Why Retail Arbitrage Won’t Help You Scale Your Business
Across YouTube channels and affiliate blogs, self-styled entrepreneurs promote the idea of retail arbitrage as a way to build a living or supplement existing income.
The idea is simple: find items for sale on clearance, then turn around and re-sell them for more.
Some swear by the technique, pointing to outsized returns — like the person who bought 182 Monopoly for Millennials board games for $19.82 each from a series of Walmart stores and then flipped most of them on Amazon for $77.29 each, a profit of about $2,500.
But the truth is that retail arbitrage isn’t the magic bullet that it seems. While retail arbitrage may result in some quick profits, you’re at the mercy of retailers and never really in control of the product sourcing. Margins are also super tight, especially after considering sales commissions and the cost of shipping. If you’re sourcing products from local stores, it also requires a ton of time.
At the end of the day, you just won’t be able to scale the business.
What is Retail Arbitrage?
Retail arbitrage is the act of buying products from one retailer and re-selling them, often on another marketplace like eBay, Amazon, etc.
Typically, those practicing retail arbitrage buy products in bulk from retail stores. Often, the product will be on clearance or heavily discounted, making the potential for a markup and a sale on a marketplace more likely. Other times, a low price offered by an online retailer will allow for an arbitrager to list the item for sale on another channel at a higher price, and if it sells, fulfill the order by purchasing it from the original low price channel, thereby profiting from the difference.
You might be wondering whether retail arbitrage is legal. While it may sound like a gray area, it’s actually completely legal. But is retail arbitrage allowed on Amazon?
Technically, yes, retail arbitrage is allowed on Amazon. If you go on Amazon and look at the marketplace, many of the sellers there are practicing retail arbitrage. (See the image below for an example of someone reselling a product at a huge markup.) The products being sold are provided not by a wholesaler but by a retail outlet from which the sellers purchased the item.
The caveat here is that certain products on Amazon can require approval from the manufacturer, which can be a lengthy process that’s difficult to navigate without being a retailer that has a relationship with the supplier.
If retail arbitrage is sounding like something virtually anyone can get into, that’s because it does have a rather low barrier to entry.
But is it profitable? Sometimes.
More specifically, retail arbitrage can be profitable in many cases. This largely depends on the price of the product being purchased, and the market for that product once it’s been bought. There are, however, some additional factors that go into the profitability.
The perks of retail arbitrage
Retail arbitrage comes with a set of perks that makes it appealing to both aspiring sellers and those simply needing an additional source of revenue:
- Retail arbitrage is a low-risk way of getting into selling. You can get into retail arbitrage by purchasing a single item if you wish, and you don’t have the costs that come with buying a physical location or buying bulk inventory from a wholesaler.
- Retail arbitrage helps sellers familiarize themselves with Amazon’s Marketplace. Those practicing retail arbitrage as an Amazon seller are learning much of the Amazon functionality needed to run a full-fledged shop.
- Getting set up for retail arbitrage is quick, only requiring that you purchase a product and list it. With retail arbitrage, there’s no need to set up a storefront with a name, branding, marketing, and so on.
In short, retail arbitrage is a cheap, low-risk, quick way for someone to get into selling. But, with the entire model relying on other retailers to provide product, retail arbitrage is limited in its growth potential.
Why Retail Arbitrage isn’t Great for Long-Term Growth
While the perks of retail arbitrage are hard to deny, there are limitations that make it a bad choice for those wanting long-term, large-scale growth. Nearly all of these limitations are tied to one core problem: you’re at the mercy of retailers. They control your product supply and the price you can buy at, and in some cases, they can even prevent you from buying in bulk.
You don’t control your supply
A traditional retailer generally has at least one supplier that keeps their inventory flowing (unless they make their own product). This keeps the retailer in control of the supply because they can communicate with their supplier and ensure that they don’t run out of products.
With retail arbitrage, you’re never in control of your supply. Once products are sold out, you are out of luck and are left scrambling to find another product to sell.
