Is retail Amazon arbitrage still viable in 2020? Or should you be pursuing online arbitrage? Let’s unpack Amazon Arbitrage.
In 2017, over 300,000 third party sellers began their journey on Amazon, and nearly half of those sellers exceeded $100,000 in annual sales. Since then, the number of sellers has only continued to grow—and so have the profits.
Third-party sellers are independent shop owners who sell a variety of merchandise. One common model on Amazon is retail arbitrage (RA). Amazon Market arbitrage is a method of selling items on Amazon that you’ve bought at a lower price elsewhere.
What you’ll learn in this article
Retail Arbitrage—what exactly does it entail? Technically, arbitrage is when you buy or sell assets with a price difference to turn a profit. In the context of eCommerce, this means you’re purchasing your inventory from the clearance sections of big box stores and then reselling them for a higher price on Amazon.
For example, let’s say you find a stuffed animal on sale for $3 at Walmart. When you look up the same item on Amazon, it’s retailing for $21. You could easily price yours at $18 and earn a hefty profit despite the Amazon fees.
This business model is a low-cost startup operation, but it lacks the ability to scale. However, for those sellers looking to increase their revenue or aspiring sellers looking to make some side-income, it can be quite lucrative.
Online arbitrage follows the same principles—except instead of sourcing your Amazon inventory from retail shops, you will get your stock from online vendors. In fact, it’s common to source items from Amazon’s competitors, like Alibaba, which traditionally sell items for a fraction of the cost you’d find elsewhere. But many of the brick-and-mortar stores you would use for retail arbitrage, such as Target or Walmart, also offer online ordering, so you can easily tap their inventory in the same way you would if you were physically going to the store.
Both RA and online arbitrage are 100% legal—although, like any type of commerce, there are some rules. On Amazon specifically, it’s important to consider that you can’t sell items that fall under the following categories:
- Items that require warranties and need to be bought from an authorized dealer
- Goods for which the manufacturer has registered its product on Amazon and barred 3rd party sellers
- Products in a category you are not approved for—typically grocery, clothing, and auto
Amazon lists its broader policies clearly on their program policies page. It’s also important to notice that if you plan to use Fulfillment by Amazon (FBA) to process and deliver your products, they have their own set of rules. For example, there is an entire list of items that require approval, some of which include:
- Collectible coins
- Fine art
- Sports collectibles
In the early days of the coronavirus lockdown, some sellers began hoarding PPE essentials like facemasks and hand sanitizer and charging exorbitant rates. Amazon countered by removing 530,000 listings and suspending over 2,500 seller accounts.
While it’s possible to make serious dough from reselling items online, taking advantage of a community panic will never be profitable. Regardless of what you sell and when—you should always consider what the market can support. Even if you price the product at the same point as the original brand, if it’s in demand, it’ll still fly off the shelves, and you’ll still make some money.
While Amazon Arbitrage is legal and can be ethical, is it right for your business?
The primary appeal of this method is the extremely low bar to entry. You can easily start a store with a couple of hundred dollars worth of inventory. You can even sign up for Fulfillment by Amazon (FBA) so you don’t have to worry about processing and shipping.
But you might also want to consider what items you would be allowed to sell in and whether you ever desire to have a personal, branded store. Toys, home and kitchen, sports and outdoors, baby items, and books are all great categories to get started in. They are open—meaning you don’t need the same approval Amazon requires for grocery and clothing items.
Finally, some may wonder if it’s worth it. If a buyer can find these items cheaper on a clearance rack, why would they spend more on Amazon? Many shoppers on Amazon aren’t always looking for the best deal. They are more interested in convenience and item availability.
To succeed in Amazon arbitrage, you’ll need to know the best practices.
There are some complaints that this business model is falling out of favor with Amazon. While it is not illegal and is not against Amazon’s policies, sellers are more susceptible to suspensions if they don’t do their homework.
One major issue stems from Amazon’s anti-counterfeiting policy. According to Amazon, sellers must be able to offer proof of an item’s authenticity if asked. While receipts should technically count as proof in the same dimensions as an invoice, the company does not always accept these receipts as valid.
To avoid this, some sellers suggest it’s better to list the items you buy under the “like new” category.
Another common stumbling block for retail arbitrage vendors has been the increase of restricted brands. A manufacturer may request that Amazon prevent third-party sellers from selling their wares without prior approval. While some vendors suggest that you can buy your approval depending on the brand (with the common fee being $1,000), most are completely off-limits.
So what brands should you avoid? Big-name brands like Uggs or Rayban, items that may require a warranty like Wacom or Samsung, or brands that suffer from counterfeits like Nike and Gucci are off the table.
