Amazon Private Label vs Arbitrage – Choosing the Best Model for Your Amazon Business

Do you want to set up an online Amazon business but can’t figure out the right selling model? You’ve come to the right place.

A selling model is the way in which you sell your products to customers. There are 5 unique eCommerce business models to choose from when selling on Amazon:

1. Private Label (or PL for short)
2. Wholesale
3. Arbitrage (divided into online and retail arbitrage)
4. Dropshipping
5. Handmade

Dropshipping has its advantages but also carries the highest risk of an account suspension (more on that in this Private Label vs Dropshipping blog). The last category: Handmade, is the least populated selling model because it’s only open to artisans i.e. people who craft unique products by hand. 

This narrows down our choice to 3 options: private label, arbitrage, and wholesale (let’s set aside wholesale for now and focus on arbitrage and private label. If you’re interested in knowing the potential of wholesale on Amazon, Check out this informative piece).

In this Amazon private label vs arbitrage post, you’ll learn the pros and cons of both selling models, how each one works, and what your expectations should be when selling via arbitrage or private label.

What is Amazon Arbitrage?

Arbitrage is an easy way to earn money online. It involves purchasing a product from one retail marketplace and reselling it on another. Let’s say you purchased a $5 product from Walmart, listed it on Amazon, and managed to resell it for $15—that’s arbitrage. Minus the fees and whatever remains is your profit. 

In retail arbitrage, you purchase products from brick-and-mortar stores and sell them online i.e. reselling. In online arbitrage, you buy products from an online retailer or marketplace like eBay and resell it on another. Arbitrage is only viable if there is a variance in price for similar products across different marketplaces. 

The simplicity of this business model coupled with the lack of upfront investment are compelling reasons to set up an online arbitrage business as opposed to wholesale or private label. But before we dive into the nuts and bolts of retail arbitrage, let’s answer some commonly asked arbitrage questions.

Is Arbitrage Legal on Amazon?

Arbitrage is legal on Amazon. There is nothing in Amazon’s rulebook preventing sellers from purchasing a product legally from one marketplace and selling it on another. Just be careful to:

1. List the product in its proper condition. If you purchased a used product, list it as used.
2. Don’t try to resell counterfeit products or those prohibited from sale on Amazon.

As long as you stay within Amazon’s ToS, you’re good to go.

Can You Make Money From Arbitrage?

Yes. So long as there exist price differences for identical products across different markets, the doors to Amazon arbitrage will remain open. However, it makes no business sense to do arbitrage if the profits aren’t worth the effort. And like any business model, Arbitrage also has drawbacks, as you’ll learn later on.

How Much Money Can You Make Doing Amazon Arbitrage?

There’s no definitive answer—some do quite well whereas others struggle to remain afloat. To succeed at retail arbitrage, you need to know how the business works. Expect to:

1. Subscribe to seller software 
2. Engage in price wars to win the buy box
3. Sell multiple products to make meaningful profits
4. Keep hunting new products to remain in business

A lot of it also depends on the competitiveness of your product niche.

How Do I Get Started with Amazon Retail Arbitrage?

To do retail arbitrage on Amazon, sign up for a seller central account. You’ll need your personal details on hand like your bank account information and contact details. After receiving the confirmation email, don’t subscribe to a Professional selling plan yet otherwise you’ll have to pay $39.99 per month.

Because you’ll start slow and on a limited budget, you don’t want to incur the extra subscription fee. The individual plan costs $0.99 in referral fees per unit sold so as long as you’re selling below 40 units per month, there’s no need to pay the extra $39.99.

The second step is to decide whether you’re going to sell products via FBA (Fulfilled by Amazon) or FBM (Fulfilled by Merchant or self-fulfilled). In FBA, Amazon will pick, pack, and ship products on your behalf and also take care of customer support—but at a cost i.e. FBA fees. With FBM, you’ll have to manage the A-Z of logistics yourself.

In both cases, remember to factor in the referral fee cost that Amazon charges sellers for using its platform (Amazon referral fee is not static; it varies from one product to another based on category, weight, dimensions, etc.).

With the introduction out of the way, the following is a step-by-step guide on how to do Amazon retail arbitrage:

Step 1: Download the Amazon Seller App and Visit Your Nearest Retailer

The Amazon seller app is free to download and use and will be your main tool to identify arbitrage-worthy products. The app lets you scan product barcodes and pull up valuable data like best seller rank, competitors’ listings, and estimated profitability figures. 

If this is your first time using the app, spend some time browsing through the different features. For those accustomed to the desktop version, the app features will feel all too familiar.

After downloading the app, visit your nearest retailer. Popular arbitrage-spots include places like Walmart, Target, TJ Maxx, Homegoods, Marshalls, Ross, Kohl, dollar stores, and convenience stores like Walgreens and CVS. Now open the Amazon app, tap the camera icon on the top right corner, and start scanning products.

There is no formula for product selection—just go with your instincts and start scanning items you think have the potential to sell well!