You won’t be able to build customer loyalty
Unlike brands and retailers who specialize in a category or product a product their customers love, retail arbitragers rarely focus on a specific category or niche. The business model just doesn’t allow for it, as you’re typically selling anything you can find on the cheap. Most often, you’re selling commoditized items that can be found elsewhere.
If, somehow, you’ve been successful enough to build a following, failure to find more product at cheap prices will affect any customer loyalty you’ve built because those who have come to count on your store will find that your supply is inconsistent.
You don’t control margins
When you’re in traditional retail, you own your product or at least get it at a wholesale price. This allows you to set the price and control the margins.
When doing retail arbitrage, you have less control over margins because you don’t own the product. You’re already paying the retail markup, even if you buy the product on clearance, which puts you at a disadvantage compared with sellers who buy it wholesale and sell it at a slight markup. You’re also paying commissions (Amazon takes 15%) and cost of shipping from the original supplier, as we said earlier.
Pivoting isn’t always feasible
You also can’t pivot as quickly as a traditional retailer when customers want something new. You have to quickly find a deal on a product at a retailer, purchase it, and then attempt to still make a profit by marking it up further.
When a product is brand-new and popular, there’s little chance you’ll be able to find it at a price that leaves room for further markup, leaving you completely unable to tap into certain customer bases. In short, you can’t always follow what your customers or the market wants when you’re left with only what the retailers have available.
Lastly, by not owning the product and not having a relationship with the supplier, you’re at a total loss if and when the product is discontinued.
Bad inventory can cost you
When a retailer has inventory that isn’t selling well and can’t be returned to the supplier, they can often salvage some money by selling the inventory at a reduced price (i.e., the clearance items that someone might buy for retail arbitrage.)
Bad inventory can result in a larger loss with retail arbitrage, because you already bought it at a higher cost than someone getting it from the supplier. If you buy numerous items and they’re not selling, you may have to lower the price to a point where you’re breaking even or losing money.
How to Build Long-Term Growth Through Amazon as a Private Seller
Retail arbitrage is a great way to learn the ins and outs of the Amazon marketplace, but establishing your presence as a private-label seller on Amazon can result in more sustainable long-term growth. As a private-label seller, you’ll be partnered with private-label brands that allow you to buy a product at wholesale, put your branding on it, and sell it at a healthy markup.
Building your own private-label store on Amazon is fairly straightforward, making this a great route for people interested in getting into selling with the potential for long-term growth. The following steps will have you running your own store in no time.
Create your Amazon store
There are more than 200,000 sellers on Amazon that make at least $100,000 in sales. Each of those sellers started their journey the same way: the creation of their store on Amazon.
The first thing you need to do is get set up as a seller on Amazon. You can choose between an individual Amazon account and a Professional plan, which is $39.99 per month. The individual plan has no monthly subscription, but comes with a fee of $0.99 per item sold, making the Professional account better for those with at least 40 sales a month.
Both accounts can sell in more than 20 categories, but those with a Professional account can apply to sell in 10 gated categories. Look over Amazon’s list of categories to determine whether you’ll need a Professional account to sell where you’re interested. If your products aren’t gated behind the Professional category wall, consider starting with the free individual plan, and move up only when you start selling 40 or more products a month.
When signing up, consider the brand name you’ll want to use for your store. You can change this at any point, but it’s a good idea to stick with the same one for as long as possible. People will slowly recognize your store’s name; changing it can cause confusion.
It’s also a good idea to set up an Amazon Store page, especially if you plan to have more than one product out of the gate. An Amazon Store page allows you to have a more curated, visually appealing storefront that showcases your products. This also gives you access to a host of analytics and data based on your store.
Partner with an existing private-label brand
With your store created, it’s time to find a private-label brand you like or believe you could sell. Private-label brands exist across a wide variety of channels, so there’s no single place to find them. You can start by searching in forums to see which brands were recommended to others. If there aren’t any posts about private-label brands in your niche market, make a post and ask about private-label brands or manufacturers.
Another route is doing a straightforward Google search of the product you’re looking for. Generally, a search string like “product + private label” will bring up numerous manufacturers that offer personalized products and bulk discounts.
