Many online sellers succeed on marketplaces like Amazon by leveraging popular eCommerce business models and sourcing strategies. Two such models are retail/online arbitrage and wholesale. In this post, we’ll break down each model so you can choose the right one for your eCommerce business.
Many online sellers use more than one sourcing model, sometimes starting with one strategy and evolving toward another. While sellers may begin with retail arbitrage, they may find products that work for them and start purchasing them wholesale.
Likewise, a wholesale buyer may experiment with private label products or use retail arbitrage to test new products and categories. So while using either wholesale or retail arbitrage may work for some sellers, they don’t have to be mutually exclusive. It’s possible to use more than one method throughout your eCommerce selling journey.
What is Retail/Online Arbitrage?
Arbitrage involves buying discounted products to resell on online platforms. Resellers typically buy branded products from big box stores like Walmart, liquidation shops, or even clearance aisles to resell on Amazon and other eCommerce sites for a profit. The primary difference between “retail” arbitrage and “online” arbitrage is that the former involves buying from physical stores while the latter involves online sourcing.
What is Wholesale?
Unlike retail/online arbitrage methods that require individual purchases, wholesale sellers buy items in bulk from a supplier, manufacturer, or distributor. Bulk inventory usually has a lower per-unit cost, allowing wholesale sellers to maximize profit margins.
How is Wholesale Different from Online Arbitrage?
A critical difference between wholesale and retail/online arbitrage is that, with wholesale, you buy in bulk and directly negotiate rates with manufacturers or suppliers. Arbitrage sellers buy discounted products from retailers to resell on their online stores. Arbitrage sellers can’t usually source the same quantities as wholesale sellers—their supply of a particular product depends on what the stores have in stock.
Retail/Online Arbitrage vs. Wholesale: Which one is more profitable?
Although there are thousands of arbitrage retailers online, adopting the wholesale model is more likely to bring you bigger profit margins. However, it depends on your products, the size of your business, your marketing strategies, and more. Both models are market-proven to generate profits for third-party sellers on platforms such as Amazon.
What are the Pros and Cons of the Wholesale Business Model?
Like every prominent selling model, wholesale selling on different platforms has unique pros and cons.
Pros of wholesale
Fast results
Wholesale selling is one of the quickest and easiest eCommerce business models to implement. Simply find an in-demand product, source it in bulk (at bulk prices), and if you can sell it quickly, you can maximize your profit margins.
High product demand
Assuming you do enough product research and choose a brand or item with plenty of willing buyers, you can be confident about selling your inventory quickly.
Savings on marketing and promotion
If you sell a well-known product like Charmin toilet paper, Crest toothpaste, or Tide (to name a few), you’ll benefit from the millions of organic searches platforms like Amazon generate for these household names.
Profitability
According to Jungle Scout, nearly 57% of wholesalers reported making profits within three months of starting their Amazon seller account. Since you’re buying inventory at wholesale prices instead of retail prices, expect higher profit margins when flipping stock for the same price on Amazon or another marketplace.
Scalability
With the right wholesale product, sellers can focus on big-picture growth rather than testing and finding products to sell. Plus, you can buy more items at once, turn inventory quickly, and ultimately achieve sustainable growth.
Less time-consuming
Retail arbitrage can suck up your time as you drive to different stores, seeking items you can flip for a profit. With the wholesale sourcing model, you can buy best-selling items in bulk, saving you time.
Cons of wholesale
As with the arbitrage business model, there are a few drawbacks to consider.
Higher upfront cost
You’ll need a large, up-front investment to buy items in bulk. Though you’ll get a lower per-unit cost for inventory, most suppliers require a large minimum order to get that price.
Higher risk
The higher upfront cost of the minimum purchase quantity can leave you hanging if the product doesn’t sell. Buying so much at once means that you could lose that money and get stuck with the inventory.
Research
Product research can be time-consuming, but it’s crucial to your eCommerce journey. Use a product research tool to help identify the most promising categories, brands, and items. Some suppliers might be out of stock themselves, so prepare a few backup options just in case.
