Online Arbitrage is a simple but powerful method of selling online but what is it?
“In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.”
Simply put, buying low and selling high. Now just drop ‘online’ in front and presto! That’s pretty much what we’re talking about. The trick is finding products at a lower price that you know have a consistently higher price on a particular marketplace. The marketplace or platform most widely used to sell on and the one I would recommend, is unsurprisingly, Amazon. It’s probably best to point out now that if you don’t have Amazon in your own country, then you should probably look at another option. Although you can sell on foreign Amazon platforms, e.g. I can sell on Amazon.com from the UK, it requires more management and there’s more tax laws involved etc, so it complicates things. That doesn’t mean you can’t do it, I just wouldn’t suggest if it’s your first venture into online business.
The main reason for using Amazon, apart from the obvious size of the marketplace, is to make use of their Fulfilment by Amazon (FBA) programme. This allows you to outsource a large part of the business, giving some level of automation and making scaling faster and simpler. Using FBA is a simple process. After purchasing stock from other online stores and having them delivered to you, you turn them round and ship them directly to one of Amazon’s warehouses, where they store them and subsequently process and ship all orders automatically for you. This also means that you can offer your products with Prime delivery which gives you a distinct advantage over sellers fulfilling orders themselves. For European sellers, you can sell your products across a number of European countries (pan-European) at no extra cost and very little extra work, vastly increasing your market size. To register as an Amazon seller it costs £25 per month (excl VAT), or $39.99 for US sellers. There are also fulfilment and storage costs to be paid on a per item basis for FBA, which should be taken into account in your profit calculations before you purchase a product. This is a very reasonable cost for the opportunity that you’re getting.
What is Retail Arbitrage?
You might also hear the term retail arbitrage, which is almost the same as online arbitrage but involves specifically sourcing products from brick and mortar stores or markets instead. This has its advantages. You can sometimes find better prices in local stores on offer items than in online stores. Also, because stock varies over the country, you could find popular items that are hard to come by for sellers elsewhere. To aid in finding deals with retail arbitrage, you can use Amazon’s own FBA seller app which allows you to scan items and immediately see list prices and potential profits. Of course, there’s nothing stopping you from doing a bit of both online and retail arbitrage to source your products however, as we’re all about automation, outsourcing and scaling to make as much passive income as possible, retail arbitrage doesn’t really fit the bill as it takes up much more time than sourcing products online especially with the help of specialist software which we’ll get into in a minute.
Using Prep Centres
We can take the automation and outsourcing of our online arbitrage business one step further by making use of a prep centre. A prep centre acts as your proxy for sending and receiving products to and from both online stores and Amazon. Instead of having products that you order online delivered to your own home or unit and having to unpack, re-label, re-pack and send to Amazon, you order the products directly to the prep centre who do all that for you as well as check the packaging for any damage. This service usually comes at a cost of around $1 per unit which needs to be taken into account for your profit calculations but it’s well worth paying though once you’re ready to start scaling. For new starters though I would recommend doing this process yourself for a short period of time so you understand exactly what’s required and how it’s done. If you were to consider this business and don’t have Amazon in your country, a prep centre would be a necessity though. My recommendation for people in the UK would be EasyPrepUK. They offer a professional and friendly service at a reasonable price and it comes highly recommended by a friend of mine who’s been in the online arbitrage game for years. For my friends on the other side of the pond, I can’t recommend any in particular having not used any US based ones but a simple Google search will offer up plenty to choose from. I would check out AutomatedFBA as it looks like a good service with levels to suit all businesses.
Finding Products to Sell
So how do you choose your products? Well, there are some basic rules of thumb when starting out; You want to keep items small so as not to attract extra shipping fees and storage costs, especially when facing returns. For the same reasons, products shouldn’t be too heavy. Try to keep them under 3 lbs. Also try and go for items that are simple in design i.e. few moving parts, no electronic items. You basically want to reduce the chance of anything being received damaged. Generally buying products that are in the top 5% of their category will mean they are pretty good sellers. Beyond that, it’s really up to you to do the research into what’s moving off the shelves quickly. My advice for people starting out would always be to maximise for quick return. I.e. buy products that move quickly even for slightly less profit. Once you build up the cash-flow you can start investing in more high profit products, which generally sell more slowly. Take into account seasonality, trends and holidays. For example, fitness related items in the new year. (New Year’s resolutions and all that).
