Table of Contents
When starting your e-commerce journey on Amazon, it can be confusing to know where to begin. With so many different methods of selling on Amazon such as retail arbitrage, wholesale and private label it can be a minefield to decide which option is best for you.
In this guide, we’re going to explore exactly what all these different methods of selling on Amazon are, the benefits, the drawbacks, initial investment required and potential earnings.
Selling on Amazon via Retail Arbitrage
What is Retail/ Online Arbitrage?
When you sell online using the arbitrage method, there are two ways you can gather your stock to sell; Retail arbitrage, or Online Arbitrage.
Retail arbitrage is buying products at physical shops, that are discounted or on sale, and then selling them online at a higher price, often on Amazon, to make a profit. For example, you might go to TKMAXX, and buy some discounted makeup for £10 and then sell it on Amazon for £20.
Online arbitrage is the same concept except instead of shopping in physical stores, you will buy items at other online shops at a discounted price, and then sell them on another online platform, most commonly Amazon, for a higher price to get profit.
How Does Retail Arbitrage work on Amazon?
People tend to use Retail or Online arbitrage in conjunction with Amazon, and there are two main ways sellers can work with Amazon to store and ship their products. There is Fulfilment by Amazon (Amazon FBA) which is when you send your products to Amazon for them to store in their own warehouse, and then ship it to your customers.
Fulfilment by Merchant (FBM) is the second option, which is when you store your own products, and take care of all the shipping from your own location to your customers.
In general, people that opt for retail arbitrage tend to store their products in an Amazon Warehouse (FBA) and people that opt for online arbitrage opt for storing the products themselves (FBM). People that do online arbitrage will order products online to their own location, store it, then ship it off to their customers.
Success in arbitrage is down to research; you must find products that are in high demand, that rank well on Amazon, and that people want to buy, to be successful. You can’t just buy any old products and expect to make a good profit, you need to research what will sell well.
Retail Arbitrage Pros
Little Input into Selling
With retail arbitrage, you are often selling established brands and products. This means you don’t have to take photos, write headlines and descriptions, or pay for ads for the product listing to rank high on Amazon early on.
Often this has already been done for you, and if you have done your research well, you would have picked an item that is already ranking well on Amazon. You also don’t have to create your own website like you might have to do with other methods of selling on Amazon.
Products are easier to sell because you don’t need to convince people to buy your products or create elaborate marketing campaigns. The products and brands you are selling are already well known and in demand.
Various apps and tools will tell you upfront how much you can sell the item for, and how well it has been selling across Amazon, so you know that people are definitely buying your product before you begin selling it.
Low Start-up Costs
Out of all the methods of selling online, this is the cheapest one to start with because you don’t have to buy lots of the same stock.
You can buy as many items as you want, spend as much as you want, and then sell it on for profit. You can even start arbitrage from zero if you opt for the ‘flipping method’. The flipping method is when you sell some items you already own (so no initial start-up costs) and then whatever profit you make off those items, you then re-invest into buying more stock and so on.
For the UK Amazon marketplace, Amazon’s fees are also low – if you are selling using an individual plan it is 75p per item sold, or you can opt for a professional plan which is £25 a month no matter how many items you sell. This is a benefit with arbitrage, because if you are just selling a few items, you won’t have to pay that subscription cost, only 75p per item.
Retail Arbitrage Negatives
There are a couple limitations you will find in terms of stock. Often with arbitrage you don’t purchase a lot of stock in one go, you might just buy 10 of the same item in one purchase. This means, if an item is selling well, you might run out of your popular stock quickly.
It can also be hard to restock the item, if the online or physical retail shops have run out of that product as well. You might end up in a position where you can’t stock a product that’s in high demand.
You are also limited by the stock availability of the shop you usually purchase from. Some retailers also only allow you to buy a set number of products, which means the amount of stock you can buy is capped.
There are ways around this issue. You can get a couple of people to buy the products to make sure you have enough to sell. However, you are then introducing a new cost factor from paying these people to buy your products, and you may lose out on profit.
Research is key for success in arbitrage, so you might spend a lot of time researching different products to find the right products to sell.
If you are buying products in physical shops, you will be looking around multiple shops, and at all the products they have there, which is time and energy consuming, especially if you are driving between shops.
