As you may expect, accepting returns is a little more complicated with dropshipping because customers are returning products to the supplier you paid.
Suppliers normally charge a restocking fee which can range from 20-30% of the total price of a product. Now be mindful because this is where a lot of new dropshippers fail.
If you don’t account for restocking fees, you could see yourself losing money and having to close up shop. We know more than a few drop shipping business owners who lamented being shut down due to items being returned with them having to bear the cost.
As such you need to configure it so that the restocking fee is passed onto your customer, and make this clear in your listing.
You also need to be aware of return windows. As a standard Amazon normally offers a 30-day return window, but you can set your own. You also need to be aware that your supplier will have their own return window.
You need to set your return window to a shorter period than your dropshipping suppliers so that in the event of a return you’ll have room to sort out any issues.
If the items you’re selling are in high demand and are fairly cheap, you can also consider accepting the returns to your address to sell later. This will save time and money but will require storage space.
Use Amazon’s return policy for guidance on how to structure your own.
Now you have a clear answer to the question “what is Amazon dropshipping”. As you can see it has numerous great advantages, but like most things isn’t without its risks, but remember, these can be overcome with smart planning and putting the work in.
We hope you’ve from this introduction to dropshipping on Amazon helpful on your quest to the e-commerce promise land.
Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.