Amazon is one of the largest eCommerce companies in the world. In 2020, Amazon achieved $386 billion in revenue, over half of which was generated by third-party sellers.
Selling products on Amazon has become a highly profitable channel for entrepreneurs.
In this article, we will explore the four most popular ways to sell on Amazon. Keep reading to learn how to build a scalable, revenue-generating business on the Amazon marketplace.
1) Dropshipping on Amazon
Dropshipping is arguably the most popular way to start selling products on Amazon. This method is especially attractive for entrepreneurs who don’t want to spend a lot of time or money on their Amazon sales venture.
Through dropshipping, merchants sell products without physically holding any stock. Instead, when a customer buys a product, the seller uses their supplier to fulfill the order.
Sellers who use this method tend to reposition items as being their own brand or product. As a result, the customer often doesn’t know their order is fulfilled directly by the supplier or manufacturer, rather than the seller they purchased from.
Advantages of dropshipping
This method of selling often has a low or no startup cost. This means there’s a low barrier to entry, so the risk for starting your own business is minimized.
Another advantage of dropshipping is the low order fulfillment costs. Having a third-party supplier handle the order fulfillment means you don’t need to be concerned about the associated costs. The result? You can focus your time and energy on making sales and maximizing profit.
Our third and favorite benefit of dropshipping is you can run your business from anywhere. Because you don’t deal with any actual product, you aren’t constrained by physical limitations. You can run your business from anywhere in the world, knowing your suppliers will handle the distribution for you.
Disadvantages of dropshipping
Before you dive into dropshipping on Amazon, it’s a good idea to be aware of the potential drawbacks of this sales method.
First, you need to know Amazon’s guidelines on dropshipping. Breaching these guidelines could result in your account being suspended.
These guidelines include accepting responsibility for returns, being identified as the seller on all invoices, correct packing slips and packaging, and making sure there’s no mention of your supplier or manufacturer on your listings or orders.
Another disadvantage of dropshipping is that you have no control over the supply chain. While being removed from the supply chain can provide you with greater freedom as a business owner, it also raises challenges. If a customer is dissatisfied with product quality or fulfillment speeds, you are at the mercy of your supplier while still having to appease the customer.
Because of the low barrier to entry, being a dropshipper is a highly competitive market. This makes it harder for you to build a profitable business that stands out from the crowd. Overcompetition in dropshipping may cause you to cut your prices, which could, in turn, result in an unprofitable and unsustainable business model.
When to use dropshipping
If you want to venture into selling on Amazon right away, dropshipping could be the perfect model for you.
We recommend using dropshipping when you are first getting started as an Amazon seller. You can use this model to test the waters by selling low-value products to see what does and doesn’t work before you invest money into your business.
Once you have a clear understanding of how best to proceed with scaling your business, you can begin to look at some of the other popular ways to sell on Amazon.
2) Wholesale, or 1P selling on Amazon
When researching ways to sell on Amazon, you may notice people talking about 1P selling. This method refers to selling products on Amazon as a first-party (1P) seller through the Vendor Central platform. Here, Amazon acts as the retailer, and you operate as the wholesale supplier.
1P selling could be considered one of the easiest and fastest ways to sell on online marketplaces like Amazon. Rather than being responsible for creating product listings on Amazon, you sell the products directly to Amazon, who then lists the products on your behalf.
Through this method, Amazon offers you a wholesale price for your products. They are then responsible for setting the price, controlling the listings, and deciding when (and if) to purchase from you in the future. This means you don’t have to get involved in the sales process, other than the initial wholesale negotiation and fulfillment.
While it sounds like an easy way to sell on Amazon, wholesale 1P selling has its pros and cons.
Advantage of wholesale, or 1P selling on Amazon
If you are a manufacturer who already has products to distribute, then 1P selling could be a worthwhile investment for your brand.