Items can be ‘Brand-gated’ on Amazon, which means you will have to receive approval from the manufacture of the product to then sell it on. Unfortunately, getting permission to sell items isn’t always possible.
Amazon also has very strict rules on what you can and can’t sell. If you are found to be selling something that you haven’t got approval or permission for, then Amazon can ban you from selling that product and even ban your account. In both scenarios, you may lose out on a lot of profit, as you are stuck with products that you are now not allowed to sell.
Brand Registry Protection is also an issue for Arbitrage when selling with Amazon. This means that Private Brands and Labels are protected from people who are trying to re-sell their items or trying to sell counterfeit copies of their items.
Private Label Sellers can report other sellers who are using their products for arbitrage, which can lead to those accounts getting flagged or banned from selling on Amazon.
Arbitrage is a difficult model to scale up because you are limited in terms of what stock you can buy and how much of it.
Unlike other sellers who have popular products that they can buy and sell hundreds or thousands of every month to make profit, your profit is very much dependable on what you have to hand. It is difficult to scale up an ecommerce business when your stock is somewhat out of your control.
Even though the potential to make profit immediately is possible, there is not always a massive return on investment when selling arbitrage.
Often the margins between the discounted price and the retail price for which it is sold are not huge, and without lots of stock to shift all the time, it can be difficult to get a high return on investment. This can also affect your ability to scale up, as without a high return on investment to re-invest into other products, you might find yourself at a profit plateau.
No Brand/Product Ownership
The products you are selling are already owned by a brand or business, which means you have no ownership rights over the products.
This can impose limitations on you that are out of your control such as retailers discontinuing certain product lines.
How Much Does Arbitrage Cost to start?
The initial start-up costs or investment can be anywhere from £0 ( if you choose flipping) to £500. It depends on how much stock you want to buy and list on Amazon, how much is available and how much is accessible for you to get. But it is more than possible to begin arbitrage with no investment if you sell something you already own, so start-up costs can be as cheap or expensive as you wish.
Out of all the selling methods, arbitrage is the cheapest one to start with, which is why it is usually recommended for beginners.
Is Retail Arbitrage Profitable?
Earning potential really depends on how much stock you buy and how much of it you can sell. Obviously, the more stock you sell, the more you will earn.
That said, margins can often be slim unless you have been able to find highly discounted items.
Is Retail/Online Arbitrage Right for You?
Arbitrage It’s a good option for beginners to learn how to sell on Amazon and get a grip of how the whole process works as it is a low initial cost and with well-researched items you can make a profit quickly. With good research and quality products that are in high demand, this can be a very good model for earning extra cash on the side.
However, arbitrage does have its risks as you can get banned easily from Amazon and then get lumbered with stock that you’re not able to sell. If you want a more stable and scalable business, a different method of selling on Amazon would be better due to the ownership and stock limitations that arbitrage poses.
In general, it is a good way to start selling and learn the ropes, but more of a short-term method of selling rather than a long -term scalable business.
That said, margins can often be slim unless you have been able to find highly discounted items.
Selling on Amazon via Wholesaling
What is Wholesaling?
With wholesale selling or wholesaling, you buy large quantities of the same product from one retailer, and then re-sell it on to your customers. A supermarket like Sainsbury’s is an example of a wholesaler. They take a brand, such as Heinz, bulk buy tins of baked beans, and then re-sell them on.
You buy these bulk items at a wholesale price which is often highly discounted, sometimes even up to 50%, and then you re-sell those items at their ‘retail price’ which of course is much higher than what you bought it for originally.
With some brands or manufacturers, they may even give you a larger discount when you buy more of their stock. For example, they might sell 10 of a product for £10, and 20 items for £18 as opposed to £20.
You have a couple options of where you can sell your products; most people choose Amazon but you can also use eBay, Shopify or create your own website and sell it on there.
The key to getting a wholesale account with regular suppliers, is to offer value to the brand or manufacturers.
They probably already have other wholesalers selling for them, so you need to show what makes you better than them, or how you can improve their sales strategy.
If you don’t offer anything new or better for them, they might just stick to working with their current partners.
Wholesale Selling Pros
With wholesaling, you are selling products that have a strong and established brand reputation, and that are already in high demand.
This means that often you can start selling the products on Amazon straight away, because people already know they want to buy this product from this brand.
