How Amazon Dropshipping Works And The Pros & Cons

This post will break down the pros and cons of Amazon dropshipping and how to make money with this ecommerce business model.

Having been in ecommerce since 2007, I’ve seen many popular ecommerce business models crash and burn. And through all of the years that I’ve been doing this, one lesson always rings true.

If it sounds too easy and too good to be true, then it probably won’t last.

Amazon dropshipping falls into this category.

First off, I want to say that there is money to be made by dropshipping on Amazon. And it’s probably one of these least expensive ways to get started selling online with practically zero upfront monetary risk.

But before you jump the gun, I want you to ask yourself a few important questions.

  • Would you rather launch a business that makes a few bucks here and there in the short term?
  • Would you rather build a branded business that can stand the test of time?

Today, I’m going to analyze the pros and cons of the Amazon dropshipping business model and provide you with an accurate picture so you can decide whether you want to give Amazon dropshipping a try.

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What Is Amazon Dropshipping

Amazon dropshipping is an ecommerce business model where you sell physical products on Amazon without having to deal with inventory, shipping and handling or customer service.

Basically, Amazon and your supplier handles all of the heavy lifting for you. When you make a sale on Amazon, you simply notify your dropshipper and they ship your products directly to the Amazon customer on your behalf.

You don’t touch a single product in the process, there’s almost zero upfront cost outside of signing up for an Amazon account and you don’t have to buy any inventory whatsoever until the item has been sold.

The low risk aspect of dropshipping on Amazon makes it an appealing business model because anyone can do it and you don’t have to be tech savvy to begin.

Is Amazon Dropshipping Free?

You can start an Amazon dropshipping business for free. Because you don’t have to pay your supplier until you make a sale, you don’t need any upfront money for inventory.

In addition, Amazon offers an individual sellers account that is free of charge. You can dropship products onto any existing Amazon listing and you don’t have to pay any Amazon fees until after a sale is made.

Compared to all of the different ecommerce business models, Amazon dropshipping is probably the cheapest way to get started selling online.

How Amazon Dropshipping Works

dropshipping

Amazon dropshipping works by partnering up with a dropship wholesaler or distributor that is willing to ship products direct to consumers on your behalf.

As a partner, you and the third party supplier decide on a wholesale price for the products you want to sell online.

Once an agreement is in place with your supplier, here’s how Amazon dropshipping works.

  • The customer places an order on Amazon for your product.
  • You forward the Amazon shipping details directly to your dropship supplier and pay the agreed upon wholesale price for the product.
  • Your dropship supplier packages and ships the order directly to the end customer.
  • You keep the difference between your selling price and the wholesale price minus any Amazon selling fees.

When you dropship on Amazon, you must abide by Amazon’s strict code of conduct. If you consistently violate any of the following rules, you are subject to a suspension.

  • Order Defect Rate Must Be Less Than 1% – The total number of orders shipped with defects must be less than 1%. An item is considered defective if it receives negative feedback, a chargeback or an A-Z claim. As soon as your ODR (order defect rate) exceeds 1%, your account will likely get suspended.
  • Cancellation Rate Must Be Less Than 2.5% – If an order is cancelled either by you or the customer before a shipping confirmation is issued, if goes against your cancellation rate. If the frequency of cancellations exceeds 2.5%, you risk getting suspended. This commonly happens if you make a bunch of sales but your supplier is out of stock.
  • Late Shipment Rate Must Be Less Than 4% – If your dropship supplier consistently ships products out late, you risk getting your Amazon account suspended.

Is Amazon Dropshipping Legal?

Dropshipping Legal

Amazon dropshipping is 100% legal as long as you have a sellers permit and follow Amazon’s terms of service.

According to Amazon, dropshipping is allowed on their platform. However, you must fulfill your goods from a legitimate wholesale supplier and not another retailer.

The following excerpt is taken verbatim from Amazon’s website.

