Since the outbreak of COVID-19, you may have been hearing more about Amazon dropshipping, and for good reason. When the pandemic hit the US and shelter in place orders went into effect, several things happened in quick succession:
- Online purchases surged as shoppers turned to ecommerce instead of brick and mortar stores
- Some product categories experienced out-of-season sales peaks, resulting in out-of-stocks
- Amazon’s fulfillment centers buckled under the strain of new orders, and to recover their footing, they restricted inbound shipments
As a result of the out-of-stocks, brands needed to ship more goods into Amazon’s fulfillment centers so they could resume selling to Amazon shoppers, but Amazon’s category restrictions prevented them from doing so quickly enough.
That’s when many brands and sellers discovered the enormous benefits of Amazon dropshipping.
What does an Amazon Dropshipping Business Look Like?
Dropship is a selling and fulfillment model wherein a brand acts as the manufacturer, fulfillment provider, and potentially also the seller. It can be a key component in creating a dynamic fulfillment network. Let’s take a look at the most common dropship approach vs. the fulfillment by Amazon (FBA) model:
Dropship Model
- Manufacturer and seller agree to dropship together, which involves creating an EDI connection between their inventory management and warehouse systems
- Seller lists product on marketplace
- Shopper orders product and seller is paid
- Seller places order with manufacturer and manufacturer is paid
- Manufacturer ships product from their warehouse directly to the shopper
Fulfillment by Amazon (FBA) Model
- Manufacturer and seller agree to FBA together
- Manufacturer is paid as seller places a purchase order, then manufacturer ships inventory into Amazon fulfillment center
- Seller lists product on marketplace
- Shopper orders product and seller is paid
- Amazon fulfillment center ships the product to the shopper
TL;DR: Dropship differs from FBA in two significant areas: when sellers and manufacturers are paid and who provides fulfillment services. In FBA, the seller pays the manufacturer upfront via a purchase order. FBA also requires inventory to be on-hand in the Amazon fulfillment center before consumers can buy the product. Dropship does not require this. Instead, manufacturers double as fulfillment centers.
Pros and Cons of Dropshipping on Amazon
Pros of Amazon Dropshipping
1) Expand catalog selection.
Through dropship, brands can list products on Amazon for which sellers won’t place a product order. For example, if a brand wishes to offer a large product selection, but a seller cannot justify buying a large volume of product due to slow sales velocity, dropship enables sellers to still list those slow-moving products without taking on inventory risk. Then, if products perform well in dropship, they can be migrated to FBA.
2) Easier prep requirements.
Because inventory is not shipped into Amazon fulfillment centers, brands do not have to meet Amazon’s strict product preparation requirements. This eases the burden on brands and opens the door to sell products on Amazon that exceed Amazon’s FBA size or weight thresholds.
3) Mitigates FBA-dependency.
As mentioned previously, dropship provides a degree of agility and resilience to a brand’s fulfillment strategy. If they have a dropship infrastructure already established, sellers can respond quickly to unexpected consumer demand since brands don’t have to send inventory to Amazon first or be limited by Amazon’s inventory restrictions.
Cons of Amazon Dropshipping
1) Shipping speed depends on you.
Dropship sellers are not guaranteed a Prime badge or 2-day shipping on Amazon because the manufacturer is fulfilling orders. This can result in fewer sales, especially if you’re operating in a saturated category, as consumers are more likely to purchase products with 2-day shipping than products without.
2) You handle customer service.
In dropship, brands are responsible for promptly shipping out orders, processing returns, and addressing customer inquiries. This requires committing additional resources, not the least of which are time and personnel.
3) Requires constant maintenance.
Dropship on Amazon requires an always up-to-date connection between the manufacturer’s warehouse and the marketplace listing. If the brand is working with a seller, this means that the seller’s inventory system must be in sync with the manufacturer’s inventory system. Being in sync involves connecting technology, but also that manual inputs are being maintained. If this is not done, it can result in out-of-stocks, harming sales velocity and creates a poor customer experience.
When Should You Dropship on Amazon?
Amazon Dropshipping is generally seen as an excellent backup to FBA because FBA offers so many benefits for brands, sellers, and consumers. However, we saw dropship become a massive asset in March 2020, when Amazon’s fulfillment centers ran out of stock of essentials. Through dropship, we were able to help our partners continue fulfilling orders even when they were restricted from replenishing inventory levels, resulting in a 3.25x increased in Amazon orders year-over-year.
In short, dropship is an excellent safety net and a great way to expand your product selection on Amazon as your grow your channel. If you’re looking for someone to help in your Amazon dropshipping efforts, check out our dropshipping services. If you’re interested in learning about other fulfillment options for ecommerce, check out our post, Walmart Fulfillment Services vs Amazon FBA.