Once you find a brand and product that’s in high demand and has good profit margins, you can sell that item again and again. This saves you the time of having to research and source different products.
As long as your products remain popular, and you keep a good relationship with your supplier, you can just repeat the process and get a continuous income.
This means you know have enough money to start to scale up your business, by branching out and selling different products from that supplier too.
Once you’ve built good reputation with one brand, you can easily reach out to other bigger brands and show them how you have positively impacted other businesses.
This will mean that other brands will want to work with you, and you can start to scale up your business even more.
Simple Re-Stocking Process
It is much easier to keep track of your stock with wholesaling. The products you are selling have been part of an established brand for some time, so the manufacturer or supplier will have sales data that you can use to help keep your inventory cost effective.
You can fill your stock to match the demand of the product and if you run out of the product, you can easily order more.
These products are often manufactured in your own country, so when you run out of stock and order more, it will arrive quickly and then you can sell it straight away.
The wait time for receiving your product are not as long as in other forms of selling, when items are sipped from overseas.
As it is easy to re-stock your products, your income can become quite predictable over time.
Once you have worked out how to match your supply to your demand, and you regularly sell their products, you can gage how much profit you will make.
Little Input into Selling
The brand you work with deals with a lot of the background work for the Amazon product listing as well, for example they will deal with any ‘Intellectual Property Infringements’. If there is some sort of issue with copyright, you will not be required to sort out that issue.
They will usually deal with marketing campaigns and pay for ads as well, which is something you don’t need spend extra time or extra money doing.
Wholesale Selling Negatives
High Start-Up Costs
The start-up costs can be high to start with as often manufacturers have a minimum quantity order on their products. This means when you first start out with wholesale you will have to buy a high volume of products initially.
Buying in bulk can also be risky for your business’s cashflow. If your product loses demand, or drops in price, you can end up with high levels of stock and low levels of demand. This inevitably leads to a profit loss.
Partnering with Suppliers
Finding suppliers in the beginning can be difficult and take up a lot of time. You will first research which brands are worth setting up an account with. (I.E a brand sells good quality products in high demand).
You will have to find suppliers who actually want to partner with you too. The best way to do this is to show how you can offer value over their other wholesale partners, for example how you can improve their sales.
You will want to prove that you are the right person to sell their product, but even with a perfect sales pitch it can still take a while before you find a manufacturer that is willing to work with you.
Once you make that partnership, it’s important to maintain a good working relationship to make sure you can continue working together.
Suppliers also have the power to cut you off at any point, which then means you can no longer work with that brand. This can be very bad for your business as it may take you a while to find another source of inventory or be impossible if they are the sole manufacturer.
There can be a lot of competition with wholesaling as often the products you want to sell are products that other people have access to and are selling as well.
If lots of people are selling the same products, prices can also drop which will lower your profit.
Some distributors or manufacturers also have a lot of people that are already selling for them.
This means they may refuse to partner with you as a seller, because if they have too many people selling the same products, naturally everyone will lose out on profit.
Registering as a Business
With wholesaling on Amazon, it is not enough to have an individual seller account. You must have a business seller account, which usually means registering as a Limited Company.
Some distributers, to make sure you are not an individual Amazon seller, will request to send the items to either a business address or to your own warehouse to legitimise you as a business. This means you can’t just ship these products to your home or straight to the Amazon warehouse. You must get it shipped to your own storage space before it reaches the Amazon Warehouse.
Having your own warehouse or storage space can be quite expensive and may be difficult to access depending on where you live and transport links to and from that area.
How Much Does Wholesaling Cost to Start?
Often manufacturers or suppliers have a minimum quantity order which means you must buy a lot of items all at once. Your costs can be anywhere from £200 up to and into the thousands, depending on how many products you want to buy and how much they cost.
Generally, it is better to start off with a bigger investment, so you turn over a profit quicker, but obviously the amount just depends on your individual financial circumstances.
Is Wholesaling Profitable?
You can be very successful selling wholesale products on Amazon, however, you are reliant on the relationships you build and ultimately the wholesaler is in charge.
Is Wholesale Selling on Amazon Right for You?
The initial stages of wholesaling, while you are reaching out to brands and suppliers to source your stock, can be quite difficult and time consuming.
However, once you have a guaranteed supplier to work with, you can buy stock and start selling immediately.