To make product sourcing a great deal easier, there are specialist softwares available that crawl Amazon’s listings and then go out and find matching products on other sites to compare prices, in order to find potentially profitable deals. They scan the web for all this information very quickly and feed it back to you in a nice, easy to read format that you can make decisions on. FBAWizard and Tactical Arbitrage (TA) are the two main ones, TA I believe is more oriented at US sellers whereas Wizard was initially UK oriented. There is a new player out thought which in my opinion looks set to beat them both. Its design is much slicker and allows for better work flow and it has a cheaper subscription fee. It’s called SourceMogul and you can try it for free here. Using this software basically cut’s out all the time you would otherwise manually be sifting through listings, switching between hundreds of tabs with different stores open and comparing prices to find arbitrage opportunities. It does it all automatically at the push of a button, whilst you have a cuppa. Just feed it the parameters so it knows what you’re looking for in your deals and come back to a long list of potential profit ponies. (If that wasn’t a term before it is now). You can specify the minimum profit that you want, the seller rating of the product, set it to search specific stores or categories and more. It also checks for brand restrictions, another important aspect of product selection. Very powerful stuff.
To further support your buying decisions, there are a couple of browser extensions to help you check the potential of these deals and calculate your expected return. It’s probably a good time to point out that if you’re not using Google Chrome I encourage you to make the switch. Not just because it’s a much better browser, in my humble opinion, but also because so many extensions built for online business only work on Chrome. Keepa is the first. It’s forms a vital part of product research. It displays a chart underneath the images on a products listing and shows the historical price changes. With a little patience and a few YouTube tutorials later, you can learn to effectively read the Keepa chart to provide key information about how many units are selling and what the price is likely to do and informs your purchase decision.
The second extension is BuyBotPro which is still in Beta so signups may be limited at the time of writing. It’s a really powerful tool that digs deep into the information behind the product and spits out a yes or no recommendation as to whether or not you should buy that product! Amazing right? Obviously, you shouldn’t blindly follow it but collaborate the result with Keepa information and your own intuition which you’ll develop over time. Used together, this set of tools can really skyrocket your FBA business to success and although not essential, I wouldn’t be without them.
Costs and earnings
You can expect an average of 20%-30% ROI with online arbitrage so the higher amount you can invest on your first few shipments, the faster you’ll get back your returns and be able to re-invest in order to scale. If you’re unsure when starting out and need some confidence just buy £50 or £100 worth of products and see how it goes. Don’t forget that for the more you purchase and send in, economies of scale come into play and allow for a greater profit margin. My top tip would be not to go too deep on any one product, even if it turns out to be a good seller. Start with a max of 10.
Due to the nature of online arbitrage, it takes some time for your profit to be realised. Products don’t sell all at once and it takes time for sales to be paid to you and to withdraw. Therefore having a cash buffer is highly recommended so that you can keep paying your monthly fees for Amazon FBA, which as mentioned above is $39.99 and any other software you’re using. I would suggest starting with at least $200 spare that you won’t be buying products with.
Last thing I want to mention is that when researching products, checking existing sellers or competitors, is important, especially if Amazon themselves is on the listing. Finding the cheapest possible source for a product or getting to market first, are the two things that will always give you the competitive edge. If you ever find yourself undercut in price though, don’t be tempted to start penny underpricing because it will not help you in the long run. In most instances, it’s a better tactic to maintain your price and wait out the other sellers than ditch your price and throw away your profits or more likely make a loss. I learned this the hard way.
If you think online arbitrage doesn’t sound like the kind 0f way you’d like to be making money online, or you haven’t got the capital to start then make sure you check out some alternatives such as matched betting or affiliate marketing.