Amazon Dropshipping: What is it & How does it Work? (2022)

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Thanks to the various benefits offered by dropshipping, most businesses appear to be set on wanting to try it. The millions of active users of Amazon are no different. They are choosing to hop on the dropshipping bandwagon owing to the potential source of profit it provides.  

But the real question is- what really is dropshipping and how can it earn you a profit on Amazon

We have curated this detailed guide to help you navigate through the ins and outs of Amazon dropshipping so that you can gain the most out of it. 

What is Dropshipping?

Dropshipping is a kind of order fulfillment method where online businesses outsource acquiring, storing, and shipping products to a third-party supplier instead of warehousing inventory themselves. 

It is ideal for enterprises due to its reduced operational costs as opposed to the traditional retail method. It increases efficiency without the additional demands of paying overhead or stocking products. However, all this does come at a certain cost. Let’s get into all the details one by one. 

Dropshipping Business Model Features

Dropshipping Business Model Features

 

A dropshipping business model is based on some general features-

  • Providing an online storefront to promote the products
  • Upon order placement by a customer, forwarding it to the dropshipper
  • Informing the customers that the products are on their way

The next steps in the fulfillment process are taken care of by the dropshippers. In the case of customer service, the seller may handle it while the other tasks associated with selling have been dispatched to dropshipping. 

 

How does Dropshipping work?

Dropshipping also has a general sequence of fulfilling the orders. It is usually-

  1. An agreement signed by the seller with the dropshipper
  2. Customer places online orders
  3. The seller receives the orders
  4. Sellers sends order confirmation to the customers
  5. Sellers forward the order to the dropshippers
  6. Dropshippers pack and ship the products
  7. Customers receive their ordered products

Amazon Dropshipping Policy

Amazon Dropshipping Policy

 

Amazon has a straightforward policy regarding dropshipping. Any seller wanting to dropship must follow the recently updated policy-

  • The seller has to be the seller of record for all the products
  • All slips, invoices, external packaging, and so on should have information that identifies the seller
  • Seller must get rid of any information that identifies a third-party dropshipper before shipping the order
  • Sellers must take the responsibility of accepting and processing the customer returns of the products
  • Seller needs to Abide by all other terms of the seller agreement and other applicable policies on Amazon

Other than these, Amazon also prohibits some aspects of dropshipping like-

  • Buying products from another online seller and getting that seller to directly ship to the buyers if you or the other seller are not identified as the seller of record.
  • Labeling the products with names and information that are not of the seller of record.

These policies distinctively forbid the sellers to dropship products off to other ecommerce businesses like eBay or Walmart. Amazon lets you dropship as long as there is no indication of dropshipping on the products to the customers. Moreover, this form of dropshipping has to be from a legitimate dropshipper in order to avoid the risk of getting your Amazon account suspended

 

How to Start Amazon Dropshipping

The process of Amazon dropshipping can be categorized into 4 basic steps-

  1. Setting up an Amazon Seller Central account

amazon seller central

 

All you have to do is keep your personal information, billing information and tax information ready. The signup process for Amazon Seller Account is straightforward and it does not take too long. 

There are two options for sellers while signing up on Amazon Seller Central- a free individual account and a professional account. The former is apt for sellers with less than 40 items to be sold and it charges only $0.99 per item. Whereas, the professional account is suitable for sellers selling more than 40 products and charges $39.99 per month. 

 

Product research

Product research will help you get an overall picture of the products that are profitable to dropship. Let’s look at some of the key strategies to start dropshipping-

  • Looking for specific products in a niche category that remains in demand throughout the year
  • Useful products are ideal for dropshipping
  • Dropshipping is appropriate for high-maintenance products to cut off unnecessary storage costs
  • Trendy and attractive products that can be marketed vigorously on social media platforms are also ideal for dropshipping
  • Avoiding Amazon Prime products as they are already being shipped with the help of FBA-registered sellers

Getting your supplier

These are some of the best ways of connecting with a supplier for dropshipping-

  • Most suppliers have contact information on their websites. So while searching for suppliers in general might be a tedious task on Google, contacting them directly through their websites can be useful. The genuine dropship supplier sites will have forms for the sellers to fill out. It is unwise to trust any website with no contact details. 
  • Going to trade shows in person is a good way to get to know your potential supplier. Although this might be a bit more inconvenient than just looking them up on the internet, this process has its benefits as you get to meet multiple authentic suppliers face to face before deciding on who to choose. 
  • Another ideal way could be to access the dropship directories. These require payment upon which these are ideal for providing information on potential dropshippers. 

