Amazon arbitrage: Finding products and reselling – this is how the business model works
Selling goods and private label on Amazon or operating dropshipping – most people can probably imagine these. However, a fourth business model that far fewer sellers actively pursue is less known: Amazon arbitrage, also known as online arbitrage or retail arbitrage.
In this context, arbitrage could be a calculable yet rewarding approach for Amazon beginners to gain valuable experience with selling on Amazon without immediately exposing themselves to significant financial or legal risks. Therefore, we would like to clarify in this article what is understood by arbitrage in e-commerce, how the model works, and whether it can be operated legally at all.
What is Amazon arbitrage?
Originally, the term “arbitrage” comes from finance and refers to the exploitation of price differences of the same asset in different markets to achieve as risk-free profits as possible. For example, a trader can buy an asset on one market at a lower price and simultaneously sell it on another market at a higher price. The word itself is derived from the French “arbitre,” which means “referee.”
Similarly, retail arbitrage or online arbitrage in retail and e-commerce refers to the practice of exploiting the price difference between two or more markets to generate profit. In this process, sellers purchase a product at a lower price to then resell it at a higher price on another platform.
Example: A tent from a popular manufacturer is offered at a discounted price of 499 Euros on eBay. However, the same model is traded for 575 Euros on Amazon. Buying it on eBay and selling it on Amazon thus generates a profit of 76 Euros due to the price difference between the two markets.
Advantages and disadvantages of arbitrage
Like any business model, retail or online arbitrage on Amazon has some advantages, but also a few downsides.
Pro
Contra
In particular, gray market suppliers and unofficial distribution channels put arbitrage sellers on Amazon in a dilemma. On one hand, branded products can be obtained cheaply there. On the other hand, there is the risk that the product or even the entire sales account may be banned by Amazon.
Unlike often claimed, such traded products are not illegal. The gray market differs from the black market in that the sold goods are legal, but they enter the market through unauthorized channels.
Typical characteristics of gray market suppliers (and at the same time some of the reasons why Amazon does not like these products on its platform) are:
Therefore, retailers should always carefully consider whether they want to buy on the gray market and, if necessary, check the Amazon Brand Registry.
Differences to other business models on Amazon
What distinguishes retail arbitrage from other Amazon business models? Essentially, there are three other business concepts: merchandise, private label, and dropshipping.
Merchandise (Wholesale)
Merchandise, or in English, Wholesale, are authorized brand products that are purchased in large quantities directly from the manufacturer or a wholesaler. The items are then resold to the end customer with a markup. Since large quantities are purchased, this means both a large initial investment and a certain financial risk if the goods do not sell as expected. Pricing is usually calculated based on a constant price advantage from large purchases and is supported by repricing strategies.
The risk in wholesale is still moderate, as retailers typically buy products with stable demand and good availability. Warranty and return rights are usually clearly defined, as they work with official suppliers.
Private Label
Private label, which means store brand, are products that are manufactured for the respective retailer so that they can sell them under their own brand name. It is possible to either purchase a pre-made product, possibly customize it, and label it with the retailer’s own logo, or to design and have an entirely new product produced. Thus, the retailer has complete control over the product, design, brand, packaging, marketing, and distribution.
In pricing, private label sellers have more freedom, as they source the product directly from the source and can charge higher prices once the brand is established. This requires a corresponding long-term strategy, which is hardly possible in arbitrage. However, the risk is significantly higher, as the investments, organizational effort, and legal hurdles are substantial.
Dropshipping
Dropshippers are intermediaries who purchase or even manufacture a product only when an order is received. Typically, the supplier or manufacturer then ships the goods directly to the end customer. Retailers make a profit in dropshipping through the difference between the purchase price and the selling price.
Dropshippers therefore have no own inventory and rely on the product quality and shipping speed of their supplier. At the same time, they also have no product costs and do not need to purchase goods in advance.
The differences between the individual business models are sometimes huge. It is important to emphasize, however, that hardly any professional Amazon seller pursues only a single strategy. Typically, marketplace sellers deal with both merchandise and private label products. Amazon dropshipping and arbitrage, on the other hand, are not as widespread, but can be an opportunity for beginners to gain experience.
Amazon Arbitrage for Beginners: Here’s How It Works
All beginnings are difficult. But for those who want to get into the Amazon game, the arbitrage model can be a relatively easy way. Below, we provide an overview of the most important steps.
In this blog post, we can only provide a brief overview of the necessary steps. Read our detailed article on selling on Amazon to get more information.
Amazon (Retail) Arbitrage: Product Sourcing – but how and where?
Product search and selection is the core competency of every arbitrage seller. But no master has fallen from the sky. Prepare yourself for the fact that you will make a lot of mistakes at the beginning of your self-employment – from which you will learn. This also applies to product selection. To make it a bit easier for you to get started, we have compiled some tips on where you can look for good products.