There will be demand already for these products as they are well known brands so you can make a profit quickly.
However, with more competition your prices and profit can drop and if a supplier cuts you off, you are left without any stock to sell. Or worse, a warehouse full of stock that you’re not able to shift.
In general, if you are familiar with how to sell on Amazon and want to make a legitimate business selling then this is a good method of earning income.
However, for beginners who are just learning the ropes, the initial start-up costs may be too high and without skill of selling it may be difficult to find suppliers who are willing to work with you.
Selling on Amazon via Private Selling
What is Private Label Selling?
Becoming a Private Label seller on Amazon is when you sell products from another manufacturer with your own branding and labelling on. This typically involves finding a product from another supplier (a ‘white label’ seller) that they are happy to be modified with your branding.
You then ship it to an Amazon warehouse from where it is despatched to the customer.
For this method people often choose websites that manufacture products overseas, a popular choice is Alibaba, which is an E-commerce company based in China.
They sell cheap products that you are able to modify to make personal to your own brand. Once you place an order, they can ship directly to an Amazon warehouse in your country.
Lots of people sell their own Private Label products on Amazon and sometimes on their own website as well.
Generally, people that are successful with private label sell high demand products for anywhere between £20-£200, which offer a good return on investment and generous profit margin.
Private Label Selling Pros
With private labelling, you own your own brand, so you have a lot of control over the products you sell and your business overall.
You are not just limited to selling on Amazon, you are able to sell your products on any platform, even your own website if you wish. This is a benefit, because if Amazon bans you as a seller, you are still able to sell your products elsewhere.
Due to having full ownership of your brand, you also have the option to sell it to somebody else for a profit, if you decide you don’t want to run/ own the brand anymore.
You have complete control over how you create and curate your brand reputation and value. You’re in control of how customers perceive you, and you can harness that responsibility to offer the best service as possible, get some good reviews and create good customer relationships.
This means you can go above and beyond the service that other sellers offer, which customers really value.
Higher Profit Margins:
Generally, with private labelling you are buying very cheap products, and selling them at a much higher price. This means the profit margins can be around 35% according to one recent study.
If you have a product in high demand, you are going to generate a high profit from it and get a large return on investment.
Freedom of Stock
You are not limited in terms of how much stock you can have; if you have the money to spend, you can buy as much of one product as the manufacturer can produce.
Products are not capped by the manufacturer like it sometimes can be with arbitrage.
You are also able to add additional products to your brand whenever you like, so say for example you start off by selling sports mats, there’s nothing stopping you from then expanding your line into matching water bottles or weights.
Protection from Amazon
Amazon’s ‘Brand Registry’ can be a massive positive for Private Labellers. With this rule, Amazon protects Private labellers from having people re-sell their items for a profit, or even creating and selling counterfeit products.
Amazon gives private labellers a lot more control over their listings because it takes a lot more effort and time to create and sell your own products, than it does to re-sell someone else’s products.
Private label is stable method of selling in terms of stock; if a manufacturer decides they don’t want to make products for you anymore, it is very easy to find another manufacturer that will, so you are not at risk of having nowhere to source your products from.
Your income with this method is quite predictable.
Often prices that you buy and sell with do not fluctuate too much, especially if you have quite niche products that not many other people have tapped into. The benefit of stable selling prices is having a steady income and profit.
Private Label Selling Negatives
There can be a lot of competition with Private Label products. There are tools that analyse the profitability of products which everyone has access to.
This means if there is a rising niche product, the opportunity can be snapped up by a lot of sellers quickly.
When lots of sellers try to muscle in on a new profitable niche product, the competition increases, which can decrease your profit.
When this happens, there is also the possibility of one seller taking the whole market by selling their product at a cheap price, or even at a profit loss to get rid of their stock.
When this happens, it becomes very hard to sell your product at the original price when there’s a much cheaper offer out there.
You are also starting a new brand that people have not heard of, so you will have to work hard to earn trust and reputation from customers.
If customers can get the same product from a brand or label that they have heard of over yours, they will most likely choose the label that they already know, which is why it’s key to offer value and create a good reputation.
Amazon as a Private Label Seller
Even though selling on Amazon has lots of different benefits, one drawback is that Amazon itself is a private seller.
This means that along with all the other private labels, you also now compete with Amazon who are biased towards their own products.
