Retail arbitrage: Arbitrary or a winning seller strategy?

Merchants who sell online constantly need to find creative ways to do business, especially in today’s dynamic environment. With supply chain issues around the world and the booming growth in eCommerce, customer demand for new products at great prices has continued to swell at an often unsustainable pace.

For new sellers and established businesses alike, the challenge of sourcing products and finding new strategies to expedite business growth has compounded, too. This is where retail arbitrage can be a game-changer.

What is retail arbitrage?

Retail arbitrage takes advantage of a price difference between two or more markets by buying cheap and selling at a markup (in simple terms, reselling). Often, this means finding a discounted product through another retailer (online or in-store) and then selling that item at a higher cost.

Retail arbitrage is perfectly legal, provided you:

  • obtained or purchased the product via legal channels (i.e., no theft)
  • sell the item in an unchanged condition (e.g., if you buy it new, you can’t use it and then try to sell it)

For example, you walk into a store and see $20 hats discounted to $10 as part of a special promotion. Seeing an opportunity, you buy 100 hats at $10 and then create an Amazon listing for them, pricing the hats at $15 each. This is a 50% return on your investment while still being cheaper than the full retail price.

Retail arbitrage on Amazon

For many sellers, retail arbitrage is one of the paths of least resistance to selling on the Amazon marketplace. Thanks to Amazon’s Fulfillment by Amazon (FBA) service, merchants can sign up, send the goods they bought at a discount into FBA, and then make a profit once they sell.

When sellers combine retail arbitrage with FBA, it looks something like this:

  1. Source a bulk of products at a discount, possibly by buying in bulk at wholesale prices or catching a good sale at an outlet mall.
  2. Create your listing on Amazon to be fulfilled by FBA and set up your shipping plan.
  3. Send items into FBA and turn on your listing.
  4. Earn back your initial investment and profits as each item sells.

The benefit of retail arbitrage using FBA is that FBA provides reduced touchpoints and Prime shipping eligibility. The convenience of free and fast shipping on Amazon can convince online shoppers to make a purchase online instead of searching for the same discounts and deals elsewhere, like in-store.

Why does retail arbitrage work?

If you think back to our hat example above, you might wonder, “Why in the world would anyone spend more on Amazon than in the store?” Consumers could certainly have walked into the same shop and purchased the hat for $10 like you (theoretically) did. But it’s not so black and white.

1) Prices vary from place to place

From store to store and across geographic regions, prices can vary — significantly. Slow-moving products in one area might be hot tickets in another, so any retailer worth their salt will take advantage of this demand and price accordingly to turn a profit.

2) Shoppers love convenience

And they’ll pay for it. Amazon has redefined the shopping experience for people around the world. With services like Prime, customers are often willing to pay a little more to avoid the hassle of going to the store, searching for items, and waiting in lines. Plus, free two-day shipping (or faster in some places) means they won’t need to wait long for their items — brownie points for you!

How retail arbitrage compares to other sales methods

Retail arbitrage is a method of sourcing products that, when done correctly, can be an effective business model on Amazon.

Amazon sellers may fall into a number of business models, including:

  • Private label: Also known as white label, this is when sellers purchase a product and sell it under their own brand.
  • Wholesale (or 1P): Brands or manufacturers sell their products at wholesale prices in bulk to marketplaces or other buyers, who then sell them at retail price.
  • Dropshipping: This is where sellers only order products from their suppliers once they make a sale; the supplier then ships directly to customers.
  • Handmade: This is where sellers create their own unique products to sell online.

Read more: Amazon 1P vs. 3P: Benefits of each and why to move from 1P to 3P

There’s no right or wrong answer as to which business model is the best. It often comes down to the individual seller, their goals, and their resources.

For new sellers, retail arbitrage can help…

  • Lower your start-up cost: A 2021 Jungle Scout report found that one-third of sellers who chose arbitrage as a business model got started on Amazon for under $500, and nearly half did so for less than $1,000 (compared to over $1,000 for the vast majority of private label sellers).
  • Get started more quickly: The same report found more than 40% of retail arbitrage sellers launched their Amazon businesses within six weeks (compared to a quarter of private label sellers who said the same).

If you currently don’t have a product to sell or the resources to buy items in bulk, arbitrage can be a great, low-risk way to get your feet wet.

That doesn’t mean it’s only for new sellers though. You can support your other sales methods and build upon them by applying retail arbitrage to your overall sales strategy.

To start selling with retail arbitrage, you simply need an Amazon seller account. Then, you can source your products, create your product listings, and begin selling.

One of the biggest challenges is that you can’t know when or what items will go on sale, nor set the market demand for those items. In some cases, items may be sold at reduced prices to clear them out because they’re simply not popular.

With this in mind, it’s important to weigh your risks and rewards before investing heavily in any product for resale.

Retail arbitrage rules and policies

No defined policy prevents or regulates retail arbitrage on Amazon. However, there are general rules of play — for example, not every product can be resold on Amazon.

If you’re not authorized to sell it, don’t sell it. Unauthorized selling of brands on Amazon led to Amazon introducing brand gating. This was their response to the growing need for brands and authorized sellers to protect their businesses by registering and “gating” brands on Amazon. Through brand gating, third-party sellers must obtain approval from both the brand and Amazon before selling gated goods.

