A lot of people, even those who might have never had the thought of entrepreneurship cross their minds, know what dropshipping is.
Over the past few years, fueled by the pandemic, the dropshipping business model has gained popularity faster than ever.
Because of this trend, the entire eCommerce industry has shifted and is growing at a staggering rate, likely to reach almost $6.4 trillion by 2024.
What's best is that the hype around the digital world of NFTs, Web3, and the metaverse, is quickly taking eyes away from traditional business models leaving them more vulnerable for domination.
Although everyone knows about dropshipping and how Shopify is the pioneer of that, there's something a lot of people might not know.
There's a special business model called Amazon FBA - you may have heard of it, and in fact, you might understand that it's a lot better than Shopify dropshipping in many ways.
However, there's another business on Amazon that a majority of people don't know about or simply don't understand.
That is the dropshipping model on Amazon - Amazon FBM.
In this article, I'm going to be comparing the two business models, Amazon FBM and Shopify Dropshipping to see which is the better business model to start your online business with.
Pros of using Shopify
Let's begin with the model that we're all more familiar with - Shopify.
Here are reasons why you might opt-in for Shopify rather than Amazon FBM.
Fast & free to set up
Shopify is super easy to use and set up.
All you really need to do is create an account and you're good to go.
Once you've created an account, you have started your 14-day free trial which gives you full access to the platform and allows you to make your site, add products, set up your marketing channels, and add apps to the website.
Within these 14-days, you're able to get everything ready before needing to pay a dime.
This is a great opportunity because I always have a single goal when I start a business.
The goal is to make a profit or break even before being charged a dime.
Therefore, within these 14 days, if you're able to get a sale or two, the business you started should already be paying for next month's subscriptions.
Some of the biggest brands in the world are set up on Shopify, for example, Kylie's Cosmetics.
Have your own storefront
We've touched on this in the previous point, but it's one thing that differentiates Shopify from Amazon.
On Shopify, you're able to have your own little storefront, you're not a seller on Amazon, but a seller on your own website, with your own brand, selling through your own channels.
A lot of people prefer to have their own site and sell through it in order to look more legit to customers.
The sites are fairly simple to make and can look stunning with a bit of practice.
It's amazing to think how easy it is to create websites nowadays compared to a few years back when it would cost either time or a ton of money.
Today, you could set up an account on something like Shopify, and have a website ready to accept orders within the same day.
Again, you might want to go through some YouTube videos to learn about the back-end setup or the apps you need to use, but it's very simple to get a hold of.
More control over your business
With Shopify, you essentially have complete control of every aspect of your business.
You have control over creating the site.
You have control over adding your products in and setting up the listings.
You have control over the stock of your products.
You have control over the pricing and the offers you have on your site.
You have control over the apps or the marketing apps you use.
You have control over your sales channels and the marketing itself.
And you have control over the customers.
When customers sign up to your email list on your site, they are now your customers.
However, on Amazon, they are Amazon's customers, not yours.
This is something a lot of people really enjoy - the ability to have complete control over their business.
On Amazon, sellers, especially new ones, are worried about getting banned on Amazon and watching their business fall through the drain.
When a customer wants a refund, even if they're not particularly obligated for one, Amazon will side with them rather than with the sellers.
It's funny to see how amazon neglects one of its biggest streams of income, but at the end of the day, they're still making a ton for many sellers.
On average, Amazon merchants make over $300,000 per year.
One of my previous articles talks about when you should quit a business venture and move on to the next - one of the reasons is lacking control over your business.
Cons of using Shopify
Now that we know about some of the reasons why we might use Shopify, let's discuss some of the reasons why we might not want to use Shopify.
In my opinion, both reasons we're going to discuss can make or break the choice.
Learn about advertising
One of the biggest problems with Shopify dropshipping is the fact that you need to drive your own traffic.
There are a ton of ways to drive traffic to a business, however, dropshippers only know one way - and that is Facebook advertising.
In fact, Facebook is probably the hardest to learn out of all the other methods of marketing.
Aside from Facebook, you have organic traffic - you can start a blog around your businesses' niche which can drive free traffic to your site.
There is also social media and your own following - a lot of people won't have a following and so it'll be hard to leverage this method of marketing.
Facebook is used by a ton of businesses because it's the fastest way to get eyeballs to your brand.
In the process of learning about Facebook ads, you might lose a lot more money than you make - especially when you're getting used to the platform, learning what sells better, and discovering your profitable audiences.
Google ads, on the other hand, might be more expensive than Facebook, but in most cases more profitable.
This is because when people are searching for something on Google, it's usually with intent, meaning they're looking to make a purchasing decision.
On top of that, Google is a lot easier to set up as you don't need images or video ads that sell.
If you're not comfortable driving traffic to your site, this might be a big problem with choosing Shopify.
Lower profit margins
With Shopify dropshipping, you run the risk of having really low profit margins.
Let's say that you're selling a product that costs $50 retail price, meaning you're selling it for that much.
To source this product from a supplier costs $20, including shipping.
You're left with a $30 margin, which is not bad, in fact, that's really good.
However, this is not where our costs end, there are still advertising fees to consider and other fees like Stripe/Paypal.
If we're assuming that it costs around $10 per unit to get an order, meaning our CPP (cost per purchase) is $10, then our profits are no longer $30, but $20.
Now if we're receiving $20, our payment processor might take a few dollars off the top (around $3) leaving us with $17 profit.
As a percentage, that is 34%, which is really good for an eCommerce store.
In general, you want to aim for 40-50% or more as a good target to hit.
