Amazon FBA Arbitrage, Wholesale & Private Label ExplainedJul 26, 2022
There are many different strategies that you can use to make a profit when selling products on the Amazon platform, with the most popular ones being Arbitrage, Wholesale, and Private Label.
Each of these strategies are quite different and come with their own advantages and disadvantages, so before jumping into the world of selling on Amazon head first, it's important that you understand what each strategy is, and which one is right for you.
To help you with this, in this post I’m going to give you the full breakdown of each – including the advantages and considerations to make so that you can decide which one is best for you.
Online & Retail Arbitrage
Arbitrage is a selling strategy that involves you buying products from a retailer of your choice, and then sending those products to Amazon, where you’ll hopefully be able to sell them for more than you paid, giving you a profit.
The arbitrage business model can be very profitable because if you know where to look, you can often buy products to later sell on Amazon very cheaply, despite the fact that plenty of customers are paying much more for the same exact product on Amazon’s website.
This ‘arbitrage’ opportunity typically happens due to the average Amazon customer not being bothered enough to hunt around for the same deals that you are, them not knowing certain bargain retailers even exist, OR due to them being prepared to pay a higher price in exchange for convenience and the next day delivery that Amazon gives them.
In order to find profitable products to flip on Amazon, you can either visit shops in your local area – known as retail arbitrage - or hunt for deals online, which is known as online arbitrage.
The main advantage of arbitrage is that you can get started with just £100 or $100, which you’ll use to buy the products that you’ll later sell on Amazon. Given that you’re going to be selling other brands established products, other advantages include that you don’t need to learn about how to advertise or put a listing description together, and that’s because more often than not customers are searching directly for the branded product that you’re selling, and the listing has already been put together previously by the brand owner.
Whilst it is possible to make huge amounts flipping products for a profit using the arbitrage model, the main disadvantage with this selling strategy is that it can take up a bit of your time to hunt around for deals which you may not necessarily find.
It’s also not as scalable as other selling methods, particularly given that retailers may limit how many units you can buy at a time, and once the retailer sells out of any clearance items, they may not choose restock. That said, if you have a low amount of start up capital, arbitrage is a great way to build up funds before switching to one of Amazon’s other selling strategies.
Selling on Amazon with the wholesale strategy involves you selling products of an established brand as a third-party seller – so very similar to online and retail arbitrage. Unlike arbitrage though, with the wholesale model you’ll be purchasing units to sell in very large quantities directly from a wholesaler, rather than a shop.
In order to be able to do this, you’ll need to find & form relationships with wholesalers across the country, which will involve creating an account and signing their terms & conditions at the very least. Most wholesales will also have a minimum required spend, meaning you’ll need to have a bit more capital than with the arbitrage business model – ideally at least £1,000 or $1,000.
In terms of the amount of profit you can make with the wholesale business model, well, margins per product are likely to be thinner than with products you may sell with online arbitrage, but, as you’re likely to be selling a much larger amount of units overall, the business is more scalable meaning it’s easier to make bigger profits in total.
One of the most challenging parts of the wholesale strategy, is finding a wholesaler that wants to work with an Amazon seller. Due to high levels of competition and sometimes a reluctance to work with amazon sellers altogether, finding a reputable wholesale offering decent products can be a difficult if not impossible task. Because of this, some amazon wholesaling experts say the best way to get your foot in the door is to lie to the wholesaler and tell them that you’ll be selling in your shop or another platform that’s not amazon, which doesn’t exactly sound sustainable.
Let’s say though that you do manage to find a wholesaler willing to work with you, and they’re able to offer you lots of branded products that you can sell on Amazon with a healthy profit margin.
Provided that the product that you want to sell has sales demand, you’ve got permission from the brand to sell, if applicable, and the product is already available on Amazon, there’s not really much additional work required from as you don’t need to build a brand, create a listing, or advertise. Sounds like easy money right? Not quite – there’s one more big consideration to make, and that’s to do with something known as the buy box.
If you’re not familiar with it, the buy box is the little box that the add to cart and buy now buttons appear in on every amazon listing. Whichever seller is named in the buy box is the one that gets the sale whenever a customer makes a purchase, unless the customers decides to see who else is selling the same product by clicking the relevant button.
The reality is though that the vast majority of customers will simply purchase from whichever seller has the buybox, without even looking at other sellers, and that’s because they don’t really need to as Amazon typically chooses the seller that’s providing the product for the lowest price.
