Are you planning to start your own Amazon business? Or perhaps you already have one, but it's not doing well, so you're considering a new approach. Regardless, the first step is to pick a business model.
What business models can you use on Amazon?
There are several. One is private labeling — You buy a unique product locally or overseas and sell it under your brand and packaging. Another is wholesaling — You buy products in bulk at a discounted price and then sell them individually for profit.
If storing and prepping products isn't something you enjoy doing, consider dropshipping. With this approach, you outsource order fulfillment to your supplier. You list products in your Amazon store, and when you get an order, you inform your supplier to ship directly to the buyer.
While all these business models are proven effective in making profits, they are not without risks. Private labeling, for instance, is riskier and more expensive than others. Dropshipping has a more complex structure than you may think. And, wholesaling requires more work to start and takes longer to scale.
This is where arbitrage comes in.
What is arbitrage?
Arbitrage is leveraging price differences for similar products on various platforms. It involves buying a product at a lower price on one platform and selling it for a higher price on another.
Why is it better than other business models? Several reasons—
- It doesn't require building a brand or filing trademarks.
- You can sell in different product categories.
- It allows you to diversify and dilute risks by investing in different markets.
- Researching and sourcing products is less complex than with other business models.
- It's easier to jump from niche to niche when assessing feasibility.
Despite this, profit isn't guaranteed with arbitrage unless three conditions are met:
- The products must be from big-name brands. Branded products come with a perceived quality and prestige that buyers desire, enabling you to justify a high price point.
- The products must be of high quality. If you can't find low-cost branded products, ensure the alternatives are durable enough to satisfy your buyers.
- The products must be in demand but not very easy to come by. These are hidden gems that take expert eyes to find.
There are two types of arbitrage—online arbitrage and retail arbitrage. Below, we'll analyze them—and break down their advantages and disadvantages—to help you decide which direction to go based on your resources and preferences.
Online Arbitrage
You can source your products from eBay, Etsy, or Alibaba. Even though these platforms are pretty much the same as Amazon, many of their products are cheaper, which makes arbitrage possible. And like any other business model, Amazon FBA online arbitrage has its fair share of benefits and drawbacks.
Pros
- Unlike retail arbitrage, which you can only do during a store's open hours, you can buy products from online marketplaces anytime.
- You have access to stores from all the places the platform operates in. On eBay, for instance, you can purchase products from stores in over 100 countries.
- eBay has over 1.7 billion active listings. The chances of finding branded, high-quality, in-demand, and unique products are higher than when you do retail arbitrage.
Cons
- You won't be able to inspect the products before you purchase them. The products might not be as durable as advertised or could get damaged during shipping.
- Many orders made in online marketplaces get canceled for various reasons, including when the seller doesn't want their products flipped or when stocks run out before your order gets processed.
- You are at risk of fraud. Unlike Amazon, younger and smaller online marketplaces don't have enough restrictions to protect buyers from rip-offs. You need to be extremely careful when transacting with sellers.
- Thanks to the lengthy and complex process of product sourcing and shipping, it takes longer to get your money back. Your package may even be subjected to delays depending on your location.
- Even though many products on online marketplaces are significantly cheaper than on Amazon, they may still be pricier than those in retail stores. Plus, additional costs apply to every purchase.
What is retail arbitrage?
Retail arbitrage is when you source your products from a retail store, like Walmart or Target. This is the simplest business model because it doesn't require you to have your products shipped to your home. Here are its pros and cons.
Pros
- You can start your Amazon business immediately. Once you have the budget, you can run to the store and purchase the products you plan to sell on Amazon. There's no need to wait for your products to be shipped.
- You can negotiate discounts. This may not be applicable when sourcing products from Walmart, but it may be elsewhere. You can't do this online because the prices in online marketplaces are often fixed, and contacting sellers to haggle is almost impossible.
- In case you purchased too many items and they won't fit in your car, you can request a delivery service, which most stores offer free of charge.
- Clearance sales in stores are way more generous than those in online marketplaces. That's primarily because the starting prices of in-store products are already low.
- Retail arbitrage allows you to inspect your products before purchasing them, guaranteeing quality and profitability.
- Products from retail stores are cheaper than those sold online. Your purchase also doesn't include shipping fees.
- You can shop and sell with a limited budget because your purchases don't incur extra fees.
Cons
- Compared to the billions of products listed on online marketplaces, you have very limited choices in a retail store. This means you cannot pick your niche and have to make do with what's available.
- You cannot secure stock all the time. The retail store might discontinue a product you sell or postpone restocking due to seasonal changes.
- You won't always find products on sale or clearance because sales promos are usually seasonal.
How about Prepping and Shipping?
You will prep and ship your products the same way, whether you do online or retail arbitrage. However, you can do this much faster with retail arbitrage, as you'll get a hold of the product right after purchase.
If you don't want to prep and ship your products, you can send them to a prep center. Yet, this option makes more sense with online arbitrage since you can instruct the online marketplace to ship your products directly to the prep center, and then the prep center can send them to an Amazon fulfillment center.
So which is better?
The answer depends on your situation. If you've just started and are low on cash, you can test the waters with retail arbitrage to avoid additional costs and afford an assortment of products. This is also a much better option if a shopping center is nearby.
Online arbitrage is ideal if you're far from shopping centers and have enough money to invest in diverse inventory. Still, this isn't to say you can only do either. Once you get the hang of arbitrage and develop an efficient sales strategy, you can use both to maximize your profit.