If there is a dedicated clearance aisle with discounted items, try scanning these first. There’s a higher chance to net bigger profits by selling items on sale. You will need to scour around though; different stores might have different discounted products so it pays to visit multiple stores in one visit.

Note: Avoid products that are prohibited from sale on Amazon.

Step 2: Verify Product Viability

After scanning the barcode, the product will appear inside your Amazon seller app along with vital information needed to determine viability. 

If it’s a single-unit product like a book then picking out the right listing is easy. However, if the product you’re interested in is sold in bundles e.g. a colored pencil pack, then you’ll need to find a listing that offers the same number of pieces as your product.

Not all sellers are generous enough to let you piggyback their listings; some are restricted from resale and have a red icon that appears on top. This could be because the product is either brand or category restricted.

Clicking on the product will lead you to the Product Details page. To determine whether an item retail arbitrage-worthy, inspect the:

Sales Rank

The sales rank is important because it lets you know how likely (and how fast) an item will sell. Ideally, you want to start doing retail arbitrage with products that won’t linger in your possession for long. The lower a sales rank, the more in-demand a product. Try to target products with a sales rank below 100,000. 

Verify your search by using ZonGuru’s free Keywords on Fire (Lite) tool to find out the monthly search volume and sales rank. 

If you want to be extra careful, you could rely on a tool like Keepa (and also Google Trends) to see whether the demand is consistent and not seasonal.

Expected Profitability

Found a product that checks all these boxes? Great!

It’s time to find out how much money you can pocket after making a sale. The Amazon seller app has this cool feature where it breaks down all the seller fees involved. Click on the pricing section and input the cost of your product. At the bottom you can find out your net profit.

But there’s more to profitability than just the numbers. Look below the price tag to see if Amazon is an active seller on the listing. If it is, it’s best to let this product go because Amazon does not share the buy box with other sellers.

The number of sellers (both FBA and FBM) indicates how competitive the product is and how many units you can expect to sell each month—provided the buy box rotates relatively evenly. A low product rank equals a lot of sales so the better a rank is, the bigger your share of the pie. 

Finally, use the FBA fee calculator to see the referral and shipping costs. Checking up on the sales history is also important because you want to know how low the price can fall and if it does, will selling the product still make sense? 

Retail arbitrage can be summed up in these two steps. Based on what we’ve learned so far, here are the pros and cons of arbitrage on Amazon:

Advantages of Arbitrage

• The biggest advantage of online and retail arbitrage is you can start with just a few hundred bucks. Let’s say you have $200 and you find a $20 product to sell on Amazon, that’s 10 products you can resell at a higher price and get the ball rolling. Other business models require thousands of dollars’ worth of investment upfront.
• You don’t have to build a brand or file trademarks to start online or retail arbitrage. Identify price gaps between two different marketplaces, purchase branded products, and resell them at higher prices. Arbitrage requires far less effort and expertise to start making money.
• The list of products for sale on Amazon—and by extension, opportunities—are endless. After learning the ropes and subscribing to the right repricing tool, you start reselling across multiple product categories simultaneously.

Disadvantages of Arbitrage

• The future is (mostly) uncertain. Sure, you can rake in big profits here and there but generally speaking, the margins are low. To compensate for that, sellers need to resell multiple products which increases the amount of work hours you need to put in. 
• The influx of bad actors on Amazon is pushing sellers to protect their brand via Amazon brand registry and transparency codes. This restricts others from reselling their products. Add to that the increase in the number of people doing retail and online arbitrage and suddenly the business model doesn’t seem as lucrative as advertised.
• There’s no opportunity to create something that you truly own. The arguments in favor of arbitrage are offset by the inability to build a self-sustaining asset down the line, something that’s possible with private label. 

What is Private Labeling on Amazon?

Private labeling on Amazon is when you source products from third-party manufacturers, apply your own brand logo to these products, and sell them on Amazon. You must also pay Amazon fee(s) in exchange for the opportunity to market your goods to the millions of potential customers visiting the platform each day.

So does private label yield a brighter future or retail arbitrage? To answer that, you first need to know how private label works. The following is a simplified step-by-step breakdown of the relatively complex private label journey:

Step 1: Researching the Right Product to Sell

Just like arbitrage, you start with product or keyword research. But unlike arbitrage, finding the right private label products relies on the use of software instead of physically walking into popular retail/discount stores.

A good private label product is marked by high-demand but low competition. But how do you find that out? By using a reputable product and keyword research tool that provides accurate monthly search estimates. A top-tier seller tool like ZonGuru goes one step ahead by scouring dozens of product categories and suggests products with the highest probability of success. Go check it out. 

Once you zero in on a product with the right figures, head over to Alibaba.com to find the right manufacturer. 

Note: Private label is costlier than retail arbitrage but offers bigger and more stable revenues in the mid to long run. Although there is no fixed number, we recommend having at least $5,000 at your disposal to cover up for the cost of inventory, brand registry, trademark, and monthly professional plan subscription fees.