Competition
You’ll likely have to contend with other sellers using the same products, given that there are more than 2 million third-party sellers on Amazon. Be sure to follow these tips to win—and keep—the Buy Box.
Challenges buying from manufacturers
Most manufacturers won’t sell to you just because you sell on Amazon. They want to deal with businesses that have established a track record of online sales, ones that can elevate their brand. It’s best to start with local or smaller brands, building up good relationships and a solid track record before buying from well-known brands.
Cash flow constraints
Amazon pays sellers every 14+ days, but sometimes you need to buy inventory more often. Luckily, Payability can get you paid the next day, every day for your Amazon, Walmart, or other marketplace sales with Instant Access.
Not a sellable business
DTC and private label brands can scale to the point of being sellable if they get big enough or offer something unique. Conversely, if you’re buying known brands wholesale and reselling them, you don’t have a sellable business.
What are the Pros and Cons of the Retail Arbitrage Model?
Retail arbitrage, like any other business model, has pros and cons.
Pros of arbitrage
Low barrier to entry
While sourcing models like wholesale ask sellers to buy large inventory stocks upfront and have relationships with brands, manufacturers, and factories, retail arbitrage doesn’t require any of that. Sellers can purchase inventory from local stores or online at their leisure. Many marketplace sellers start this way because it’s easy to get going.
Low upfront cost
You don’t need to buy products in bulk or pioneer a brand-new product to get started.
Low risk
Since you don’t have to buy bulk inventory, you can purchase the merchandise you want based on retail or online availability. If the product doesn’t sell, you won’t lose a lot of money or get stranded with long-term storage.
Easy to test new products & categories
Since the upfront cost barrier is so low, it’s relatively easy to sell different products and see what works without spending too much or storing a lot of inventory.
Easy to restock
If you’re running low on your best-selling products and it’s available online or in your area, you can quickly restock without worrying about production times, order processing, or shipping. Overall, retail arbitrage gives online sellers a lot of flexibility.
High product demand
If you’re selling high-demand name brand products like Tide detergent or Pantene Pro-V shampoo, you can reach consumers organically searching for them on popular platforms such as Amazon.
Cons of arbitrage
Like every other business model, there are a few drawbacks of buying retail arbitrage to consider.
Time constraints
As you scale your business, it can be time-consuming to search different stores and online retailers for your best-selling products. If you’re not buying in bulk and need to buy bit by bit, sourcing can take a lot more time, especially when compared to other models such as wholesale.
Low margins
While it’s easy to pick up your inventory at a retail store, you’ll also pay retail prices for your inventory. That typically results in lower margins than if you purchased the same inventory at wholesale prices.
Limited inventory availability
Buying inventory via retail stores means you can get more quickly and easily. However, if the items you want are temporarily unavailable, you won’t be able to source or sell them until they’re back in stock. Even if the store has inventory, some set item purchase limits per customer.
Scalability
Since your item supplies are limited to what’s available via retail, it can be difficult to stock up on top products. While you can still build a large, scalable business, you can’t rely on a single product to get there.
Increased competition
Retail arbitrage remains a popular and important eCommerce business model. However, as more businesses start selling on marketplaces like Amazon, it can be difficult to stand out or find products with sufficient profit margins when you’re paying retail prices.
Cash flow issues
When you’re practicing retail arbitrage, you might need new inventory multiple times per week or as soon as it’s available. Yet Amazon makes you wait 14+ days for a payout.
Luckily, there’s a simple way to get paid daily for your Amazon and other marketplace sales with Payability Instant Access. There are no credit checks—approval is based on account health and sales performance. You only need 90 days of sales history and $2,000/month in sales to get started. For more information, and to apply for the service, click here.
Not a sellable business
Like wholesale sellers, retail arbitrage sellers on platforms like Amazon can build large businesses and make a great living, but don’t have sellable businesses like some private label and DTC brands do.
Tips for Making Money as a Wholesale Seller on Amazon
To make the most of your wholesale business on the world’s largest eCommerce platform, here are a few best practices.