Drop shipping, or allowing a third-party to fulfill orders to customers on your behalf, is generally acceptable. If you intend to fulfill orders using a drop shipper, you must always:

  • Be the seller of record of your products;
  • Identify yourself as the seller of your products on all packing slips, invoices, external packaging, and other information included or provided in connection with them;
  • Remove any packing slips, invoices, external packaging, or other information identifying a third-party drop shipper prior to shipping the order;
  • Be responsible for accepting and processing customer returns of your products; and
  • Comply with all other terms of your seller agreement and applicable Amazon policies.

Examples of drop shipping that is not permitted:

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; or

Shipping orders with packing slips, invoices, external packaging, or other information indicating a seller name or contact information other than your own.

Overall, Amazon dropshipping is 100% legal as long as you obtain a business license, sellers permit and follow Amazon’s rules.

Right now, there are 3 popular Amazon dropshipping business models. Based on Amazon’s terms of service, two are illegal and the third is your main option.

How Old Do You Have To Be To Do Amazon Dropshipping?

To open an Amazon seller account for dropshipping, you need to be at least 18 years of age. If you are not 18 years old, you must register the seller account under a parent or guardian’s name with their permission.

However once you turn 18, you can change the registration name of the account under your own.

AliExpress Dropshipping On Amazon

AliExpress Dropshipping

The first “illegal” Amazon dropshipping method is called AliExpress dropshipping.

AliExpress dropshipping is a special type of dropshipping where all Amazon orders are fulfilled directly from China via AliExpress, an Ebay like marketplace owned by Alibaba.

Because AliExpress is based in China where products are generally cheaper, Amazon dropshippers take advantage of the price disparity to sell Chinese products at US prices and pocket the difference.

The big problem with AliExpress dropshipping is that the products are typically junk and the shipping times can take 3-4 weeks or longer for an item to arrive.

Because Amazon expressly prohibits dropshipping from another marketplace, AliExpress dropshipping on Amazon is prohibited. If you are caught, then you will get suspended so don’t even try it.

Ebay Dropshipping On Amazon

what is ebay

Another obsolete and illegal Amazon dropshipping method is called Ebay dropshipping.

Ebay dropshipping is where all Amazon orders are fulfilled directly from a cheaper listing on Ebay. Basically, a seller lists an item on Amazon at a higher price than an equivalent Ebay product and pockets the difference.

Once again, Amazon expressly prohibits dropshipping from marketplaces like Ebay, so don’t even try it.

Amazon Dropshipping From A Wholesale Supplier

amazon

As referenced above, the only legitimate way to run a reputable dropshipping business on Amazon is to use a distributor or wholesaler as your dropship supplier.

All shipments must be branded with you as the seller of record and you must remove any trace of your dropshipping providers in your packing materials.

In other words, the Amazon order must appear to be fulfilled by your company in the eyes of the customer.

How To Make Money With Amazon Dropshipping

make money

Making money with Amazon dropshipping requires 4 basic steps.

  • You must open an Amazon sellers account
  • You must perform keyword research to find profitable products to sell
  • You must have reliable wholesale suppliers to supply your products
  • You must create an Amazon listing for your product

Step 1: Open An Amazon Sellers Account

You can sign up for an Amazon sellers account over at https://sellercentral.amazon.com.

You will need to have your personal information, a bank account and tax info handy to complete the Amazon Seller account forms.

If you are a beginner, sign up for an Individual Seller account which is free. However, once you exceed 40 sales per month, switch to a Professional Seller Account to save money on Amazon fees.

Step 2: Find Profitable Products To Dropship

To find profitable products to dropship on Amazon, you should follow these guidelines.

  • Sell products that won’t go obsolete
  • Sell products that are niche or only apply to a focused group of people
  • Sell products that are catchy or flashy that are conducive to impulse buys
  • Sell products that are not sold directly by the manufacturer or offered by other Prime sellers
  • Sell products that are higher ticket so you can make more profit per sale

Read this post for more information on how to find profitable products to sell online

Step 3: Find A Dropshipping Supplier

To find legit dropship suppliers, consider using the following methods.

