Retail Arbitrage Guide – Definition & How to Make Money Buying & Selling
Arbitrage involves buying a good or service for a certain price and then reselling it at a higher price to take advantage of market pricing discrepancies. This concept has been around since humans invented the concept of money, and is best known by the adage “buy low, sell high.”
You might be familiar with the concept of arbitrage when you picture day trading stock brokers or people who flip houses. Or, perhaps you’re familiar with geoarbitrage, which involves taking advantage of your currency by moving to a country where your dollar has more power.
While these forms of arbitrage might seem extreme, there’s also a more accessible option: retail arbitrage. If you want to make money by buying and reselling everyday merchandise, learning how to start your own retail arbitrage business is the perfect business model to try.
What is Retail Arbitrage?
Retail arbitrage involves buying products and reselling them for profit. This sounds simple on paper, but like any flipping business, your success comes down to selecting products that sell quickly and knowing your margins so you can turn a profit.
Typically, people make money with retail arbitrage by buying products that are heavily discounted through clearance sales. Buying products on sale helps widen the price discrepancy between your initial purchase and your resale price.
For example, you might buy a pair of men’s swimming trunks on sale at Walmart for $12.99 and then resell it on websites like eBay or Amazon for $19.99, netting a $7 return on investment before any selling and shipping fees.
This is a basic example of making money with retail arbitrage, but swimming trunks are just one example. Popular product categories for retail arbitrage sellers include:
- Apparel and shoes
- Baby toys and supplies
- Jewelry and accessories
- Personal care products
- Sports equipment and apparel
The key is to find products on sale that have consistently high demand. At the end of the day, it doesn’t matter whether you’re reselling running shoes or makeup — successful retail arbitrage means selling your inventory for a profit, and it’s the math that matters.
Advantages and Disadvantages of Starting a Retail Arbitrage Business
If you’re considering making money with retail arbitrage but aren’t sure if it’s the right business model to pursue, consider these pros and cons.
Advantages of Retail Arbitrage
Some benefits of retail arbitrage worth considering include:
1. Existing Market
When you sell on marketplaces like Amazon and eBay, you’re accessing millions of global buyers. This is a faster route-to-market than starting your own online storefront or retail business where you have to attract customers yourself.
2. Easier Product Selection
Business models like dropshipping often have high failure rates because finding a product that catches people’s attention is critical.
In contrast, retail arbitrage sellers generally sell a variety of everyday products, like apparel and household essentials. This means it’s the arbitrage math that matters for your profit margin, not finding the next trending product that sells well through Facebook ads like with a dropshipping store.
3. Consistent Demand
Because you mostly sell staple products with retail arbitrage, there’s consistent demand for your inventory.
4. Niche Variety
With retail arbitrage, you don’t have to brand your business or pick one niche to focus on. You can sell anything if you believe the buy price is low enough for you to turn a profit when reselling.
It generally takes time to learn how to source inventory for retail arbitrage and what products sell quickly. But once your business is operational, the main growth constraint is how fast you can source cheap inventory.
Online sales channels like Amazon have practically endless demand, and retail arbitrage businesses can generate millions in revenue.
Disadvantages of Retail Arbitrage
Retail arbitrage is largely a case of getting the math right and leveraging demand on existing online marketplaces. But this side hustle still requires work and patience to scale. Plus, there aren’t any guarantees you can make money, and there are several other downsides to consider:
1. Starting Costs
When you start a retail arbitrage business, it’s important to test several products so you learn what sells well and how to properly price your listings. But this also means spending money on inventory before making any sales.
If you want to try retail arbitrage, anticipate spending a few hundred dollars on initial inventory to test the waters.
2. Operational Expenses
Upfront inventory costs aren’t your only expenses for running a retail arbitrage business. Depending on your selling platform, you’re potentially paying seller membership fees, listing fees, and shipping costs. Additionally, resupplying your store with products is an ongoing cost.
3. Inventory Risks
Putting money into a retail arbitrage business isn’t a safe investment. This is because the money you tie up in inventory isn’t very liquid. You can’t simply turn boxes of clearance merchandise back into cash if you need your money back.
Slow-moving inventory or products that simply never sell are an inevitable downside of this business model.
4. Not Passive
If you want to earn passive income, retail arbitrage isn’t the right business model. Between sourcing inventory and managing your listings, there’s a lot of work that goes into a retail arbitrage side hustle.