You can also take to marketplaces like Amazon or Alibaba and dig for private-label products. It’s not always evident at first whether a product is private-label or made by the brand selling it. Look for similarities in the products, and dig into the product listing to see who the actual manufacturer is. From there, you can look into the manufacturer’s page or contact info and inquire about having them brand a product for your store.
You can also search for artisans or manufacturers in your area. For example, if there’s a local soap maker that knows of you, you could reach out to see whether they’d be interested in creating soaps exclusively for your store, with your brand name on them. An additional perk of going local is that it’s even easier to build a great relationship with the supplier.
Once you have your private-label product picked out, it’s a good idea to register with Amazon’s Brand Registry. This will ensure that your brand is protected and your products aren’t ripped off and sold elsewhere.
Personally handling shipping can be time-consuming and difficult. This is especially true as your business scales. If you don’t want to go the route of running a private label Amazon business and shipping products, you can turn to drop-shipping businesses as well.
A drop-shipping business will offer a selection of products that you can host in your own online store. When a customer purchases one of these products, you’ll pay the drop-shipper a fee, and they’ll send the product from their own warehouse. You’ll never handle a product yourself, nor will you have to purchase any inventory ahead of time.
The only downside to this method is that you can lose out on some profits due to the drop-shipper taking a cut. The upside is that you never have to risk money on buying inventory, nor do you have to worry about paying shipping fees and handling the logistics that come with that.
Market your business
Your shop will likely get some organic traffic over time, but marketing your business will help you drive sales and build your reputation much faster. There are a number of steps you can take to market your business. Use the following steps as a jumping-off point to spread the word about your brand and build your reputation as a great seller on Amazon:
- If you have the budget for it, you can start by running Amazon sponsored ads. These use a pay-per-click (PPC) model, where you pay a fee each time the ad is clicked. These can get rather costly, so set daily limits if you plan to use these. If you see that many of your clicks are converting into sales, you can consider upping the daily PPC allowance.
- Consider taking part in lightning deals. Amazon regularly runs lightning deals that last a day or less. During this period, items are offered at a low price and promoted via a special section on Amazon, as well as on the home page. While you won’t make the same profit for each product sold during this period, you can possibly sell a high volume that results in a greater profit overall.
- Promote your store externally. Your Amazon store doesn’t exist in a bubble. Create a website for your brand, where you can build up your expertise as an expert in your niche via great blog content, with natural plugs for your products. You can also promote your products across social media and even in forums like Reddit if you’re discreet.
Look for complementary product opportunities
Once your store has been live for some time, and your products have been selling, you can start looking for complementary products to offer. Think of new products that would pair well with what you’re already selling. For example, if you’re selling bars of hand soap, it would make sense to offer private-label soap dishes to go with the soaps. As an added perk, these complementary items can eventually be featured in the “Frequently bought together” section on Amazon, furthering your sales.
Start with your current private-label manufacturer, and inquire about additional products they offer. If they have any that seem like a natural fit for your existing customers, try striking a deal. If your current private-label brand doesn’t have any complementary products, that’s OK. To find one that offers something complementary, use the same process you used to find your first private-label manufacturer.
If you’re already selling multiple products, determine the Amazon conversion rate for each one, and find complementary products to go with those that are performing the best.
Routinely gather sales data in case of business sale
Unlike retail arbitrage, your private-label Amazon business is an actual asset you own. This means you can one day sell your business to an interested buyer if you wish.
To ensure that you’re prepared for this occasion, and because it’s good practice to have in place regardless, regularly track your sales performance and general business analytics. You can find this information under you Amazon Business Report section.
If you have an Amazon Store page, you have quick access to daily sales totals, info on where your traffic came from, and more.
Regularly track all of this information, and keep it organized in a spreadsheet. This information can help you keep an eye on the health of your store and, in the event someone wants to buy or invest, can stand as proof that your business is doing well.
Built to Last
Retail arbitrage can offer some quick profits and help you learn the Amazon marketplace, but its growth potential is limited. Building a presence on Amazon as a seller with a unique product offering is a great way to build sustainable, long-term growth that is truly yours. When you own the process, you can grow the business as large as you want. At the end of the day, you can sell it when you’re ready to move onto another venture.