Before signing an agreement with a supplier, it is suggested to do some investigation. Asking questions about their inventory management, fulfillment process, and payment methods can give you a clearer picture of their business model. You have to make a contract with your chosen supplier to get the letter of authentication. This becomes particularly handy if Amazon ever asks for proof of authorization. 

 

Creating a listing and selling the products

creating listing

 

The final step includes creating an Amazon listing and beginning to sell the items. 

In case of promoting the products on an independent eCommerce site, Amazon needs to be integrated as a sales channel. 

Key Participants in Amazon Dropshipping

Starting with the seller of record, or your eCommerce company, let’s break down some of the important participants and their roles in depth.

Seller of Record (SoR)

The authorized dropshipping retailer is the person listed as selling the product to the final customer, often known as the seller of record (SoR). They determine the selling price, report the transaction as revenue, and take on the burden of paying the applicable sales tax. They are the sellers of record because they own the goods before they are delivered to the consumer, even if a third party manages the inventory and transports the goods.

As long as they are the seller of record and identify themselves as such, employing a dropshipping service is typically permitted for Amazon sellers.

Amazon Dropshipping

 

Manufacturers

Products are created by manufacturers and sold to distributors and retailers. Although the sellers can buy products directly from manufacturers, the large minimum orders they have may make it difficult to launch or grow their businesses. However, some manufacturers provide dropshipping services as well.  

 

Wholesalers

Wholesalers typically purchase goods from producers and resell them to retailers at a small markup. They perform the role of middlemen; typically, they don’t sell to customers directly but they might offer dropshipping services to retailers.

Based on the business model and fulfillment needs, the sellers need to decide which dropshipping providers would be ideal for their specific requirements.

 

Cost of Amazon Dropshipping

Everyone who wants to use Amazon dropshipping must register as a seller on the Amazon website. Regardless of how many goods you sell, their Individual plan costs $0.99 per unit sold, while their Professional plan costs $39.99.

Depending on the type of product, Amazon’s dropshipping costs range from 10% to 15%. For companies with relatively low profit margins, this might not be an option. It is also suggested to keep an eye out for all the changes made to different Amazon fees in 2022. 

 

Pros of Amazon Dropshipping

  • Out of all eCommerce platforms, Amazon has the highest market share and a large audience.
  • It is simpler to set up and less expensive initially. Dropshipping is far simpler to start than Amazon arbitrage or private labeling and requires little to no upfront fees.
  • Has almost no overhead pay. You don’t need to maintain any inventory, thus overhead expenses are not a concern.
  • Poses low danger. Dropshipping enables you to try out various things without spending a fortune, and Amazon offers a wide range of specialized markets for your products.
  • Provides a range of freedom.  You are not confined to one place. You can sell to customers in a certain location as long as you can partner with a supplier who can fulfill orders there.

Cons of Amazon Dropshipping

  • Since there is almost no entrance barrier to starting a dropshipping business, you may anticipate a fierce competition with other brands.
  • There is no trademark protection and control over product specifications. The product’s specifications and quality cannot be mandated. Your brand could be damaged if your clients simply obtain products of poor quality.
  • Supply chain is subject to little or no control. When it comes to inventory levels and shipment times, your supplier is essentially in charge. Keep in mind that one of the simplest ways to have your account suspended is a stockout.
  • If the supplier makes mistakes when filling orders, your firm will suffer as the seller.
  • In addition to the fact that your margins are subject to price variations, your wholesaler receives the majority of the money.
  • Many dropshipping vendors are beginning to sell directly or even offer their own products on Amazon.

 

Is Amazon Dropshipping the right choice for you?

Amazon dropshipping might be the right choice for you based on certain criteria. Asking yourself the following questions might provide you with some clarity- 

 

How do you want to grow your brand?

The way your business presents itself to customers is reflected in your brand. Customer loyalty can increase by creating a memorable brand image.

Dropshipping gives you less control over product quality, the delivery process, and the appearance of the finished package, even though you may be able to build a branded online experience. A customer can decide not to use your brand again if the items and packaging don’t live up to expectations.

There is frequently little flexibility for product customization with dropshipping vendors. It could be challenging to differentiate your brand from the competition due to this restriction.

 

How much control do you want over the quality of the delivered products?

Customer acquisition, brand loyalty, and return rates are just a few areas where product quality may have a significant impact. While you might be able to check the products’ quality at the beginning of your dropshipping partnership, you probably won’t have much influence over it moving forward. Negative product reviews might be a thing to consider in this case. 

 

How fast do you want to ship the products?

Customers shopping online frequently anticipate fast shipping. Nearly 84 percent of respondents to a recent survey said that delivery was a crucial aspect of their online purchasing experience.

Your business may suffer as a result of lengthy shipment periods. Review the normal shipping charges and delivery schedules before working with a dropshipping supplier.