You can eventually outsource these tasks if you generate enough revenue, but expect a lot of shopping hours and administrative work unless your business takes off.
How To Make Money With Retail Arbitrage
Like other online business ideas, it’s helpful to follow a game plan when starting a retail arbitrage business. There’s a steep learning curve and it takes time to grow your inventory and monthly revenue. But if you stick to a process, it’s possible to turn your retail arbitrage business into a significant side hustle or even full-time business.
1. Research Products to Sell
Before you spend money on your first batch of inventory, spend time researching products that sell well online. This provides a foundation of product knowledge you can refer to when shopping in-store for deals.
One useful resource for product research is Amazon’s best sellers list. This page highlights top-selling products based on sales volume across dozens of Amazon categories. As you scour each category, make note of details like:
- Price Points. Many retail arbitrage sellers stick in the $10 to $40 range for products. This price range lets sellers buy in bulk. Staying above $10 also means you’re making meaningful profit per sale and not selling cheap dollar store products for $0.25 in profit per sale. There are exceptions, but prioritize products with reasonable entry prices and profit potential of a few dollars per sale.
- Product Ratings. Always check Amazon ratings for products you’re considering. Negative reviews and a low rating can turn away potential customers or mean more product returns, all of which hurt revenue. Ideally, look for four to five star ratings.
- Size and Weight. Selling bulky, heavy products means expensive shipping. Shipping costs are a major, downward pressure on your profit margin, so review shipping rates for the platform you sell on. As an example, Amazon has a comprehensive shipping fees table that you can use to factor shipping costs into your profit margin before buying a product.
- Seasonality. Christmas lights might be a top seller during the holidays, but this is a poor retail arbitrage buy unless you capitalize early on seasonal demand. As a general rule of thumb, don’t invest too much money into seasonal inventory to avoid holding products for a long time.
- Expiration Dates. If you’re selling products with expiration dates like groceries or personal care products, factor this risk into your purchasing decisions. Marketplaces usually have rules for selling products with expiration dates. For example, Amazon has specific shelf life requirements for different product categories, and eBay requires delivering orders to buyers before product expiration dates.
- Durability. If your product breaks during shipping, it’s a complete loss for your business. Online marketplaces generally side with buyers in the event of damage or disputes, meaning they get a complete refund.
2. Source Products From The Right Retailers
Once you have an idea of top-selling products and product buying tips, you’re ready to source inventory.
Low everyday prices and clearance sales are your best bet to find products ripe for arbitrage. Some popular retailers for sourcing inventory include:
- Best Buy
- Bed Bath & Beyond
- Big Lots
- Home Depot
- Office Depot
- Old Navy
- Rite Aid
- T.J. Maxx
You can also try flipping products from thrift stores, provided product condition is good enough to sell as used online. Similarly, garage sales can also have gems like clothing, toys, and books that are excellent resale candidates.
Local stores and bargain hunting at garage sales are in-person shopping options. You can also try sourcing products from online retailers with low prices. Popular online stores that resellers often use include wholesalers like Alibaba and AliExpress.
Wholesalers are beneficial for retail arbitrage because you typically get a lower per-unit price the more you buy. For example, on Alibaba, a protein shaker bottle costs between $1.70 and $1.99 per unit. But to get the lowest price, you need to order over 1,000 units, which is obviously a lot of money you shouldn’t spend out of the gate when you’re learning.
Buying products online to resell is still viable. But as a beginner, focus on finding clearance items at local retailers that have a higher retail price online.
When you find a product that you think you can flip for a profit, double-check what it’s selling for online. One quick way to do this is to use the Amazon seller app for Android or iOS. This app lets you manage your Amazon seller account if you decide to sell on Amazon. But you can also research a product’s current prices, Amazon sales rank, customer reviews, and profit estimates if you sell the same product. The app also lets you scan product barcodes or type in the product name to find data.
Other scanning apps that help you find profitable items include:
For starting out, Amazon’s seller app is more than enough to check potential profit margins for products you’re considering. If you want to dig deeper, Keepa lets you track Amazon prices over time, so you can check if a product you’re considering historically trends upwards or downwards in price in the coming months before buying.
As a final tip, anything you can do to get sale prices even lower helps your retail arbitrage efforts. For example, one popular retail arbitrage trick is to shop at Kohl’s to take advantage of Kohl’s Rewards. This free loyalty program pays you 5% cash back in Kohl’s Cash for shopping, so you can use cash-back earnings to get even cheaper inventory on future purchases. If you spend $1,000 on inventory over the course of several months, it’s a free $50 discount.
