Why You Should Stop Retail Arbitrage and Move to Private Label on Amazon
Whether you’re actively buying product and reselling online or you’ve heard about retail arbitrage as a quick and easy way to make a few bucks online, what you may not know is that it is not a good long-term way to build a sustainable and scalable business that you can later sell.
Let’s talk about what retail arbitrage is: the good, the bad, and the ugly. We’ll check out the differences between retail arbitrage and private labelling, so you can see how ultimately, private labelling is a more appropriate choice if you want to build a scalable business asset that you can later sell for 20 to 36 times its average monthly revenue.
First, let’s take a look at what retail arbitrage is and why so many people go for this type of business model.
What Is Retail Arbitrage?
Retail arbitrage is a simple concept. You buy a product at a low or discounted price and then resell the item at a higher price, making money on the difference.
Sound a lot like regular retailing? Well, that’s because it is, but with one key difference. A seller doing retail arbitrage sources product direct from other retailers instead of dealing with manufacturers or wholesalers.
Here’s an example. You go to your local Walmart or Target (or any department store), and see there is a clearance sale for a product — a toy, let’s say. You jump onto Google and notice that this toy sells for full price on Amazon/eBay, so you buy up all 20 units at half the retail price (e.g., recommended retail price [RRP] $20, your price on sale $10).
You then either fulfill the orders yourself or ship the product to Amazon’s fulfillment centers so they can distribute it for you. Then you set your list price for the product at $1 less than the RRP of the primary listing for that product. Because it’s cheaper than the main listing, you get the sales. Next thing you know, you’ve managed to sell the product at a profit and you never had to get on the phone and speak to a supplier or manufacturer.
So what’s the big deal? Those big guys already made margin on the products they sold before making millions, so who cares that someone is making a bit of extra money on the side?
And you are right — while there are some benefits to retail arbitrage for customers, the main benefits are for the sellers using this technique to sell product.
Amazon and Its Customers Benefit
For Amazon and its customers, retail arbitrage has advantages:
- Retail arbitrage increases the range of products available on Amazon, making some items available that may not be available to Amazon through traditional supply chain agreements.
- For every item sold on Amazon’s platform by a third party, Amazon earns a commission. More of these third-party sellers means more revenue.
It’s a Gateway to Private Label Selling
Aside from the profits to be made, there are other benefits for retail arbitrage sellers. Retail arbitrage can be seen as an introduction to Fulfillment by Amazon business and Amazon’s Seller Central Dashboard. Many times, retail arbitrage can be a gateway to becoming a private label seller on Amazon later on.
It Teaches Sellers How To Sell on Amazon
Retail arbitrage can teach sellers:
- How to create and use an Amazon Seller account
- How to navigate the Amazon Seller Central Dashboard
- How to best ship products to Amazon fulfillment centers
- How to correctly label products to sell on Amazon
- What the requirements are to set up their bank account to accept payments from Amazon
- What to expect from other sellers and how they react when the seller adds their products to Amazon
- To grasp how important Amazon Prime is for sellers
There’s a Low Barrier to Entry
Another benefit to retail arbitrage is its low barrier to entry. You have low capital required to start arbitraging — you can get started for as little as $100. As an individual seller (as opposed to having a professional seller’s account), so long as you are making fewer than 40 sales per month, there is no subscription fee to sell on Amazon.
When you look at how easy it is to get started, and how little it costs, you can see that retail arbitrage can be a great way to get started selling on Amazon for very little risk. This is why retail arbitrage is popular with people who want to create a side income.
So why don’t we think it is a long-term solution to running a “real” business?
Why Is Retail Arbitrage not Scalable?
Retail arbitrage has its downsides. While it is low risk when you are arbitraging on a small scale, the risk gets exponentially higher when you try to scale up your operations. Let’s take a look at some of the problems with this business model.
You Never Really Own the Product
Not owning the product or brand you are selling can severely limit your profits. If you find a product that’s a winner, and makes a ton of sales, you can’t just go and produce thousands of the same product to meet further demand. You are limited by your ability to source product from other retailers.
In many cases, if a product is popular, retailers may impose buying limits, which can make it a headache for you as you try and rope family members and friends into helping you buy up product, not to mention the time and fuel spent on travelling around to multiple outlets to collect your stock. If you are arbitraging stock from other e-commerce sites, you may need to set up multiple accounts to get around buy limits.
You Need Permission to Sell Brand Gated Products
Brand gating is where certain brands can be sold on Amazon only if they have permission from the brand owner. If a brand is gated, and you are not expressly authorized to sell that product, you will not be able to offload the stock on Amazon. This limits your ability to turn over stock and means you have to go to other platforms such as eBay to sell your inventory.