The hands-off nature of 1P selling removes the headache of logistics and distribution of fulfilling orders for the end consumer. It also means you don’t handle customer service, consumer sales, or any direct-to-consumer marketing. This gives you more time and freedom within your business. Additionally, you won’t have to hire someone to help with these tasks, which keeps your business overhead low.
Because 1P selling on Amazon is a method of wholesale, you can sell your goods in bulk. Rather than relying on small, individual orders from the end consumer, you receive large purchase orders from retailers, earning you more profit in fewer sales..
Disadvantages of wholesale, or 1P selling on Amazon
Before opting to sell on Amazon via 1P selling, you need to consider your potential profit margins. Amazon will agree to buy your products at wholesale pricing, but often, they will negotiate to buy at lower rates.
Compared to direct-to-consumer sales, you can expect to receive a 20%–30% reduction in price when selling products wholesale. And, while Amazon will agree to a minimum advertised price (MAP), they also have the freedom to sell products for less than this if resellers are using a lower price point.
Secondly, you have no control over the product listing, which means you have no say in the pricing, product description, or photos. If you are someone who likes to have control over the ins and outs of your business, then wholesale may not be for you.
Another big disadvantage of 1P selling on Amazon is how restrictive the conditions are to sell through the Vendor Central platform. Before you agree to sell products via 1P selling with Amazon, be sure to check these conditions first. You may find you’re unable to sell products through other marketplaces, which leaves you at the mercy of Amazon for the sale of any goods.
When to use wholesale, or 1P selling on Amazon
Despite its disadvantages concerning financial rewards and restrictions, 1P selling works well for manufacturers who want to add another sales arm to their arsenal.
Before opting for 1P selling, first compare 1P selling to 3P selling on Amazon and choose a method that works best for your business.
3) Private label, or 3P selling on Amazon
While 1P selling takes place through Amazon’s Vendor Central platform, 3P selling is managed through the Seller Central platform.
With private label, or 3P selling on Amazon, you are the retailer. This means you are directly responsible for selling products to consumers via the Amazon marketplace.
As a 3P seller, you maintain control of your products and pricing. This gives you greater freedom of choice about how you sell your products and fulfill orders. With 3P selling on Amazon, you can choose to fulfill products through Fulfillment by Amazon (FBA), Fulfillment by Merchant (FBM), or to outsource fulfillment to a trusted partner.
Advantages of private label, or 3P selling on Amazon
Unlike 1P selling, 3P selling gives you authority over the pricing and listings for your products. This lets you price yourself competitively in real time against other Amazon sellers. You can also adjust your pricing to improve your profit margins and increase your revenue as an Amazon seller.
Another benefit is that, by cutting out the middleman (in this case, Amazon as a retailer), you can further increase your maximum profit per product. You also have better control over your inventory levels and don’t need to rely on another party to relist products when they sell out.
Being a private label, or 3P seller on Amazon offers you the freedom to expand to other sales channels and marketplaces. Whereas 1P selling can often limit you to selling products through Amazon only, 3P selling allows you to sell products on other marketplaces without the risk of being delisted.
Disadvantages of private label, or 3P selling on Amazon
3P selling puts you at the center of your Amazon sales process; you are responsible for meeting all order demands, including packing, shipping, and order fulfillment. This comes with the added obligation to process orders in a timely manner, meet customer expectations, adhere to marketplace requirements, and undertake direct-to-consumer marketing activity.
As you can see, 3P selling can be a time-consuming way to sell on Amazon. However, the increased profit of selling directly may offset this challenge.
Another drawback is that you still need to pay Amazon seller fees. These fees average from 8% to 20% depending on your chosen category. Along with seller fees, you will be responsible for the additional costs associated with fulfilling orders. Therefore, it’s important to weigh the potential profit versus losses of a 3P selling business.
When to use private label, or 3P selling on Amazon
If you’re deciding between 1P and 3P selling on Amazon, 3P selling is the favorable option, in our opinion. We especially recommend you use this method if you have the time to manage product listings and fulfill orders.
