Once you start looking into easy ways to make money, chances are you’re going to stumble upon mentions of online arbitrage.
When we first started selling on Amazon, we opted to go the private label route right away. However, we did spend some time exploring online arbitrage too.
I decided to put this blog post together to tell you why we decided not to continue with online arbitrage.
Let’s cover some of the basics first so that you have all the information you need.
What is Online Arbitrage?
So, what is online arbitrage and how does it work?
ok so it’s a simple concept, as an online arbitrage seller you will find deals online to re-sell on another website for a profit.
Most sellers use the clearance or deal sections of popular websites like walmart, tescos etc.
Scanning these websites takes time, in order to scale things up you’ll either want to use software like Tactical arbitrage or hire a VA to find deals on a daily basis.
To be successful you’ll need to consistently scan different websites to find suitable product deals.
Most online arbitrage sellers re-sell their products on Amazon, most refer to this as the Amazon online arbitrage business model.
Amazon is popular with re-sellers due to the huge customer base and the ease of the Amazon FBA fulfillment model.
If you choose to resell using Amazon FBA, once you’ve received your items you’ll prepare each product and send into Amazons FBA warehouse network.
The video below explains how we prepped these products (Amazon have very strict preparation rules).
With FBA, Amazon will store your items and send them out on your behalf as orders come in, they will even handle your returns.
In order to make a profit you’ll need to list each product on Amazon at a competitive price (this is where it can become difficult).
You could use a number of other online marketplaces to resell, but for this article we’ll keep the focus on Amazon.
If you’ve been doing your research, you’ve probably also heard about retail arbitrage – let’s take a quick look at that too.
What is Retail Arbitrage?
Unlike online arbitrage where you source products online, retail arbitrage (RA) involves sourcing products and deals from physical retailers and sellers.
As an RA seller you’d walk into somewhere like Walmart, head to the clearance isle and look for products that you could re-sell on for a profit.
With retail arbitrage a lot of the products sold are from well known brands, this means pricing information is readily available on Amazon.
There are a number of different apps RA sellers use when out on a sourcing trip…
By scanning a products barcode you can instantly see your potential profit and how many units you’d be likely to sell over the course of a month.
Some sellers are having a lot of success with the retail arbitrage business model, it just wasn’t suited to our set up.
RA sellers spend most of there time out and about trawling stores for deals, if you enjoy this sort of thing it can work well.
Many people see retail arbitrage as a gateway to private label selling, but this isn’t always the case.
Why We Stepped Away from Online Arbitrage
When we started our Amazon journey we were private label sellers right from the start…
A lot of people asked why we bothered trying out online arbitrage if we were having success with private label.
The truth is we wanted to diversify, as a private label seller you have responsibility for the products you are selling (they must be safe and certificated for your chosen marketplace).
We thought that by selling other peoples products we’d limit some of that risk, we also though it would be a starting point before we moved in the wholesale business model.
This video below explains our decision in a little more detail.
With Private label you’ll be partnering with a manufacturer to create a product that you can label with a brand of your own, by building your own brand you can built your own tribe of customers.
Here’s the difference between arbitrage and private label in a nutshell.
If you were an arbitrage seller, you would purchase a brand name coffee cup at a reduced rate, which you would sell on Amazon for a higher price. As a private label seller, you would work with a manufacturer to create your own branded coffee mugs.
There is a lot more responsibility associated with private label selling because the products are your own, this means that you are liable for the safety of that product.
Although there is this added level of responsibility, we believe that it’s well worth the extra effort (if you do things properly).
So why did we finally make the decision to stop doing online arbitrage…
As private label sellers, online arbitrage was a topic we heard about often – we eventually decided to give it a try.
Over the course of several months, we decided to purchase a few thousand pounds worth of stock, we then prepped the products and sent them into Amazon FBA.
There are a few things that we discovered during this process, the first was that product sourcing was far more difficult than we had anticipated – it took up a lot of time.
Our process looked like this:
- Use tactical arbitrage to trawl a number of popular websites
- Analyze the findings
- Purchase winning products
- Receive and prep products to send into Amazon FBA
- List of Amazon to sell for a profit
Not only was this process time extensive but the winning products had razor thin profit margins.
Let me give you an idea of how different they were compared to private label.
With private label, we can purchase a product for $2 and sell it on for about $12.
With online arbitrage, if we bought a product for $2, we would usually be able to sell it on for about $7.
After Amazon fees and packing costs, we’d be left with very little profit.
With online arbitrage we found it harder to find product opportunities and when we did, we’d make much less money.
If you happen to have the funds and resources to get a team to take care of product sourcing for you, you may be able to make some money but you’ll still be working off smaller margins.
In the UK and possibly most of the US too, finding deals for online arbitrage is a lot of work with very little return.
As a private label seller, you do have more responsibility for both product safety and marketing but the profit margins make it worth it.
If you are thinking about starting private label yourself, you may find this training useful.
Why We Recommend Private Label Selling
Here are just a few of the reasons why we recommend starting a private label instead of investing in online or even retail arbitrage.
- You’re in control of your brand. It’s your product and your brand, you make all the decisions. You have complete control over your product, you actually own the asset that generates the income.
- Higher profit margins. Honestly, we’re here to make money, so why settle for lower profit margins when you don’t need to. When you get to control the price point, you get to decide how much money you would ideally like to make. Be careful though, if you’re just getting started, it may take some trial and error to get to the right price point.
- Better control over your inventory. The beauty of being in charge of your own products is that you can manufacture and order new stock as and when you need it. If a specific product is selling really well, you won’t need to spend time trying to find more stock at the right price, you simply order more.
- Private label is scalable. It’s much easier to expand your business as a private label seller. The risks associated with expansion are much higher with online and retail arbitrage. With private label, if a product is performing well, you have the option to add complementary products to up sell. It’s much easier to expand your range and build on the relationship with your customers. Received useful customer feedback? You can work with your manufacturer to improve your product.
- Process optimization comes easily. When you’re in charge of your products and supply chain, creating optimized systems to improve processes is much easier. As your profits increase, you can hire staff to take care of the tasks that you don’t have time for but still need to get done.
- You can sell your business. Private label businesses are much easier to sell later down the line. With private label you can establish a brand and build trust with customers, this also gives you the opportunity to grow your sales away from Amazon.
We’re all for private label but it would be unfair if we didn’t mention some of the challenges associated with this business model.
- The barrier to entry can be high. Since most manufacturers will expect a minimum order quantity, you need to be ready to purchase a large batch of products upfront. This can be anything from 500 to 3,000 units.
- Product research and development is a must. Since you’re going to be investing a sizeable amount of capital upfront, spending time on product research and development is essential. To minimize the risks associated with private label, you need to make sure that the product/s you have in mind are what customers want. Research and development not only takes time, but requires some investment. Fortunately, there are so many excellent tools that you can use to make this a lot easier, Jungle Scout and Helium 10 are just two of our top choices.
Yes, capital is something to consider when starting a private label, but it’s still possible to get it done if you don’t have a large amount of funds available to you, you’ll just need to start with smaller order quantities.
If you want to learn more about how we got started with very little capital, watch the video below:
The Final Verdict
If you want to explore online marketplaces such as Amazon and aren’t looking to become a full-time online seller, you could make some extra income with retail or online arbitrage.
Keep in mind that your margins won’t be as high as they could be and you’re going to be spending a lot of time on product sourcing.
Private label selling is a level up, but it does require more time and money, particularly during the beginning stages. If you do things in the right way your efforts will pay off. You can end up with a very valuable business.
Good luck! If you have any questions ask away below.