There Are Brand Registry Protections
Updated Amazon Brand Registry protections give private label sellers greater control over their product listings. Sellers can gate their products as mentioned above, but they can also report you as a non-authorized reseller, or worse yet, as a seller of counterfeit product. These actions can result in your account being shut down, stopping your business in its tracks. Protections such as these are only going to get tighter over time and reduce the amount of available product you’ll be able to effectively sell via arbitrage.
There Is a Low Potential Return on Investment
In retail arbitrage, your margins can be quite limited. Everyone wants their cut: the manufacturer, the distributor, the retailer, and — of course — Amazon. This will always cut into your margin. You don’t get to choose your margin, whereas in private label selling, you own the brand, and therefore, you decide what your margin is.
There Is a Higher Risk of Losing Money on Bad Inventory
When retailers sell off product in a “sale,” they are typically still making a good margin on the product because they bought it wholesale. What if you buy inventory that doesn’t sell? Maybe it’s a bad product or had a recall issued. What if the competition is too high? You might not be able to offload the stock at a profit after all your expenses. In retail arbitrage, your margins are already tight, so getting stuck with inventory you can’t sell can be a big risk.
Large retailers can afford to dump stock if it’s not selling, as the loss is covered by any number of more profitable products they sell. In retail arbitrage, there are only so many products you can manage at once, meaning if you have to dump stock because it’s not moving, it can cost you a lot more.
Competitors Are Selling the Same Products
Arbitrage sellers depend heavily on getting the Buy Box, which is the box with the big “Add to Cart” button on the right side of a listing. As a retail arbitrage seller, you have to be aware of how many competitors there are in the market. If a ton of other sellers are competing for the Buy Box, then winning it from them is going to be considerably tougher than if there is one other competitor or no competition. You are also looking for product that is getting a lot of traffic and sales but with low competition, which means you need to be on the pulse and prepared to jump in when an opportunity arises.
It’s a Lot of Work
Retail arbitrage is a “hands-on” business. Not to say that private label selling isn’t, but the consistency and control over your own products in private labelling means you can systemize, automate, and outsource a lot of work. With arbitrage, it’s much harder to systemize things when you have no consistency with the product you are selling, where it’s sourced, and what your margins are going to be.
Disadvantages Exist on the Amazon Side
There are also disadvantages for Amazon associated with retail arbitrage. There is a higher level of uncertainty about what’s being sold on Amazon. It is difficult to control the quality and condition of retail arbitrage products. Counterfeit items are also a huge risk for Amazon, and retail arbitrage has a higher likelihood of inauthentic or counterfeit claims, which means more unhappy customers. Amazon has a customer-centric focus, so if a seller could potentially diminish the customer shopping experience one way or another, it’s bad for business.
Retail Arbitrage Sellers Have a Poor Reputation
Some retail arbitrage sellers are unscrupulous. In the endless pursuit to make a quick buck, some sellers put small private labels (mom-and-pop operators) at risk of going out of business. This earns retail arbitrage sellers a poor reputation among private label sellers who are trying to build genuine sustainable businesses.
It Puts Private Labels out of Business
Being successful in either retail arbitrage or private label selling depends on the Buy Box, which basically means if you are reselling a private label product, you are going to hijack another business owner’s listing. This will greatly impact their ability to sell their own products.
Price Wars Are Inevitable
Private label sellers have also wised up to some of the practices used by arbitrage sellers to automate the arbitrage process, resulting in price wars and private label sellers wiping out the entire inventory of a retail arbitrage seller who is trying to hijack their listing using aggressive sales tactics.
It Is Less Possible to Make Money in the Future
When you consider the facts that major brands can be automatically gated on Amazon, and that private label sellers are getting better and more effective protections for their brands, the gap where it’s possible to make money via retail arbitrage is getting smaller and smaller all the time.
It Is Not a Sellable Business
Ultimately, you are not building a real sellable business; you are creating a job for yourself. You are simply trading goods in a manner that’s considered a gray area.
The value of a business is built on goodwill and assets. With retail arbitrage, all that hard work goes toward building up someone else’s brand and asset, not your own. Spending the same amount of time to build a real asset and brand can give you a sellable asset that you can make 20 to 36 times profit on. You can’t do that with a retail arbitrage business.
Let’s take a look at why private label selling might be a better option, and why many sellers prefer to leverage private label products instead.
Why Are Private Label Products a Better Long-Term Option?
Private label selling is where you, as a seller, partner with a manufacturer to create a product that you label with your own brand. Big retailers like Target have been doing this for years. They sell name-brand products, but also sell products with their own in-house branding (private label). They do this because they make a much larger profit on their private label products than they do from selling the name brands.
It works the same way on Amazon. The difference is that the private label products are typically sold by independent sellers like you. So instead of making only a 5 percent margin when selling a name-brand product (through retail arbitrage), with private label selling, you are making closer to a 20 percent margin (or a lot more, depending on the product).