If you’re ready to have more creative authority over your brand, then 3P is the perfect sales method for you, as you will have full control over your product listings, merchandising, marketing, and more. It’s the ideal choice for those who are ready to handle the infrastructure and additional work that comes with listing products on Amazon via the Seller Central platform.
You can minimize the challenges of 3P selling by using MyFBAPrep. We will handle the preparation and packaging of your products for Amazon, letting you reap the fulfillment benefits of 1P wholesale and the cost-saving rewards of 3P selling.
4) Amazon retail arbitrage
If the first three options for selling on Amazon don’t appeal to you, retail arbitrage might. This popular method takes advantage of price differences between two markets. In simple terms, retail arbitrage (or online arbitrage) is all about reselling.
When you sell products using retail arbitrage, you buy discounted products from retailers and then resell these at a higher price on Amazon. For example, you may buy a product for $5 from Walmart, and then sell it for $10 on Amazon. If you buy 100 of these products at a $5 price point, you could then make a $500 profit reselling them at the higher $10 price point.
With retail arbitrage, you don’t need to engage a supplier to help you source products. You simply find products that are being sold cheaper at a retail store, then sell them at a higher price point online.
If you’re worried consumers won’t buy your product at a higher price point, don’t. They will buy, because its simple economics: product prices vary from store to store and from time to time.
If, for example, demand for a certain product drops, its price may also fall. You can use this window of opportunity to purchase a product at a lower price point, then resell it for profit when demand increases again.
Advantages of Amazon retail arbitrage
One of the key benefits of retail arbitrage is the low cost of entry. You can begin selling products through retail arbitrage with a low initial investment of $100–$200. This is because you sell products in small quantities and so don’t need to hold large quantities of stock.
Retail arbitrage is also a great way to make money quickly if you’re looking for a fast revenue-generating method. If you’re interested in starting to sell products on Amazon, then retail arbitrage is another easy and fast way to begin making a profit online.
Disadvantages of Amazon retail arbitrage
One of the biggest drawbacks of retail arbitrage is that it’s not a scalable business model. This sales method is often dependent on what product you’re able to buy at a discounted price. You can rarely plan such purchases in advance, so you likely can’t forecast future earnings from retail arbitrage.
Retail arbitrage also risks going against brand regulations. Amazon is making it harder for retailers to resell products through the marketplace. Third-party sellers often have to gain approval from brands before they can sell products on Amazon.
This can make it difficult for you to find products you’re allowed to sell on Amazon without seeking initial approval from the brand. If you accidentally use retail arbitrage to sell a product that’s part of the Amazon Brand Registry, you risk getting your account suspended and your seller capabilities revoked.
The final drawback of Amazon retail arbitrage is that it can be time consuming. Unlike other sales techniques such as 1P selling and dropshipping, retail arbitrage requires you to spend a significant amount of time trying to source great deals. This can entail visiting local stores or scouring the internet for deals on products you marked for interest.
When to use Amazon retail arbitrage
In short, the best time to use retail arbitrage is when you’re looking for a quick profit.
While the initial hunt for a product may take time, you will often find you can turn a quick profit once you find a great discounted product to resell on Amazon. This makes retail arbitrage an excellent choice if you need to make additional income in order to meet a short-term financial goal.
Summary of the most popular ways to sell on Amazon
As you can see, entrepreneurs have valuable options when it comes to selling products on Amazon. While not every method will suit every seller, it’s likely one of these four ways of selling on Amazon will be ideal for you and your business.
Whichever method you use, we recommend you first weigh the pros and cons. Where possible, it’s best to find a method that will bring you the highest financial return on investment for the lowest time and financial investment.
To make your transition to an Amazon seller an easy experience, we recommend engaging a third-party logistics partner to help you handle fulfillment. Our Preptopia™ platform paired with MyFBAPrep logistics services is the hassle-free way to save time and grow your online business.