  • Contact The Distributor Directly – Every product sold online contains a UPC barcode. By looking up the manufacturer directly and contacting the distributor, you can ask whether they have a dropshipping program in place.
  • Attend Wholesale Tradeshows – Everywhere in the world, there are wholesale tradeshows catering to products in every category. By attending a tradeshow, you can quickly and easily find dropship wholesalers all in one place. You can use a site like WholesaleCentral.com to find tradeshows in your area.
  • Use A Dropship Directory – Directories like Worldwide Brands pre-vet legit wholesale distributors that offer dropshipping. Access to this directory comes at a one time cost.

In general, most dropship suppliers will only work with legit retailers so you must practice your pitch and come across as an experienced seller.

Never ever admit that you are a newbie.

For more information on where to find wholesale suppliers, please consult the following guides.

Important Questions To Ask Your Amazon Dropshipper

question

When it comes to dropshipping on Amazon, your relationship with your dropship supplier is extremely important. After all, your business success depends on your supplier’s ability to deliver your orders on time.

Any hiccup will increase your risk of getting suspended by Amazon and losing your entire business overnight.

As a result, I’ve compiled a list of questions that you MUST ask your dropship supplier before getting started.

Are There Any Dropship Fees?

Dropshipping margins are very low and typically fall into the 10-30% range. On top of low margins, most dropship suppliers will also charge a per order dropship fee as well.

This dropshipping fee can range anywhere from a few dollars or more depending on your product. In addition, you will have to pay the shipping and handling costs for the supplier to ship out your product to the end customer.

Some dropshippers may pad their shipping fees to make additional margin on the transaction.

Make sure you run the numbers to ensure that you can still make a profit after all dropshipping fees.

Are There Any Deposits Or Upfront Payments Required?

Some dropship suppliers will ask for a deposit towards future product orders upfront. But over time as trust is established, you can often negotiate payment terms and have this deposit removed.

Regardless, make sure to ask your supplier how they want to get paid. Some require an invoice for every purchase order, while others will allow you to create one mass payment invoice at the end of the day.

Ask for a sample invoice so you can find out if there are any hidden or unexpected costs. Do your homework!

Do You Sell On Amazon?

Some dropship suppliers are already selling their products on Amazon which puts your Amazon dropshipping business at a major disadvantage.

Because your supplier has better pricing than you do, it will be difficult if not impossible to compete directly with your supplier.

What Is Your Return Policy?

Returns are a reality with any ecommerce business and you need to know how to get your money back for any returned orders.

In practice, it can be quite an ordeal to handle a return. Typically, you’ll have to file an RMA with your supplier first and then have the customer ship the product back to your supplier directly.

Once the product is received, your supplier then reserves the right to provide you with a refund depending on the condition of the item.

Do You Provide An Inventory Data Feed?

Because Amazon’s selling requirements are so strict, you have to make sure that your inventory levels are up to date in real time.

After all, if you sell a bunch of items on Amazon that are out of stock, you will have to cancel those orders and risk your account getting suspended.

In general, your supplier’s inventory levels change constantly, especially if they work with large retailers like Target or Walmart. As a result, you need to know how much product you can sell WITHOUT running out of stock.

Always ask your supplier if they support EDI which stands for electronic data interchange. If they can’t provide you with real time or daily inventory updates, consider using a different supplier.

The risk of an Amazon account suspension is not worth it.

Can The Packaging Be Branded With Your Logo?

Because Amazon requires you to be the seller on record, it’s important that your packaging and inserts be branded with your logo.

If your supplier refuses to ship under your brand, you should probably pass or risk getting suspended on Amazon

How Often Does Pricing Change?

Prices can change at any time and it’s important that you are alerted of any increases immediately. Because dropshipping margins are razor thin to begin with, any price increase can lead to a loss.

Ideally, your supplier will honor the prices quoted on your purchase orders but you have to ask to make sure.

Bring up all of these questions ahead of time to cover your tracks or you may end up losing a lot of money.