Other stores like Target and Walgreens also have loyalty programs that let you save money, ultimately boosting your retail arbitrage profit margin. If you can’t use a loyalty program to save, shop with a cash-back credit card. Retail arbitrage is a high-expense business, especially as you scale, so even earning 1% to 2% cash back on everyday spending could be hundreds or thousands of dollars in savings.
3. Resell Products Online
After purchasing inventory, you’re ready to start generating sales.
Many retail arbitrage businesses rely on the Fulfilment by Amazon program, or Amazon FBA, to power sales. This is because as a FBA seller, you’re not responsible for shipping and logistics. Rather, you send inventory to Amazon warehouses so Amazon handles order fulfillment when you make sales. This lets you focus on sourcing more inventory and managing your listings instead of dealing with endless shipments.
Amazon FBA has various seller fees, warehouse storage costs, shipping expenses, and potential long-term storage fees. But for starters, you pick one of two plans to sell under:
- Individual Plan: Pay a $0.99 fee for every sale
- Professional Plan: Pay $39.99 per month regardless of sales volume
Amazon retail arbitrage has a steep learning curve. This is because Amazon has specific packaging requirements, variable fees depending on product categories, and numerous seller rules you have to comply with.
But despite these complexities, Amazon FBA is still one of the best ways to start a retail arbitrage business because it takes logistics off of your plate. Amazon also has comprehensive documentation on its Seller University portal to help you start your own Amazon business. You can also find affordable Amazon FBA courses on Udemy that provide a step-by-step guide for starting a FBA store. You can also use a product like Jungle Scout to help get started.
Other marketplaces are also viable sales channels. Different platforms you can resell products on include:
Just avoid spreading yourself too thin. If you start with a batch of 10 to 20 products to resell, list everything on one marketplace. Take multiple, high-quality product photos and write comprehensive product descriptions. Additionally, research competitor prices and price your listings to be the same or similar to the market average. If you receive questions from potential buyers, answer them in a timely manner and provide the best customer service possible.
Ultimately, you want your seller profile to gain a positive reputation. Websites like Amazon and eBay have seller ratings. Over time, a high rating becomes a competitive advantage for you over beginner retail arbitrage sellers.
4. Use Profits to Replenish Inventory
To keep your retail arbitrage business running, it’s important to reinvest a portion of your profit into new inventory.
It’s often tempting to use extra income to pay off bills or put towards a vacation. But keeping your online listings stocked and growing your inventory is important to drive sales. This is especially true if a particular listing is selling well and ranking on websites like Amazon when people search for that product. In this case, keep that listing as well-stocked as possible since you’re getting a steady stream of sales.
Once you have a gauge on your monthly revenue, set a percentage of your profit aside specifically for buying more merchandise. After some practice, you can put more money into inventory if you’re confident it will sell quickly. But for starters, grow your store slowly and avoid dipping into your savings account to continually fund your business.
5. Optimize Your Operation
If you get your retail arbitrage business off the ground and turn a profit, that’s already a significant achievement. But like any business, there’s always room for optimization that can save time and money.
The more time and money you save, the better. A retail arbitrage side hustle is like running a small business, and optimization is a never-ending process that you should always consider. With retail arbitrage, some operational areas you can improve include:
When you’re new to retail arbitrage, sourcing products is slow. But as you become better at identifying profitable products, shopping becomes faster.
You should also note which days certain stores in your area typically put products on clearance. Additionally, get to know store managers and ask them for insight on upcoming sales. If a manager knows you’re going to buy out their clearance inventory, they might give you a heads-up or inside info on when you should swing by the store.
Fees are often complex with retail arbitrage, especially if you sell through Amazon FBA. This is because there are seller membership fees, shipping and storage costs, and even fees for removing your inventory from Amazon warehouses.
As you get your first sales, pay attention to what fees eat up most of your profits. For example, switching to a professional Amazon seller plan for $39.99 per month is cheaper than an individual plan if you consistently sell more than 40 products per month.
Like inventory sourcing, shipping has a learning curve, so you’re slow when you start selling. But shipping is also an area where you can save money.
For example, Amazon FBA offers a package preparation service that ensures products have compliant packaging and labels for shipment. But you pay a per-unit fee for the luxury depending on the product category. Apparel, for example, costs $0.50 to $0.80 per unit in preparation and labeling fees with this service.