Fighting for the buybox is where problems can arise if you’re selling a product that’s in demand that others can also source easily from other wholesalers too.
For example, lets say you purchase 1000 units of coffee pods from a wholesaler, and according to your calculations, you’re going to have a 15% profit margin if you sell it at its RRP. You stick it on Amazon for £20, and wait for the sales to come in. But after a few days, you see you’re not making any sales, and when you check why, you can see what’s happened.
Another person, selling the exact same coffee pods as you sourced from the same or another similar wholesaler, has decided that they’re willing to sell for a lower price in order to win the buybox and make some sales. So, in order for you to win the buybox and make some sales, in response, you decide that you’re willing to settle for a lower profit, which results in your cutting your price below your competitors, meaning Amazon awards you the buybox.
Your competitor then responds with another price cut of their own to win back the buybox, which ultimately results in either a race to the bottom in order to shift units, or both of you reaching some sort of equilibrium price and settling for far fewer sales than you anticipated.
Now imagine this situation, but instead of competing with 1 seller for the buybox, you’re competing with 20 or 30, and you’re all sat on 1,000 units of one product that you’re looking to sell.
Whilst that example may be an example one, it hopefully highlights the importance of checking for buybox competition before deciding what product you want to purchase from a wholesaler.
Sharing the buybox also applies if you’re doing arbitrage, though arguably it will happen less frequently if you’ve found a deal giving you a great profit margin, that not many others know about.
Selling on Amazon FBA with the Private Label selling strategy involves you purchasing an already established unbranded product, labelling it with your brand name, and then selling it for a profit. When you sell your own private label product, you’re in control of everything, which includes the products specification, its packaging, its instructions, and anything else that you can imagine to do with how it looks.
The main benefit with selling private label products is that you can sell a product that is completely customized to your own tastes, without having to spend huge sums of money on research & development. All of the inventing has already been done by the manufacturer, how easy is that?
Research has proven that people love and value brands, which brings with it a whole host of benefits to us, which includes being able to charge premium pricing, and build a loyal customer base that refer business and look to buy everything that the brand offers.
The biggest advantage with the private labelling strategy though, is that in addition to receiving profits every month from the sales that you make, as each month passes and as your profits grow, so should the appeal and the valuation of your amazon business to an investor. Unlike the other selling strategies on Amazon, with private labelling, you’re not building somebody elses business by selling their branded products– instead, you’re building your own by selling branded products that you’ve created.
So if you ever get bored of selling or just simply want to cash in, rather than packing everything up, you can sell your business to an investor for potential millions, like many others out there have already done.
Private labelling for me, is definitely the most appealing of the three strategies, however, it’s not without its disadvantages. As you’re going to be selling a branded product that’s not currently available on Amazon, because it’s yours, you’re going to need to create a brand and put together a product listing, both of which can take a bit of time and cost a bit of money. The upside of making and having your own listing though, Is that there’s nobody to share the buybox with - it’s all yours, so you never have to worry about somebody trying to undercut you selling the exact same product on the listing that you’ve created.
You’ll also need to learn and make use of Amazon’s Advertising to showcase your product, which whilst not difficult, can take a bit of getting used to.
Though the earnings potential with selling your own private label product can reach 7 or even 8 figures, especially if you sell to an investor, you do need a bit of a budget to get started. The absolute minimum to give you the best chances of success, would be £1,500 or $2,000.
- Arbitrage: easy to get started, low capital needed, not scalable, less passive,
- Wholesale: No brand building needed, more scalable that arbitrage, difficult to find wholesalers, buybox sharing.
- Private Label: Building your own brand, Able to charge premium price, build loyal customer base, sell business to investor, requires brand building)
So that’s a summary of the three most popular selling strategies when it comes to Amazon FBA.
Arbitrage – which is great if you don’t have much of a starting budget and you’re happy to hunt around in stores and online for possible bargains, wholesale – which is better for those of you with medium sized budgets and where you don’t want the potential hassle of creating and building your own brand, and private labelling for those of you that want to build and create a scalable business that hopefully generates you monthly profits and gains value over time as more and more people learn about your brand.
It goes without saying that private label is my number 1 pick, it’s the exact selling strategy that I used to grow an initial £3,000 investment into a business that now generates around £155,000 in monthly revenues, something that I think I’d have struggled to do with the other selling strategies so quickly.
Hopefully you enjoyed this article - if you do fancy learning more about Amazon FBA & private label, check out my free training session on the topic here.