How Often Do Products Change?

Amazon is very strict about its products listings.

Certain products may undergo revisions in packaging from time to time and it’s important that the product listing EXACTLY matches the product shipped.

Your supplier must have a way to notify you of any product packaging changes and/or product revisions.

To be absolutely safe, make sure you match Amazon ASINS and UPCs by hand to ensure that your products exactly match what your dropship supplier is selling.

How Are Orders Submitted?

It is your responsibility to submit your order data to your supplier as soon as you make a sale on Amazon. As a result, you have to find out what system your supplier uses for processing orders.

Ideally, the process should be automated so you don’t have to painstakingly enter in orders by hand. But some unsophisticated dropship suppliers still use fax machines or email!

How Soon Is The Order Shipped?

To keep your Amazon account in good standing, your orders have to be shipped out on time. If your supplier is late with their shipments, you will take the blame and risk getting your entire account suspended.

Ask your supplier what their track record looks like for shipping and whether they offer any guarantees.

Once an order ships, your supplier also needs to provide shipping and tracking information to you electronically. Every Amazon order requires this information and it’s your job to submit it.

Step 4: List Your Products On Amazon

Once you have your suppliers in place, it’s time to start selling.

If your product isn’t currently being sold on Amazon, you’ll first need to create a product listing.

Here are some guidelines for creating a high converting Amazon listing.

  • Use Keywords In Your Titles And Bullet Points – Using a keyword tool like Jungle Scout, find keywords that shoppers are using to search for your products.
  • Take Great Photos – Your photos should be at least 1000×1000 pixels in size. Make sure you fill up all of the photo slots in your listings.
  • Write Enticing Bullet Points – Write copy for your listing that entices a shopper to click “add to cart”.

For more information on how to create a killer listing, consult my Amazon selling guide.

Best Amazon Dropshipping Software Tools

Jungle Scout Supplier Database

If you want to be successful with Amazon dropshipping, you’ll need software to help you find profitable products to sell and to perform keyword research for your Amazon listings.

For product research, the tool Jungle Scout organizes every product sold on Amazon into a searchable database.

By accessing this database, you can quickly find profitable products to dropship by performing specific queries based on what you want to sell and your desired profit.

For example, I can have Jungle Scout return me all products under the Kitchen & Dining category that make at least $5000/month with less than 100 reviews. This is extremely powerful!

Jungle Scout also has a built in keyword tool that will tell you which keywords customers are searching for to find your products.

Below is a 5 minute video demo on how I use Jungle Scout to do product research. If you want to follow along with the video step by step, then download the tool at a discounted price.

Click Here To Try Jungle Scout And Save 30%

Watch the 4 minute video below

The Pros Of Amazon Dropshipping

Benefits Of Adwords Express

Assuming you have a dropship supplier in place, let’s do a deep dive into the pros and cons of dropshipping on Amazon as an online business model.

These are the main advantages of dropshipping on Amazon.

Amazon Is A Huge Marketplace

At the time of this posting, Amazon has over 50% marketshare for all of ecommerce. As a result, Amazon is by far the largest online retailer in the United States.

When it comes to launching your own online store, most people are concerned with how to generate traffic and Amazon largely solves the traffic problem for you.

Every day, Amazon has billions of shoppers looking to buy the products you have to sell. By piggybacking your products on existing listings and winning the buy box, you can leverage the Amazon sales channel to make sales immediately!

Amazon Dropshipping Is Easy To Setup

Most people are afraid of the technical aspects of starting their own ecommerce store. But with Amazon, you don’t need to be tech savvy at all.

You don’t need a website. You don’t need a hosting company nor do you need to know anything about conversion optimization.

All you need is an Amazon seller account and you can start selling your products online.

In most cases, you don’t need to create a new listing because one already exists. As a result, you may not even need to take product photos or purchase upc codes!

Just make sure you read the Amazon seller agreement and terms of service before you start selling.