If the recommended products from your search terms are Amazon’s own products, it becomes more difficult for you to be seen.
Time and Energy Consuming
There is a lot of work that goes into Private Labelling. You will research and then source your product and modify it so it is your own.
You will be required to take your own pictures, write your headline and description for the Amazon listing, and then you must make sure that your product is seen on searches.
This might involve trying to get good reviews from customers, paying for ads, or spending a lot of time and effort trying to rank high on searches.
It is your responsibility to get a good reputation for your brand and provide customers with value so they keep coming back and so you can get more customers in the future.
This means taking lots of care in your product and customer service, making sure your reviews are positive.
Ensuring high quality products can be difficult when buying products overseas, so this requires thorough research which can be very time consuming.
Often the manufacturers are companies overseas, commonly China, which means it can be difficult to communicate with them if there are any issues you need to discuss. It can take a while to ship your products to the country you are selling in as well.
You must think ahead in terms of stock; if you run out completely and then order more, you may not have a product to sell for another 6 weeks.
High Start-up Costs
The upfront costs can be high, as sometimes manufacturers put minimum limits on how much stock you can buy.
This means you must buy higher quantities of stock before you even know if it will sell.
You may have to spend money paying for ads in to drive traffic to your products in the beginning when your brand is not well known and doesn’t have a reputation yet.
This can mean a big investment early on, which increases the risk factor for your business.
There is the risk of having a manufacturer who produces low quality products, which you may be unaware of when making the initial purchase.
This can lead to lots of negative reviews on your account, which will affect sales and rankings.
This may increase your risk of being flagged and banned by Amazon.
If you have lots of negative reviews and people have reported you, then your account can be suspended and banned from selling.
Often private labellers opt for selling using FBA; storing and shipping from Amazon warehouses. If you’re account gets banned or products lose demand, you can end up with inventory stick in the warehouse that you can’t shift.
Especially if the product is low quality, you will get stuck with the stock that you can’t sell, or that you don’t want to sell.
How Much Does Private Label Selling Cost to Start?
The initial investment for this method is higher because you have to buy lots of stock for your first order.
It would cost too much for manufactures to just send out 3 or 4 of their items, so you often have to buy in bulk which can be expensive in shipping and storage costs.
Manufacturers will also have a minimum amount they want you to spend, depending on what you are selling and how much you initially must buy.
Is Private Label Profitable?
This has the highest earning potential out of all of methods but doesn’t mean you will be successful.
If importing from abroad you will need to have a much greater understanding of supply chains, customs checks and more which can eat up your profits.
Is Private Label Selling For You?
Private labelling can be very lucrative, and you can have a full-time business with this method.
You have a lot of control over what you sell and what it looks like, and how you want your brand to be perceived by customers.
There are risks in terms of larger initial investment, and there can be lots of competition on certain products may make it difficult for yours to stand out.
You must also make sure that your products are high quality to get positive reviews from customers, which will lead to higher rankings and a better brand reputation.
This model is fantastic for people who have already sold on Amazon and are well-attuned to how the process works, but it can be tricky for beginners who do not have much experience or skill with selling as it requires a lot more effort than wholesale and arbitrage.
Overview: What is the Best Selling Method to Start an Amazon business?
Taking into consideration the pros and cons of each method, in general – in our opinion – retail arbitrage is the safest and cheapest way for beginners selling on Amazon. It has low start-up costs and is fairly low risk in terms of selling stock, as you are selling products that are already in demand.
Once you have got to grips with how to sell on Amazon, and you decide you want to generate a higher income, this is when it would be better to move onto either wholesale or private labelling.
If you have a very good grip on selling and are happy to put the effort into creating your own brand, then private labelling is the way to go. If you want to continue working with well-known brands but on a larger scale, then wholesale will undoubtedly be the best option for you.
No matter which route you decide to go down, the key takeaways from this is to do lots of research and spend time finding the right products. With this, and commitment to selling, you will be able to make a profit.
Need Help with Your Amazon Accountancy?
Your Ecommerce Accountant are specialist online accountants working with ecommerce sellers on marketplaces every day.
We help Amazon and Amazon FBA sellers with complex issues such as VAT compliance, selling abroad and tax efficiency.
Contact us today for a free 30 minute consultation on your ecommerce accounting needs.