However, if you watch 'gurus' on YouTube, you'll realise these people have margins below 20%.
Therefore, they might be making $10K per week, however, they're really only earning $2k per week in profit.
Look at the true figures.
Pros of using Amazon FBM
Now that we've talked about Shopify, let's discuss Amazon FBM and the reasons why you might want to start on Amazon.
Higher profit margins
Unlike Shopify, Amazon's profit margins are likely a lot higher, especially if you don't need PPC ads.
Every month, Amazon.com (USA) gets around 2.5 billion+ visitors to their site.
That means, every month, Amazon sellers have the opportunity to get 2.5 billion pairs of eyes on their listings (theoretically).
This usually eliminates the purpose of advertising as Amazon drives all the traffic to your listing.
Instead, however, they will usually charge something called a referral fee for each purchase.
This can range between 5-15%, give or take.
Now let's imagine the same $50 product with a $20 sourcing cost.
We have a $30 margin before the referral fee.
Let's say that the referral fee is around 10%, meaning we're going to lose $5 for that purchase.
Instead of a $30 profit, we now have a $25 profit margin meaning we're taking home 50%.
On Amazon, it's important to have good reviews - when you're just starting out, the high margins give you some breathing room and allow you to lower your pricing to drive orders and reviews.
No advertising skills needed
When it comes to selling on Amazon, there is a way to advertise if you really wanted or needed to.
There's something called Amazon PPC, which stands for pay per click.
That means, Amazon will sponsor your listing and you'll be paying for every click you receive on your listing.
Marketing on Amazon is a lot easier than marketing on something like Facebook, however, I've heard that it's not very profitable.
Firstly, you don't need to worry too much about creatives, you can simply use your Amazon listing images and still make a ton of money from the adverts.
In fact, in many cases, you won't need to use Amazon PPC because people will find and buy your product anyways.
Depending on how well optimized your listing is, you're able to get more traffic if your listing ranks better for it's main keywords.
For example, if you're selling a wrench, you'll want to include a lot of keywords about wrenches, home improvement, etc, in order to rank for those words and appear in more search results.
This eliminates the need for running ads, although, to get a very strong listing, you do need to get 10+ reviews.
Easy to scale
Amazon.com receives over 2.5 billion monthly visitors.
Amazon Europe receives billions of monthly visitors too.
It's safe to say that Amazon is the biggest business in the world with the most amount of customers.
Wherever you are, chances are, you've heard of and used Amazon at some point in your life.
Unlike other platforms, Amazon gives you the chance to start and grow a business rapidly, without having to worry about where the next customer is coming from.
All you need to worry about is making sure you have a good product that could get reviews and keep stock up to date.
If you're dropshipping, then you're going to need to find a supplier that is able to maintain large amounts of stock for you.
The worst possible situation is setting everything up, receiving a bunch of orders, then realising that your supplier has run out of stock.
I'm currently working with a supplier who told me that they're changing their products after the next round of stock hits the warehouse - a little stupid, but it's part of the challenges of starting a business.
On Amazon, you're not able to cancel orders, and so you have to communicate to buyers that their order cannot be delivered and so they'll need to cancel it.
On top of that, the fact that you don't need a storefront to maintain makes it a benefit for many sellers.
Cons of using Amazon FBM
Those were some of the main benefits of using Amazon.
By now, you might start to make some decisions in your head, but you might want to stick around to learn about the negatives first.
Selling on Amazon is not as easy as selling on Shopify.
Amazon does their best to make sure customers are getting the best experience possible.
To do so, they're ensuring that they only allow the best sellers on their platform.
They also don't like dropshippers all too much, and so they try their best to scare them away.
They may ban accounts or put holds/restrictions when they realise someone might be dropshipping.
Although it's allowed, they say that you need an agreement with your supplier to ensure that only your company appears on marketing material, packaging, and invoices.
When you make an account, there's a verification process you need to go through which could take days or even weeks to get through.
They've also added a video call step to the verification process.
It's a quick 5-minute call with an employee to check your documentation and make sure they're legit.
Once you've made it on the platform, it doesn't end there.
Now you have to make sure that you're in line with all their policies - having the return address, billing information, credit card information, etc, all up to date.
This is normal until you realise that your products need a barcode, or an 'ASIN/EAN/UPC' in order to list it.
Although you can apply for exemption, this will not always be handed to you.
Lots of competition
Amazon is a marketplace full of other sellers.
Did you know that Amazon has over 2 million sellers on its platform?
This means that Amazon makes over $80,000,000 per month from subscriptions alone because it costs $40 per month to sell on Amazon.
The competition can make it a lot harder to get noticed early on and get the reviews that help you get more sales and rank higher in the algorithm.
A lot of people who sell on Amazon say this is one of the biggest disadvantages to selling on Amazon and can be a primary reason why some people don't succeed.
With that said, you might want to rethink your option of using paid advertising like amazon PPC to get a little kick-start in the beginning.
Those were the pros and cons of Shopify and amazon FBM.
In my opinion, it's smartest to start on Amazon then, as you build up the business, start to grow your Shopify slowly too.
That way, you can have a highly profitable business, and grow your own brand off the back-end of it by setting up a Shopify and really bringing customers to you, not to Amazon.
Did you find this article helpful?
If so, please leave your thoughts in the comments below - let's get some conversations going!
Share this article on social media and with others, let's help more entrepreneurs realize their dreams!
Join my Quora group where we're building the largest community of online entrepreneurs in the world.
Don't forget to subscribe for free and get the 1-page business plan template!
(Find me on social media if you don't receive it)
Till next time,