Amazon Dropshipping Is Not Risky

Amazon dropshipping probably has the lowest barriers to entry of any ecommerce business model. With a free Amazon seller account, you can literally start making money right away without any money required up front.

You don’t need to buy inventory. And as a result, you don’t have to worry about cash flow, unsaleable products or clearance items at all. There are no overhead costs and no inventory risks which means that practically anyone can do this with zero experience.

The Cons Of Amazon Dropshipping

Downsides To Adwords Express

The main advantage of dropshipping on Amazon is that it’s easy to get started but just because something is “easy” doesn’t mean that it’s better.

In my experience, “easy” almost always means that it’s not worth doing.

Amazon dropshipping has a huge list of cons which I will enumerate below.

Amazon Dropshipping Margins Are Razor Thin

The margins for dropshipping on Amazon are already very low. Depending on the supplier and the product for sale, dropshipping typically carries a 10-30% margin.

For certain products, I’ve seen margins as high as 50% but that is definitely not the norm.

Meanwhile, it can be quite expensive to sell on the Amazon platform.

For example, Amazon typically takes 15% of your top line revenue right off the bat as Amazon selling fees. If your margins are only 30%, that means that you only have 15% leftover to play with.

With such low profit margins, any minor slip up can ruin your business.

To realize why, it’s important to understand how selling on Amazon works.

Dropshipping other people’s products on Amazon is predicated on winning the buy box and maximizing your gross profit margins. Chances are, you will NOT be the only one on Amazon selling your exact same products.

As a result, you constantly have to play with your pricing to compete with other sellers and usually the lowest price wins the buy box.

Unless you have the best margins for your product (unlikely), it will be extremely difficult to win the buy box and still make an acceptable profit after you subtract Amazon’s fees.

I’ve seen this time and time again. Amazon dropshippers often find themselves in a price spiral to the bottom because every seller lowers their prices to fight for the buy box.

Low margins also means that you can’t spend money on advertising and promotion.

Processing customer returns can be a major issue as well. Because Amazon’s return policy is so liberal, you’ll often have to eat the cost of a return if your products are not returned in sellable condition.

Amazon And Supplier Prices Change Constantly

Prices on Amazon are dynamic and change constantly. Similarly, your supplier prices also change on a regular basis.

Unless you watch both Amazon and supplier prices like a hawk, it’s very easy to either lose out on potential sales (by not having the buy box) or lose money altogether on sales due to out of date supplier pricing.

As an Amazon dropshipper, it’s almost impossible to manually change prices for all of your Amazon listings and account for supplier pricing changes at the same time WITHOUT using an automated tool.

However, Amazon repricing tools are expensive and will incur additional overhead on a business that already has razor thin margins.

An Amazon Dropshipping Business Is Not A Sellable Asset

Unlike a traditional dropshipping store, an Amazon dropshipping business is not a sellable asset. After all, you don’t own a single thing when you dropship on Amazon.

You don’t own the marketplace. You don’t own the customers. You don’t even own the products!

With the Amazon dropshipping model, you are basically a worthless middleman, peddling goods that you don’t even own or control.

Sure you can make some short term money this way, but it’s cash flow, not an asset.

Amazon Hides Customer Data From You

According to Bain and Co, repeat business is the lifeblood for any ecommerce store. And a 5% increase in customer retention can result in an increase in 75% to the top line.

However, Amazon hides all customer data from you. As a result, you can never build a meaningful relationship with your audience nor can you ever intentionally sell to them again.

As an example, my ecommerce store over at BumblebeeLinens.com only has a 12% repeat customer rate. But that 12% represents over 36% of my yearly revenue.

I have colleagues who run stores where over 50% of their sales come from existing customers!

Because Amazon prevents you from contacting your customer, you are missing out on a lot of sales.

Most Dropship Suppliers Won’t Work With You

When interviewing wholesale suppliers, a common question they’ll ask you is whether you have a real, physical storefront or an online store.

After all, most dropshipping suppliers do NOT want you to sell their products on Amazon. Why?