Some additional rules to abide by include:

  • If your products are listed as new, they must be in new condition.
  • Keep receipts for all your sourced products in case they come into question.
  • Avoid dropshipping through unfamiliar and untested brands and manufacturers in case they don’t fulfill the delivery.
  • Don’t sell counterfeit products.
  • Keep your prices competitive. If Amazon’s engine catches you selling the same thing on another marketplace for less money, you risk getting delisted.

As is the case for all Amazon sellers, it’s important you abide by the Amazon seller policies and code of conduct.

Where to source products for retail arbitrage

Sourcing products to sell through retail arbitrage on Amazon can feel daunting, especially if you’re new to it. The key is to find the best deal you can to turn around and make a profit while still delivering a competitive price to your customer.

Before you start sourcing products, have your Amazon Seller app handy so you can research products and determine your potential ROI.

Product ideas for retail arbitrage

Knowing the best products for resale can help you mitigate risk and execute a successful strategy. Whether you’re looking online or in stores, keep these categories top-of-mind:

  • Health and beauty items, especially those in the below-$20 range that can be purchased in bulk for resale. Look for products that don’t expire quickly.
  • Home goods like décor, accessories, and maintenance items are in constant demand and come with reasonable price tags at the best of times.
  • Clothing and shoes are among the most profitable categories, as clothing is a fundamental human need. Constant demand, fast fashion trends, and frequent sales make clothing an excellent option for retail arbitrage. The tricky thing is hedging your bets when it comes to sizing and designs.
  • Sporting goods are non-essential items, but they appeal to a wide audience, from kids to adults, casual athletes, and more. Sporting goods include hiking, fishing, camping, athletic wear, and general sporting equipment.
  • Toys are an especially hot commodity around the holiday season, so smart sellers should carefully monitor discount patterns and take advantage of seasonality to get the most bang for their buck.

Retail stores to watch for inspiration

If you’re ready to start sourcing products like the ones above, it’s time to hit the stores, both online and in person. Don’t forget: Your local stores may have unique, regional promotions you can take advantage of, so check in regularly and always scour the clearance section.

Dollar stores

Dollar stores like Dollar Tree, Dollar General, and Dollarama maintain low prices on all their wares and can be great places to source products for flipping. Check Amazon as well before buying up an inexpensive product; sometimes these items fall into the “gated” category and can’t be sold without prior authorization.

Be sure to hit the toys, stationary, party supplies, groceries, and even electronic sections of dollar stores for the best products to resell.

Outlet malls

Malls and outlets often feature deals you wouldn’t find online or in metropolitan areas. These stores usually have hidden gems you can flip, and, in a mall setting, you can hit multiple shops across several categories in less time, making them an effective sourcing strategy.

Be sure to check out electronics stores, clothing boutiques, discount or ”factory” clothing/shoe stores, and the ever-famous As Seen on TV shops.

Liquidation centers

While not a common shopping destination for consumers, liquidation centers are ripe for the picking as retail arbitrage sellers. These stores often have web domains that let you browse their wares in advance to save you a trip to the store.

Think clothing, home wares, and even furniture or appliances.

Big box stores

Places like Walmart and Target already have their own marketplaces similar to Amazon, but there’s also retailers like Best Buy, Home Depot, and more to check.

Home Depot, for example, has a shockingly wide variety of products that expand beyond home improvement and maintenance, with frequent sales for things like gardening tools, home décor, and outdoor entertainment items. Check with the store manager for local deals to see the latest sales and discounts.

Other marketplaces

Don’t forget about other marketplaces. Purchasing discounted items on eBay to resell on Amazon is a great option for a savvy seller. Look for popular items in your preferred categories that can be purchased in bulk, and always cross-reference platforms to see what kind of pricing you can use to turn a profit.

Tip: Be careful about pricing on this front. If Amazon sees the same item available elsewhere at a lower price than yours, your listing may get removed in the interest of serving the best deals online.

Retail arbitrage best practices

In retail arbitrage, as with any other sales method, your number one priority should be to protect yourself, your brand, and your business. Here are a few best practices to sell through retail arbitrage while maintaining a strong brand.

1. Choose your products carefully and vet your sources well

The adage, “If it seems too good to be true, it probably is,” holds especially true when sourcing products for resale. Keep a close eye out for stolen or counterfeit goods and steer clear of suspicious listings; these items can get you in big trouble if you knowingly (or even unknowingly) list them for sale on Amazon.

If you source products without seeing them in person, be sure to work with reputable sources.

2. Document every purchase you make

When you source products, be sure to keep track of those purchases and maintain an organized and easy-to-follow paper trail for each product. This can protect you down the road if your sourced products come into question by proving you obtained them through legal channels, as well as demonstrating their authenticity.

3. List items in the appropriate condition

If you bought an item new, you must resell it in the same condition. Be careful not to damage any products you purchase, and list them correctly. If a product becomes damaged, you can’t resell it on Amazon. Learn more about Amazon’s condition guidelines here.

4. Follow Amazon selling policies

Read and make sure you understand Amazon’s selling policies, and monitor your account for any red flags that pop up (no matter what kind of products you sell).

Wrapping up — Use retail arbitrage to expand your catalog

Retail arbitrage selling isn’t the best strategy for every eCommerce professional who wants to sell on Amazon. But it can be a great option for sellers looking to test new items and expand their business.

Remember, Amazon Marketplace has lots of tools available, as well as strict policies you must adhere to if you want your sales strategy to be successful.

If you’d like to work with a partner on your retail arbitrage business, use MyFBAPrep to get items ready for sale via FBA.