Find a Good Product to Sell Wholesale
Remember to choose products that aren’t sold by a private label seller or Amazon. Instead, focus on items from established brands or in niche categories, because these tend to have high potential. Product research tools can help you gauge an item’s popularity on Amazon so you can invest in it with confidence.
Once you narrow down your options, contact the brand owners to discuss wholesale options, open an account, and get started. That way, you won’t have to deal with overseas manufacturers, customs clearance and fees, or long shipping times. Most brands have contact information on their websites, and some have specific wholesale request forms.
Estimate Your Profits
The purpose of becoming a seller is to earn money. Take these steps to ensure that you profit from your investment:
- Price your product within 2% of the Buy Box
- Use Amazon’s FBA calculator to evaluate the fees associated with your product.
- Subtract the cost of your product and Amazon’s fees from the sale price. A positive figure indicates a profit on every sale.
Properly Manage Inventory
Inventory management is key to making money as an eCommerce seller. You want to avoid selling inventory faster than you can restock it, or else deal with the dreaded Amazon stockout. You also don’t want to purchase too much inventory and pay storage fees, or tie up your cash in items that aren’t selling fast enough.
Understand Your Turn Rate
Part of inventory management strategy involves understanding your turn rate, which is how quickly you sell out your inventory. Using third-party inventory management tools or the inventory reports in Seller Central can help you see your turn rate, helping you know how much product to reorder, and when.
Tips for Making Money as a Retail Arbitrage Seller on Amazon
Interested in trying retail or online arbitrage? Follow these tips to find success and turn a profit.
Use a scanner app
When shopping for discounted products, don’t buy something just because it’s on sale. It needs to be high-demand and generate good profit margins. To choose the right products, use a scanning tool like Amazon Seller App to gauge an item’s profitability and associated fees.
Be patient
The arbitrage model involves more time spent on inventory sourcing, so you’ll have to be patient. Taking longer to find profitable products at discount prices doesn’t mean you should give up. Make it easy on yourself by going to nearby stores first. A successful retail arbitrage seller recommends using one (or all) of the following retailers: Walmart, Target, Kmart, Shopko, Meijer, Home Depot, Lowes, Menards, Big Lots, Walgreens, CVS, Rite Aid, Toys R Us, Bed Bath & Beyond, Office Depot, and Staples.
Be picky with your products
Scott from Online Selling Experiment recommends investing in products that meet the following guidelines:
- You are eligible to sell the item
- Its sales rank is under 250,000
- Profit is greater than $3 per unit
- Return on investment is over 50%
Check product data
If you’re still unsure about investing in an item, look on Amazon (or marketplace of choice) to see how that product performs. What’s its going price? What do customer reviews say?
Anticipate sales
Understanding when sales happen—and how stores manage clearance items—will give you an advantage. You’ll be able to schedule your time to shop when items will be most discounted. Some stores start sales at a small discount, like 10-15%, but later on, sale prices fall to 75% off. When you can discern this pattern, you can source products at the lowest possible price.
Consider a repricer
Your profits depend on your sourcing price versus your selling price. If you’re not sure how to set the latter, use a repricer tool to give you a starting point. The last thing you want to do is set your price too high to be sellable, or set prices too low to reap maximum profits.
Final Thoughts
The wholesale business model on Amazon has tons of potential. Aside from the large up-front investment, you can get going quickly and—if you’re smart about product choice—start making money quickly, too. Just remember to keep tabs on your inventory management and cash flow. There are also real benefits to the retail arbitrage business model, and it offers a lot of flexibility to sellers who use it. It really depends on your goals as a seller and what works best for your business model.
No matter how you source your inventory to sell online, Payability is here to help with Amazon daily advance cash flow and financing without any credit checks, ever. Payability works with thousands of online sellers, many of whom use either the retail arbitrage and wholesale models—or both. See how Payability customers Jump City Toys grew their family business on Amazon using retail arbitrage and how Wild & Gold Distributors scaled their business on Amazon using the wholesale model.