To better illustrate the difference between arbitrage and private label selling:
- Imagine buying a “Joe’s Super Bottle Opener” on clearance, which you then resell on Amazon at a higher price point; this is arbitrage.
- Private labelling is having a factory in China create a bottle opener, which you get branded as “Shmoe’s Super Duper Bottle Opener” and sell on Amazon.
So why is private labelling a better long-term option than retail arbitrage?
Advantages of Having Your Own Private Label Brand
It Is Your Brand and Your Asset
With private labelling, you have complete control. It is your product, your brand, and you make all the decisions. You decide on how the product looks, what kind of packaging you use, and the name. You can even create your own branded website, where you can produce content to further market your product. You have 100 percent creative control.
Higher Profit Margins Are Possible
With a private label product, you decide where to source your product from. This lets you control the base cost of your product. If you buy your product from a manufacturer for $2, and then sell it for $20 on Amazon, that is a HUGE margin! The best thing is, you control the price point and decide how much money you will make.
It also means you have a larger margin for error. So if you can’t move the product at the first price point, you can play with the price and work out what customers are willing to pay. Even if you were to clear the product for $10, that’s a 400 percent markup! You can’t get that margin doing retail arbitrage.
There Are Brand Registry Protections
With the updates to the Amazon Brand Registry, sellers have greater control over their product listings. This is great news for private label sellers who have spent a lot of time and money developing their products and brands in order to get into Amazon’s Brand Registry program. The ability for private label sellers to “gate” re-sellers and counterfeits from their listings means that selling products that you are not authorized to sell just got a lot harder. As a result, this will increase profits for brand-registered private label products.
You Manage Your Own Inventory
See a product is selling well? Order more inventory. See a product performing poorly? Clear it out and reduce your next allocation. Having a quiet month? Run a promotion to stimulate sales.
When you own the products, you control the inventory. You don’t have that level of control when you sell other people’s products.
You Can Grow the Business
If you see an opportunity to expand your business, you can do that with private labelling. If you see one of your products is performing well in a particular niche, you could find complementary products to supply as an upsell, or bundle several products to increase perceived value.
If you decide to expand your range, you already have a relationship with a supplier, which makes the process easier than it was the first time. You can even take customer feedback and improve your existing products, which is impossible for a retail arbitrage seller.
Your Process Can Be Automated
When you control your own brand, products, and supply chain, it is much easier to develop systems to automate all the “busy work.” When you have consistent cash flow, you can grow your business by hiring staff to take care of the things you don’t want to do. It’s known that some private label sellers run their business working only an hour a day. This kind of automation can give you the freedom to live the lifestyle you choose, whether that be in a big city in the U.S., or on a quiet beach in Thailand.
You Build a Sellable Business
When you build a private label brand, you are building a long-term asset. All the work you put into developing your products, promoting your brand, and building goodwill and trust with your customers results in a sellable asset. All the data and analytics you collect from your seller central back end proves viability. You are building an asset that you can later sell for 20 to 36 times its monthly revenue.
Disadvantages of Private Labelling
There Is a High Barrier to Entry
When sourcing products from a manufacturer, they will usually expect a minimum buy quantity of the product before they even talk to you, which can be anywhere from 200 to 3,000 units of product. This means you will need to put cash upfront for your first batch of product.
Product Research and Development Is Needed
We mentioned earlier that retail arbitrage has minimal risk when starting out. The difference here is that until you have done your product research, found a supplier, and then invested (sometimes a considerable amount of) capital upfront, you have no guarantee that the product is going to successfully sell. There’s a greater risk of losing money, whereas with retail arbitrage you are already selling products that typically have a proven track record, which minimizes your risk.
The Final Answer: Private Labels Are Worth the Effort
Owning and running your own private label business is a level up from retail arbitrage. Yes, it takes more time and money in the initial stages, but in the long run the advantages far outweigh the hassles. The biggest benefit of private label businesses is that after all your hard work, you have a sellable business. Many private label sellers have managed to pay off their mortgages and partially retire from the proceeds of selling their private label businesses, or used their money to invest in new business ventures or investments. You can’t do any of this with a business you can’t sell. Instead, you have only created a job for yourself.
Creating a Real Asset You Can Sell Using Private Label Products
Retail arbitrage is a great way to get your feet wet selling products on Amazon. With its low barrier to entry, simple ways of sourcing product, and easy opportunity to make money fast, it makes sense to go down this path if you are just testing it out.
But if you want to build a sustainable business long term, especially one that you can sell, you will want to go down the private label path. While the cost can be prohibitively high for some when starting out, the opportunity to sell a real asset for 20 to 36 times its monthly revenue can result in life-changing money for many people.
If you have been doing arbitrage successfully for a while, or just want to dive right in and sell your own products, then a private label will allow you to develop a trusted brand and build a profitable business asset. With the recent updates to the Amazon Brand Registry, it’s a great time to be a private label seller.