As a beginner, rely on Amazon’s prepping services so you have fewer rules to worry about. As you gain experience, you can package and label inventory yourself for significant savings on large shipments.
eBay also has various shipping discounts you can take advantage of, like discounts on UPS, FedEx, and USPS shipping rates that help you cut costs.
When you list a product on marketplaces like Amazon and eBay, you include images, a product title, and description. Improving your listings helps get your products in front of more customers since your listings can appear when people search for specific products.
Including more high-quality photos and writing comprehensive product descriptions are two fast ways to optimize your listings. You can also spy on what successful sellers do for their product description writing and apply the same tactics.
6. Experiment With New Products
After several months of growing your retail arbitrage store, you should have a solid understanding of products that sell well. You might even find yourself gravitating toward a few niches you feel comfortable with, like apparel or beauty products.
But part of growing your sales means venturing into uncharted territory. You should still focus on resupplying your storefront with your top-selling products. But don’t be afraid to use some of your revenue to purchase new products you spot on clearance to test new opportunities.
Product diversification also helps mitigate risk. The last thing you want is to have most of your money tied up in inventory for a single product, only to find it stops selling quickly due to changes in consumer preferences or another seller stealing your business.
Before jumping into retail arbitrage, there are several other business risks and requirements to consider.
1. Earning Guarantees
Many ways to make money online come with a reliable paycheck. For example, working as an online English teacher or becoming a virtual assistant both pay an hourly wage. If you need to pay off bills or grow your savings, it’s comforting to know your side hustle efforts yield results.
In contrast, retail arbitrage doesn’t guarantee a paycheck. Plus, earnings can be volatile even if you find success; you can be in the negative or barely break even some months and potentially make hundreds or thousands of dollars the next depending on sales.
The upside is that retail arbitrage can scale as a business whereas freelance income depends on how many hours you work. But if you absolutely need money today, stable online work or gig economy jobs are better choices.
2. No Brand Building
Because retail arbitrage involves reselling products, you don’t build your own brand in the process of building your business.
You can private label products to solve this issue, which involves selling products from manufacturers with your own packaging or slight product modifications to develop your own brand. But private labeling often requires negotiation with manufacturers, which takes time and effort.
If you don’t want to build a brand, this isn’t a downside. But if you like the idea of having an identifiable business that customers recognize and trust, retail arbitrage isn’t for you.
As an alternative, you can make your own products and sell on Etsy or create a storefront on platforms like Shopify. This usually takes more time to find buyers because you’re offering something new under your own brand versus selling an already-familiar brand to consumers. But the trade-off is that you own everything, and seller fees are lower than Amazon FBA.
E-commerce is immensely competitive. According to Statista, 55% of goods sold on Amazon come from third-party sellers. Similarly, if you search for products on eBay, you often see hundreds of thousands or over a million listing results.
As a beginner in retail arbitrage, you’re competing with larger operations who can squeeze you on pricing because their scale creates better margins. This means it usually takes time to get your first sales and to grow your inventory using profit. In short, don’t expect to start making thousands of dollars or even getting sales the moment you list your inventory.
4. Time Requirements
Running a retail arbitrage business is like having a part-time job. Sourcing inventory and shipping can take hours out of your week. Plus, these tasks gradually take more time as your operation scales. When you add in listing optimization and dealing with customer service, the time commitment can become significant.
Successful retail arbitrage sellers use their revenue to outsource time-consuming tasks. But for smaller operations, this probably isn’t an option.
The bottom line is that you have to have enough time to try this side hustle. If you only have a few hours per week to spare, flexible business ideas like starting a blog or YouTube channel are more viable.
With the growth of e-commerce, business ideas like retail arbitrage and dropshipping have grown rapidly in popularity. Thanks to technology and changes in shopping habits, new ways to make money online continue to become available.
However, retail arbitrage isn’t a get-rich-quick scheme or for the faint of heart. Immense competition and tight margins make it a tough business model. If you don’t have much free time, it’s also difficult to source products and manage your listings each week.
That said, with time and practice, you can make money with retail arbitrage, even while working a full-time job. The key is to slowly learn the ropes, use your profit to fund additional inventory, and to continually optimize your business. It might take weeks or months to get your first sale, but flipping is a viable business model with high earning potential if you’re willing to put in the work.
Published at Wed, 16 Jun 2021 19:00:31 +0000