Retail arbitrage is an ecommerce business model. You purchase products from retail stores, then list them for sale on other online marketplaces at a higher price.
What is Retail Arbitrage?
Retail arbitrage is an eCommerce business model centered on buying inventory at a discount from offline and online retailers and then reselling it online for a profit.
The low barrier to entry and almost nonexistent capital requirements make it an attractive side hustle for bargain hunters.
How Retail Arbitrage Works
Find products to buy, buy them, and list them online to resell. Pretty simple, right? On the surface, yes. In practice? Not so much.
Ideally, you don’t want to list your products higher than retail prices since people can usually purchase the same product directly from brick and mortar stores. Instead, you want to capitalize on finding clearance sales and discounted products at a low price that you can turn around and sell at the regular retail price.
There are some situations where you can buy many products at retail prices and sell them for more. A standard option is video game consoles – which tend to go out of stock at all retailers during the holiday shopping season. This is especially true the year the console launches.
You’ll find that some people are willing to pay over retail to have the item. However, this approach doesn’t generally work in multiple niche markets. And is often frowned upon since it hurts the brands. And in some situations, you may find a brand-restricted product that you cannot sell via Amazon retail arbitrage.
Benefits of retail arbitrage
1. The barrier to entry is almost nonexistent
Low barriers to entry are two-sided swords in business. We’ll talk about the downside of this factor in the next section, but for now, let’s focus on why this is a positive.
Many people dream of becoming their boss and running a successful eCommerce business, but they’re hindered by what they perceive as an insurmountable barrier to entry.
Don’t you need to create a product to sell? Thousands of dollars in startup capital? A professional-looking website and social media presence?
These mental barriers prevent many folks from pursuing their eCommerce goals. However, you don’t need any of these things in retail arbitrage to get started.
Creating seller accounts with Amazon, eBay, and Craiglist is entirely free. Mobile scanner apps are also free, making the only capital expenditure the initial purchase of whatever goods you’re reselling.
2. It’s a great way to learn Amazon FBA or eCommerce
If we were in charge of an MBA curriculum, we’d require that every student start their retail arbitrage store. There is no better way to learn eCommerce.
You can learn distribution, profit margins, taxes, shipping costs, purchase orders, and invoicing. Not to mention how to navigate the top eCommerce selling platforms.
As you dive deeper and scale your business, you’ll need to learn digital advertising, inventory management, and wholesale partnerships.
Watching many tutorials, taking a course, or reading a blog about retail arbitrage is one thing. It’s another thing to learn these skills out of necessity and watch real money come in as a result.
These are all topics that you could read in a book, but there’s no comparison to diving in headfirst, making mistakes as you go, and internalizing these concepts.
When you are ready to scale beyond retail arbitrage into selling your products, you have all of the skills you need and significant experience under your belt.
Retail arbitrage is a low-risk way to learn eCommerce that you can abandon at any time, making this benefit one of the most notable on this list.
3. You can turn a profit quickly.
You don’t need to wait on long sales or production cycles to see profits with retail arbitrage. You can hit the road with your free scanner app, spend a few hours finding deals, and turn around and get them to Amazon FBA before the day’s over.
From there, Amazon does the rest. And if you’ve done your research and followed a process (more on that later in the post), you can see profits in days or weeks.
This rapid profit turnaround gets people hooked — they see the revenue potential of retail arbitrage and fall in love with the hunt.
4. You’re capitalizing on the groundwork of trusted brands.
Have you ever thought about why you don’t need to convince someone of the quality of a pair of New Balances? Or the fun of a brand-new LEGO set? Two words: brand trust.
There are billions of corporate dollars earmarked every year for the monumental task of building brand trust. Any entrepreneur who sells their product will tell you that the most valuable currency in eCommerce isn’t money but trust.
Trust means repeat business, word-of-mouth evangelism, and a higher lifetime customer value.