Online marketplaces and shops
First, the obvious. Online, you will find numerous platforms to conveniently discover new product ideas. Contrary to popular belief, Amazon is by no means always the cheapest marketplace, which creates good conditions especially for the arbitrage model. These platforms can often compete with the e-commerce giant in terms of price:
Retail
You can also find worthwhile bargains in brick-and-mortar stores from time to time, but of course, the selection is smaller here. Therefore, retailers should particularly focus on the following stores:
Specialty stores
Tip: Price comparison sites like Idealo or Google Shopping help you find the cheapest prices and identify price differences.
Amazon Arbitrage: Software and Tools
Every Amazon seller, whether arbitrage or not, must deal with the topic of tools. In the initial phase, this business may still manage without external software, but as it becomes more professional, there are simply too many tasks to operate profitably without helpful tools. We present the most important tools in the area of Amazon (Retail) Arbitrage Software.
Tactical Arbitrage
This is a sourcing software specialized in arbitrage that scans shops and websites and automatically compares product prices with those on Amazon. If a shop is not yet included, it can be added. In addition, Tactical Arbitrage covers so-called replenishables (deals that do not arise from special offers and are therefore regularly available). Such replenishables can be reordered by sellers, allowing them to create a kind of basic income.
However, Tactical Arbitrage is not exactly self-explanatory. Therefore, newcomers should first learn the basics of sourcing in order to be able to act meaningfully with this software.
Business Analytics
SELLERLOGIC Business Analytics is a professional profit dashboard tailored to the needs of Amazon sellers. Sellers use it to monitor their business figures in real-time and gain a comprehensive overview of their business performance – at a global level as well as at the account, marketplace, and product level.
Business Analytics follows a data-driven approach for a deep, realistic picture of all business results, allowing for informed analyses to be conducted. Sellers reliably identify their bestsellers with this service, as well as the profit killers that diminish the profitability of their business. This precise overview of all revenues and expenses, including all Amazon fees, serves as the basis for all important strategic adjustments.
Refund Management of FBA Errors
Most Amazon sellers eventually use FBA. And Amazon FBA arbitrage is not uncommon either. Because fulfillment by Amazon can be a real help in logistics and fulfillment. But no program is perfect. And so Amazon also makes mistakes repeatedly (e.g., items damaged in the warehouse), for which the seller is entitled to compensation – after all, their property, the goods, has been damaged.
The catch: This does not happen automatically. The seller is responsible for identifying such FBA errors and submitting a refund request. A tedious task that consumes too much time to be economically feasible. Fortunately, there are corresponding services that completely automate this work.
With SELLERLOGIC Lost & Found, sellers do not have to conduct their own analysis of FBA errors. Lost & Found independently handles every step on the way to a successful FBA refund. The AI-powered system ensures smooth processes and maximum refunds. It monitors all FBA transactions 24/7 and automatically detects errors – and this up to 18 months retroactively. It promptly enforces any resulting claims, allowing the seller to receive the maximum refund amount from FBA errors.
Conclusion
Amazon (Retail) Arbitrage offers especially beginners in selling on Amazon an attractive opportunity to gain initial experience without having to make high initial investments right away. The business model exploits price differences between various sales platforms to generate profits, which can be quite rewarding when applied correctly.
The advantages such as low entry barriers, flexible working hours, and low storage costs are, however, countered by challenges. Time-consuming product research, difficult scalability, and potential legal risks, especially when using gray market suppliers, must be considered.
For newcomers, Amazon arbitrage still offers an interesting opportunity to experiment in e-commerce before considering more complex business models like private label or trading goods/wholesale.
FAQ
Yes, Amazon arbitrage is not prohibited and is completely legal. However, if goods are sourced through so-called gray market suppliers, there may be issues with Amazon or the brand owner.
There are hardly any upper limits. There are many Amazon FBA sellers who report millions in sales. However, this requires a lot of work, know-how, and resources. Nevertheless, quick successes with an Amazon FBA business are still possible today. For example, AMZ Smartsell started with a starting capital of 900 euros and was able to generate revenues in the six-figure range within a few months.
Online arbitrage refers to the practice of exploiting the price difference between two markets. Sellers purchase a product at a lower price to then sell it at a higher price on another platform. The “Amazon to eBay” arbitrage and “eBay to Amazon” arbitrage are well-known examples, where goods are bought cheaply on one platform to sell them at a higher price on the other marketplace.
It does not require much equity to start with Amazon FBA. Even with less than a thousand euros, dedicated beginners can generate sales of 100,000 euros within a few months. However, this requires the right tools: Rapid growth with SELLERLOGIC Repricer by your side.
Image credits in the order of the images: © VicPhoto – stock.adobe.com / © SFIO CRACHO – stock.adobe.com / © Generative AI – stock.adobe.com / © SELLERLOGIC