A service like FBA can be useful for sellers looking for quick order fulfillment services.

 

How much capital can you invest?

The dropshipping business strategy sometimes enables you to postpone goods acquisition until clients actually place orders. Dropshipping may therefore appeal to business owners looking to launch a venture with a small outlay for inventory. When compared to buying, storing, and shipping goods on your own, some solutions, such as third-party fulfillment, enable you to start and maintain your company with less money.

 

What is your target profit margin?

Dropshipping has a lower entrance hurdle than other company models like having a physical store or constructing your own order fulfillment facility. Unfortunately, this may increase the level of competition facing your company.

Businesses that implement dropshipping may face intense competition on the market. Because they have made such small investments, dropshipping vendors frequently have the ability to provide products at affordable prices. Consequently, you risk having low profit margins with dropshipping in your company.

If you position your company in a niche outside of any industries with intense competition, you might be able to get past some of these obstacles. Utilize market analysis, networking, and sales to identify niche markets that may be profitable or less crowded. 

Are you prepared to manage supply and inventory issues?

Inventory issue

You can have little to no control over the supply chain if you decide to use dropshipping. How many orders your dropshipper can fill may depend on production delays. Having to warn clients that an item is out of stock is the exception rather than the rule. One strategy to prevent running out of product inventory is to source goods through a variety of dropshipping providers. You can rely on a different source if the first one runs out of a necessary item. Working with several suppliers, however, makes logistics and fulfillment more difficult, which can be contrary to the intent of a dropshipping plan.b

 

How will you tackle refunds, returns, and replacements?

Returns are a necessary component of doing business online. Sometimes the return procedure is as easy as a consumer contacting you to let you know they want to return an item. After the customer returns the item, you issue a refund and get in touch with the dropshipping vendor to request credit or reimbursement. This, however, is not always the case.

Be ready for more difficult replacement and return procedures. Before establishing your refund and return policy, take the time to learn how a dropshipping provider manages returns.

Consider each step of the online purchase transaction. Before agreeing to work with a dropshipping supplier, consider the following types of questions to ask:

  • Who is accountable for defects?
  • Who pays the shipping costs for damaged goods being returned?
  • What are the restocking fees for the supplier?
  • What is the customer return period?

Before you make changes to your business model, asking questions like these can help you comprehend a dropshipping agreement and provide a clearer sense of the potential costs associated.

amazon returns

 

How will you handle customer care service?

You might still have to address consumer inquiries and worries regarding a shipment, delivery, or product quality even if you might not physically handle the products.

Negative evaluations and a bad customer experience might emerge from a seemingly little miscommunication with your dropshipping supplier. Think about the entire purchasing process from the perspective of the customer to prevent this. 

Pay close attention to the following customer experience factors:

  • Customers should know when to expect their orders after placing an order.
  • Do packages arrive when they are supposed to?
  • Are the goods delivered in good condition?
  • Does the packaging accurately represent your brand?

Create a favorable customer experience at each of these touchpoints to increase your chances of getting good ratings and growing your business.

 

Best Amazon Dropshipping tools

Here is a collection of resources you’ll find useful as you learn how to start dropshipping on Amazon-

  • Use Merchant Words to view the data and search volume for various keywords. $30/month is the price of the pro plan.
  • Use FeedCheck to view all of your product reviews in one location. It’s a terrific option if you have a broad assortment of Amazon products in your store. You can work on improving your reviews while offering better customer service if you have simple access to reviews. You can also keep an eye on the items of rival companies. The lowest monthly price for them is $19.
  • Amazon can be added as a sales channel to your store using Shopify. Shopify may be used to keep track of your inventory and notify you when you have orders from Amazon that need to be fulfilled. Make sure you haven’t chosen FBA for shipping your products if you want to benefit from Shopify.
  • You can use the repricing techniques in Sellery to get inside the Amazon Buy Box. You can conduct pricing experiments to maintain your competitiveness and increase profitability. This one is available for a free trial.
  • Feedback Express assists you in obtaining more Amazon store reviews. In order to maintain a high rating for your items and store, it also helps to eliminate bad reviews. Customers who have a reputation for leaving unfavorable reviews can potentially be put on a blacklist. Prices begin at $20 per month.
  • Amazon provides a number of tools to make selling easier. Spreadsheets with order and inventory data are readily available for download. Pricing and product quantities can both be changed easily.

 

Tips for a successful Dropshipping on Amazon

It’s simple to start a dropshipping business on Amazon. But it takes a little more effort to be successful with dropshipping on Amazon.

In any case, here are five suggestions to make dropshipping a success for you.

Promoting your listing

You must increase traffic to your product listing in order to increase sales. There are several ways to accomplish this.