It’s because suppliers don’t want a bunch of different companies creating a price war on Amazon. Typically, a supplier will either sell on Amazon themselves or pick a few key businesses to be Amazon sellers on their behalf.

Selling wholesale is much less risky and lower maintenance than being a dropshipper which makes working with Amazon dropshipping businesses less desirable from a third party supplier standpoint.

Amazon Can Ban You At Any Time

Remember all of the stringent requirements that Amazon imposes on their sellers mentioned above?

In order for any Amazon dropshipping business to be successful, your suppliers must be top notch.

  • They must ship out all orders on time
  • They must electronically provide inventory counts
  • They must electronically provide product detail changes

Basically, you are heavily dependent on your dropshipping supplier and it’s VERY easy for a screw up outside of your control to take down your entire business!

For example, if you accidentally forget to shut down your listing due to a stock out and you generate a bunch of sales you can’t fulfill, your Amazon seller account will probably get banned.

If your supplier accidentally ships a bunch of items that don’t exactly match your Amazon product listing, you’ll probably get a bunch of complaints and get banned.

If your supplier screws up and ships a bunch of orders late, you’ll probably get banned.

But don’t take my word for it. My friend John Rampton used to run a 7 figure Amazon dropshipping business until he got banned from Amazon and lost EVERYTHING overnight.

Below is a podcast interview I recorded with John that describes his traumatic experience.

Is Amazon Dropshipping Profitable?

While Amazon dropshipping is an easy business model to start, it’s difficult to master if you want to make significant money online.

Because your margins are so low, you can only make significant profit at scale.

Bottom line, you need to sell a bunch of different products, drive down your costs and make sure that your Amazon listings are dynamically price optimized.

Meanwhile, you also have to make sure that your inventory counts and product descriptions are always accurate to prevent your Amazon account from getting banned.

As result, you can’t do any of this by hand and you have to rely on software to manage operations.

Here’s what you need to automate in order to even have a chance of making a profit.

  • Purchase Order Creation – When an order comes in, you have to automatically send it to your supplier for fulfillment
  • Repricing – Because Amazon prices fluctuate constantly, you have to make sure you own the buy box. Otherwise, you won’t make any sales.
  • Inventory Listing Management – When you go out of stock, you have to make sure to deactivate your listing to prevent unfulfillable sales.
  • Product Data Syncing – The products being shipped by your supplier must EXACTLY match your Amazon product listing. Any change in packaging or product version needs to be accounted for
  • Order Tracking – Your supplier must electronically provide shipping and tracking information which you must send to Amazon right away. This process must be completely automated to handle the volume of orders you will receive.

Basically, every area of your Amazon dropshipping business needs to talk to each other. Amazon dropshipping success is a low margin volume game with very high risks.

You can make money with this business model only if you scale and any mistake can mean losing your entire business overnight.

My friend John Rampton learned this the hard way. Will you?

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About Steve Chou

Steve Chou is a highly recognized influencer in the ecommerce space and has taught thousands of students how to effectively sell physical products online over at ProfitableOnlineStore.com

His blog, MyWifeQuitHerJob.com, has been featured in Forbes, Inc, The New York Times,  Entrepreneur and MSNBC.  

He's also a contributing author for BigCommerce, Klaviyo, ManyChat, Printful, Privy, CXL, Ecommerce Fuel, GlockApps, Privy, Social Media Examiner, Web Designer Depot, Sumo and other leading business publications.

In addition, he runs a popular ecommerce podcast, My Wife Quit Her Job, which is a top 25 marketing show on all of Apple Podcasts

To stay up to date with all of the latest ecommerce trends, Steve runs a 7 figure ecommerce store, BumblebeeLinens.com, with his wife and puts on an annual ecommerce conference called The Sellers Summit.  

Steve carries both a bachelors and a masters degree in electrical engineering from Stanford University. Despite majoring in electrical engineering, he spent a good portion of his graduate education studying entrepreneurship and the mechanics of running small businesses.