As e-commerce continues to boom in 2022, more and more business models are gaining popularity. Dropshipping is one of them, which has become dramatically more popular in recent years. Dropshipping, a method of fulfillment for Amazon sellers, allows for businesses to outsource the procuring, storage, and distribution of their inventory. A retailer might find this as an attractive solution if seeking to lower their overhead costs and initial capital requirements. However, there are also downsides to dropshipping that any entrepreneur considering Amazon dropshipping should know.
What is Dropshipping?
Dropshipping, put simply, is an alternative fulfillment method, where much of the process is outsourced to a third party company. This company, usually a supplier or 3PL (third party logistics) company, takes over the responsibility of maintaining inventory, distributing, and shipping the product to the customer.
This alleviates the daunting tasks for retailers and business owners of handling the entire fulfillment process, which carries heavy initial capital requirements and overhead costs. With a retailer’s capacity preserved, this allows them to focus on their role as a storefront and manage growth, inventory sourcing, customer service, and marketing.
How to NOT to Dropship:
When it comes to dropshipping on Amazon, there are strict guidelines that will need to be followed. According to Amazon, “drop shipping, or allowing a third party to fulfill orders to customers on your behalf, is not acceptable unless it is clear to the customer that you are the seller of record.”
Also found on Amazon’s page for dropshipping are examples where dropshipping violates their policies, and may result in account suspension or other consequences:
- Purchasing products from another online retailer and having that retailer ship directly to customers, if the shipment does not identify you as the seller of record or if anyone other than you (including the other online retailer) appears on packing slips, invoices, or external packaging, it is strictly prohibited without exception; or
- Shipping orders with packing slips, invoices, external packaging, or other information indicating a seller name or contact information other than your own is also strictly prohibited.
How to Dropship:
While the exact operational logistics will depend on your business model and resources, a dropshipping provider will fulfill orders as customers place them. Below are the general steps for when an item is ordered on Amazon by a customer, and how the dropshipping partner takes over the fulfillment process and logistics.
- First, to dropship on Amazon, you’ll need an Amazon Seller account. You may visit their site to create an account in minutes, and explore products to dropship.
- Your dropshipping partner procures or supplies the products. Typically, they will manufacture the product, but not always. Dropshipping partners can take the form of third-party logistics providers, in which they only receive and re-ship inventory.
- An agreement or contract is secured with the dropshipping partner based on volume, rates, and other variable costs.
- As the retailer, you are responsible for running and maintaining your storefront, on Amazon.com, and keeping inventory levels current and accurate.
- A customer places an order through your storefront for an item.
- Payment is made through Amazon, which will then be credited to your Seller Central account.
- The order is then forwarded to your dropshipping partner, who will then take over the fulfillment process. As a seller, your part of the fulfillment and shipping is done, and you can focus on maintaining and growing your storefront.
- The dropshipping partner prepares the product and preps it for shipment to the customer.
- The dropshipping partner ships the item directly to the customer, concluding the process from order to delivery.
Pros and Cons of Amazon Dropshipping
As with any business model, particularly in the e-commerce space, there are perks and drawbacks regardless of your approach. With dropshipping on Amazon, there will be pros and cons, and your personal and business goals will determine if the pros outweigh the cons. Here are some benefits as well as limitations when it comes to Amazon dropshipping to consider:
Benefits of Amazon Dropshipping
- Ease of Scaling
Outsourcing fulfillment of orders allows for greater headroom of capacity, and increases your business’s ability to process more orders.
- Flexible Physical Location
Because dropshipping frees the retailer of needing to store or fulfill orders directly, you are free to run your business from anywhere.
- Low Overhead Costs
Since storage and fulfillment is outsourced, all you pay is a fixed per-item fee. In turn, you won’t need to own or rent a storage facility, or a fulfillment center.
- Low Starting Costs
Another perk to low overhead costs involved is the fact that starting costs are also low. This low entry barrier makes dropshipping appealing to entrepreneurs looking for an accessible business model in e-commerce.
- Large Potential Markets
With Amazon’s massive daily traffic volume, dropshipping on Amazon hits the sweet spot between accessibility for retailers with plenty of customer traffic.
Limitations of Amazon Dropshipping
- Increased Points of Failure
Because fulfillment and storage is outsourced, this also means it is out of your control and there is less direct oversight. There is an increased potential for failure at any given point in the process.
- Low Profit Margins
Because of the additional costs involved in outsourcing fulfillment, this per-item cost will cut into profit margins on your inventory. This can be considered the cost of not maintaining a fulfillment or storage center.
- Greater Competition
Because dropshipping has a lower entry barrier, the attraction of this business model will ultimately mean greater overall competition.
- Potential Fulfillment Delays
Due to less involvement in the fulfillment process, and the possibility of other retailers utilizing a dropshipping service, delays may occur during peak seasons.
- Inventory Management Issues
With inventory being held in an external location, instant updates to inventory levels may not be feasible. There may be delays in communication or current metrics.
With the right business model, needs, and goals, dropshipping may be the fulfillment option that makes the most sense for your business. Its low entry barrier and accessibility will translate to greater competition, however the ability to fulfill customers’ orders without incurring overhead costs can be a game changer. It is imperative to perform due diligence in ensuring dropshipping makes sense for your business. If it does, it can provide great leverage and opportunity to scale more efficiently.