First, there is Amazon Pay-Per-Click, their internal sponsorship scheme (PPC). PPC allows you to construct product advertising that boost your product’s ranking in Amazon’s search results for specific keywords.

Following that, you can promote your Amazon product listing through outside channels like Facebook advertisements, social media, blogging, email marketing, etc. This strategy can help you set your product apart from those of your rivals, albeit it may take a little longer to get going if your brand doesn’t already have a following.

 

Focusing on the customer

Amazon Dropshipping

Dropshipping on Amazon allows you to avoid many of the challenging aspects of running your own business. Your product does not need to be produced or shipped by you. Simply making sure the consumer receives it and is satisfied is all that is required.

As a result, dropshipping allows you to devote more time to customer support than you would normally spend managing your business.

Good product reviews are also facilitated by excellent customer service. And positive product ratings on Amazon can make or break your products.

 

Focusing on your brand

Dropshipping’s main drawback, as I mentioned above, is that you will be selling a product over which you will have no ultimate control over its creation or design. The same supplier will also be available to other sellers.

You no longer have much of a competitive advantage as a result. You should concentrate on the brand.

However, just because your product is an exact replica of one made by a rival company doesn’t imply it has to be the same. For instance, 40 oz. stainless steel tumblers from the company YETI cost $40 each. The identical stainless steel tumblers are available from their rival RTIC for less than $20. In spite of this, YETI continues to rule that market.

 

Getting samples

Make sure you understand what you’re selling before you list your goods. Take the plunge and place an advance order for a unit. Better yet, if you can accomplish this without the provider discovering that you might be a dropshipper.

Examine the sample when it is received. How did it appear when it first came? What was the time frame? Did the goods match the descriptions?

Once you begin dropshipping on Amazon, all of these minor details will assist you to anticipate how your buyers will get the product.

 

Casting a wide net

Because you have no start-up costs with dropshipping, it’s a lot easier for you to cast a wide net. In other words, you can list numerous products at the same time.

 

Is Amazon Dropshipping profitable?

The typical dropshipper makes between 10% and 30% on each sale. Their top-line revenue will be reduced by about 15% if they dropship through Amazon.

Your net profit after selling a product on Amazon, if you’re selling at a 30% margin, will be 15%. This is really good, especially when you take into account the large audience you’ll be able to reach.

Though it’s very competitive and shouldn’t be your primary priority at first, winning the Amazon Buy Box can increase your Amazon dropshipping margins.

 

Alternatives to dropshipping

There are options if dropshipping is not the best strategy for your e-commerce firm. If you want to outsource fulfillment, these are a few choices.

Utilizing third-party fulfillment to outsource product storing and transportation

Instead of dropshipping, some merchants make bulk product purchases and then employ a third-party fulfillment company to store the products, pick and pack orders, and manage shipment to customers.

With this strategy, you can potentially purchase things in advance for less money. Additionally, you can: 

  • Evaluate the quality of the goods before shipping them to the fulfillment center.
  • Offer discounts and promotions on your products.
  • Offer subscription services or product bundles through some providers.

 

Creating your own branded products

 

Creating your own branded products

 

You might need specialized products with your own branding at some time in the life of your company. Selling branded goods can help your company expand by doing the following:

  • Setting your company apart from other online retailers
  • Creating a distinctive online experience to gain consumer loyalty.
  • Creating a distinctive online store brand
  • Increasing brand awareness to support the introduction of future products
  • Creating your brand’s identity as a resource.
  • Some retailers look for a dropshipping vendor to include customized elements like unique packaging and branding and produce branded or white label goods.

 

Having a company make branded goods in large quantities and then using FBA for distribution is an additional choice. Utilizing this technique, you can benefit from Amazon’s quick Prime Shipping, which will help you stand out in the congested eCommerce market.

Focusing on earning a commission through affiliate marketing

If you’d prefer to completely skip managing clients, orders, and returns, affiliate marketing is something to take into consideration. Affiliate marketing is an entirely new business strategy.

Affiliate marketers don’t actually sell any goods. Instead, they market goods for an online store and get paid when a customer makes a purchase via a special referral link.

While affiliate marketing is more of an advertising strategy than a retail one, it can nevertheless have advantages like lowering startup or overhead expenses while allowing you to grow an audience and earning money when things you recommend to your audience result in sales.

 

Conclusion

In the end, only you can decide if dropshipping is a good fit for your company.

Even though it can be enticing to avoid managing stock levels, paying for warehouse space, shipping orders, or handling physical things, there are advantages and disadvantages. Find the best online selling and fulfillment plan to aid in the expansion of your eCommerce business by weighing your options and goals.

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