Step 2: Partnering Up With the Best and Most Reliable Supplier 

There are numerous manufacturing hubs located across the globe but we’ll cut to the chase and say that you should only source products from China and in particular, Alibaba.com. Explaining the ‘why’ in detail requires a separate blog of its own (conveniently found here). 

Here are the three main reasons to source products from China:

• Chinese manufacturers offer the lowest product manufacturing rates
• Most of these manufacturers have been in the industry for decades and are reputable
• The vast majority of third-party sellers source their products from China

Get in touch with such manufacturers by visiting Alibaba.com and individually vet companies you think are up to par. Partnering up with the right people also requires negotiation skills and business acumen. 

If you feel as though the entire process is too complex, we have a handy tool called Easy Source that brings up the best manufacturers related to your product of interest. It basically vets them for you and all you have to do is get in touch with the customer support and convey your requirements.

A word to the wise: After shortlisting the suppliers, ask them to ship over product samples for quality inspection purposes. You could also order a product from one of your main competitors and compare it with the sample. Identify areas of weaknesses and relay them to your supplier.

Step 3: Setting up Your Product Listing 

As your first badge of inventory enters the production stage, now is a good time to create a product listing. A product listing—or product detail page—is your virtual storefront. It features the title, product description, imagery, bullet points, and A+ content, all of which work together to enhance your brand image.  

The more effort invested in a product listing, the higher the dividends. Not least because it reflects positively on you as a seller, but also because listing optimization plays a pivotal role in search engine optimization. 

In retail arbitrage, sellers can just hop onto a product listing and start selling. In private label, you have to create an attractive copy that convinces potential buyers that your product is worth purchasing. Remember to organically add the keywords you’ve gathered using the tool we mentioned into your content. This informs Amazon regarding the nature of your product and also helps bring in that extra bit of traffic.

Note: Here’s an Amazon listing optimization guide containing all the information you need to create well-optimized product listings.

Step 4: Run Sponsored Ad Campaigns 

The final step in our private label journey is to set up and manage ad campaigns. Sponsored ads help bring in those initial and much needed sales for private label products. Because you just started, your product is most likely listed on the nth page of relevant search results. 

PPC ad campaigns provide product listings with the steam needed to start moving up the ranks. There are three types of sponsored ads to choose from: 

1. Sponsored Products
2. Sponsored Brands
3. Sponsored Display

Sponsored product ads allow new sellers to increase visibility by essentially ‘buying’ the top spots on page 1 of relevant search results. Sponsored Brands and Display make sense once your business starts doing well and you can afford dishing out extra cash to further accelerate sales.

Product ranking improves faster when those buying your goods leave behind positive review ratings. Positive customer feedback results from a superior product, emphasizing once again the importance of partnering up with reliable manufacturers. 

These 4 steps sum up how to start selling private label products. Let’s wrap things up by looking at the pros and cons of private label on Amazon.

Advantages of Private Label

• As a private label brand, you get to call the shots. Whether it’s marketing, product research, advertising, or sourcing, you get to decide which direction your business takes. It may seem difficult at first but there are plenty of guides available online to help you out.
• Running a private label business becomes a lot easier once you enter the profitability stage. It’s relatively smooth sailing from that point on and if you’ve targeted the right niche, you can continue to grow your asset and possibility generate monthly revenues exceeding $100,000
• An Amazon business is, for the most part, automated. Combine that with advanced seller tools and you have the opportunity to create an online store that lets you escape from the 9-to-5 grind. While succeeding at Amazon FBA may not be a walk in the park, it’s also not as hard as some make it out to be.

Disadvantages of Private Label

• You can’t go into private label empty handed or with smaller investments. Get ready to pay for inventory, branding, advertising, shipping, and other costs before you become profitable.
• You need to be patient. Unlike arbitrage, you can’t start making money from the get go. 

Arbitrage vs Amazon Private Label – The Verdict

Time for the verdict!

In our opinion, you should choose Amazon private label over arbitrage—online and offline. The reason is simple: you can’t keep running between different retail stores, scanning products while avoiding awkward looks from store employees—that’s not how an online business should be.

The ideal online business is where you can sit and work from the comfort of your home. You make key decisions and let your automated store earn on your behalf, something only possible with an FBA private label business. 

Even if your first couple of retail arbitrage products start making you money, you’ll still be in a perpetual loop of hunting for the next product. And guess what? 5 years down the line and not much will change. 

Private label, however, gives you the opportunity to create a brand. If you play your cards right, this brand will grow into an asset which you can ‘flip’ in the future or increase revenues by adding new products to your store.

Ready to start with private label? Remove the guesswork and let Zonguru do all the heavy lifting. Countless sellers started from scratch just like you and now own successful stores that enabled them to live life on their own terms. 

Whether you’re just starting your Amazon journey or been in the game for a while, ZonGuru has just what you need to improve your business. Sign up for a FREE trial today, cancel any time.