A benefit of retail arbitrage is that this step has already been done for you. When you’re reselling household names like Nike, L’Oréal, and Vtech, you’re standing on the shoulders of giants.
These brands have already done the spadework of building brand trust, so you don’t have to.
Downsides of retail arbitrage
1. You can’t build a tribe of loyal customers
Many visionary entrepreneurs will tell you one of the most rewarding things about their work is seeing a loyal group of happy customers from around their brand. It provides a sense of fulfillment to see real people positively impacted by whatever you’re selling.
Not to mention the monetary and word-of-mouth benefits of loyalty to your business.
Unfortunately, this is something retail arbitrage sellers will never be able to experience. Even if you’re the most successful seller on Amazon, you’re only fueling further brand loyalty into your flipping products, not your own business.
For many sellers, this isn’t a concern. They’re only in it for the profits.
Fair enough, but it may be best to look elsewhere for entrepreneurs looking to build a community of loyal customers.
2. You’re at the mercy of the retailers.
When your entire business model is at the mercy of retailers, you lose control. This isn’t as scary as it sounds. Almost every business in existence is contingent upon another company to some degree.
The PC software industry assumes that Microsoft will continue to support Windows. Grocery delivery services like Uber Eats rely on grocery chains to sustain their business.
However, there’s no getting around that you’ll never be able to “outgrow” whatever retailer you’re sourcing from. You can’t control their supply or how they stock their shelves.
We’ve heard horror stories of arbitrage sellers accepting sales on a scorching item to realize that their regular sourcing retailer was sold out of the thing and wouldn’t replenish for weeks.
When you’re in charge of the manufacturing and distribution of your products, you can scale production accordingly. Not so with retail arbitrage sellers dependent on big-box chains.
3. Scaling can be a headache.
Retail arbitrage is a “time for dollars” business model. This is the critical difference between a freelancer and a business.
When you build a business, you’re creating a cash-producing asset. If you’ve set up the proper systems and processes, you could walk away for a week, and the business would still generate revenue. Not so with retail arbitrage.
You have to be constantly hustling. When you stop scouting, buying, and flipping, you stop generating income. That can feel constraining to many visionary entrepreneurs who want to grow their revenue and impact beyond their efforts.
It’s also important to consider your opportunity cost. Don’t buy into a pipe dream of unlimited cash until you calculate your dollar-per-hour income.
For example, you stop at TJ Maxx, scan a few items, and find a pair of shoes that can turn a decent profit — maybe $10 each (a fairly conservative estimate). So, you purchase all 15 teams on the shelf. You head home, list the items, box them, and send them to Amazon FBA.
You manage to sell them all a few weeks later, turning a $100 profit after taxes and shipping. Not bad!
But how many hours did you spend driving, scouting, scanning, and packing? Let’s say the entire process took you five hours. That’s $20/hour. A respectable wage, no doubt, but let’s remember our opportunity cost.
Opportunity cost is the cost of choosing one alternative over another. This means you spent four hours generating $20/hour at the expense of four hours of work elsewhere. That four hours could’ve been spent building up another eCommerce business or investing in yourself.
This isn’t at all to say that the choice to pursue arbitrage was a poor one. It’s essential to take the dopamine hit of a profit out of the equation and use cold, hard math to determine your actual ROI.
4. You may face steep competition and market saturation.
This is the dark side of low barriers to entry. A trendy, accessible, and approachable eCommerce model means very high market saturation and competition.
This is especially true when you consider that arbitrage sellers are sourcing their products from the same places.
Due to the popularity of reselling products on Amazon, the platform gates certain brands — and even entire categories — to new sellers. This mitigates the risk of bad actors selling counterfeit goods to make a quick buck.
If you don’t get “ungated,” prepare to face fierce competition.
Retail arbitrage works well for some – but it’s more of a side hustle. It’s all about your goals for making money online. The good news is that other business models offer more sustainable alternatives. If you’re ready to sell online, you can start your brand with private label products or wholesale suppliers, run an affiliate business, or a dropshipping business.