Keeping Amazon’s policies and fees in mind are key to success on the platform. Ryan Grant, the founder of Online Selling Experiment, has moved millions of dollars worth of product—$950k just in December 2019. “It’s essential that new sellers start by understanding the fee structure,” says Grant. “It’s a common mistake to believe the fees are the same on every item. But that’s something you should never guess at.”
For those looking to scale their already growing arbitrage business, Grant suggests testing your successes in other categories as well as expanding your operations. Bringing on a new team member or personal assistant can help you evaluate more inventory and make more money.
Beyond the policies, being successful on Amazon depends on how much time and effort you put into understanding your customers and fees. Dakota Dieumegarde has been a retail arbitrage and wholesale vendor on Amazon for over a decade and has earned a 92% positive seller reputation rating from his customers.
“New sellers should find products that are light, shippable, and in demand,” says Diemegarde. “In reality, finding a product shouldn’t be a problem. But you need to be able to store and ship it competitively.”
He’s also paid close attention to how the platform’s shipping fees affect his customers. Regardless of whether the buyer purchases one or twenty items, Amazon charges them the same shipping price per item. When this happens, Diemegarde refunds the customer the excess amount charged for shipping.
While there are many reasons to dive into RA on Amazon, it’s important to have a roadmap to avoid pitfalls and streamline your process. After all, indirect costs like fuel can add up.
1. Sign up for Amazon and register as a seller
To become an Amazon seller, you’ll need a valid form of ID—such as your driver’s license or credit card. In addition, Amazon has two seller plans you can choose from. The first is the Individual plan, in which you pay Amazon $0.99 per unit, and the Professional or Pro plan, where you pay a flat fee of $39.99 per month. Once you start selling more than 40 units a month, it’s usually better to switch over to the monthly fee.
2. Decide your stores and route
Will you be purchasing from Walmart, Target, or another big box store? How can you save on fuel and inventory? What is your budget? Are you a member of any of these stores and can you get any cashback benefits or coupons? These are some crucial questions to get you started.
The most popular sources are:
- T.J. Maxx
- Home Depot
If you’re interested in online arbitrage, many of the big-box stores have online equivalents. But for sourcing online, you’ll also want to look at accumulating coupons, cashback offers, and discounted gift cards. Websites like Rakuten, Giftcards.com, Cardpool, and RetailMeNot are great resources for those starting out.
You can use this to scan barcodes as stores and get an idea if certain items are profitable or not—or whether you can sell them at all. This mobile app will even take FBA fees into its calculations, so you can really understand whether the item will be worth the work.
Another thing the Amazon Seller app offers is the ability to check the sales rank. A lower sales rank lets you know that an item is popular and selling faster—so it’s likely a good choice.
When it comes to sourcing online, you’re going to want to look at the Universal Product Code (UPC) for an item. While not every item will have its UPC code listed, it is the most accurate way to verify that the product you are purchasing will match its listing on Amazon. Software like Tactical Arbitrage or BuyBotPro are designed for online arbitrage and can better help you research, source, and verify your products.
4. Check customer reviews
Customer reviews heavily impact whether or not a seller stays in business—but they can also provide good feedback as to whether the items will be worth selling rather than become a liability. It can also be useful to look and see if customers are complaining about the price point—as you may be able to offer them a lower-priced item.
5. Review your competition
Who else is selling the product? One of the biggest competitors for Amazon sellers is Amazon itself. While there is little data to suggest buyers prefer Amazon’s original products over others, they are able to reduce the price point.
6. Understand your profit point
As a rule, most resellers suggest you should at least be able to charge 3x what you paid for the item in order to make a profit. “Tripling the price is fine, but you’re more likely to be leaving money on the table, especially for higher-priced items,” says Grant. Instead, he suggests that new sellers look for a 50% ROI.
7. Decide whether you want to store and ship yourself or sign up for FBA
You may or may not save money using FBA, but you will probably save time. That said, the fees for shifting the processing and delivery to Amazon range from 8-15% and are based on the size and weight of the product. However, there are many other kinds of fees associated with different FBA services and you could very well end up paying more than you bargained for.
8. Decide on your products and list your items on Amazon
Once you’ve determined that your product is eligible to sell on Amazon and profitable, you need to buy as much of it as you can and then begin listing items on Amazon and advertising your products.
9. Optimize your marketing
Once you’ve got your arbitrage strategy in place, you can improve your conversion rates through automating emails, building custom landing pages, and optimizing your keyword rankings. There are numerous ways to let people know about what you’re doing, including using chatbots and search ads. Landing pages can be extremely useful—since visitors are 72% more likely to bounce from the product page itself.
Despite the hurdles, retail and online arbitrage on Amazon remains profitable for thousands of business owners. Whether you source online or in physical locations, arbitrage is a great way to boost your business sales. If you haven’t already, you can later use the profit to expand your store, gain approvals for gated products, or add a wholesale model.
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