What is Online Arbitrage in Comparison to Retail Arbitrage?

What We Will Cover in This Article:

a picture of some writing that says arbitrage

In this article, we will look at the distinctions between online and retail arbitrage.

In many ways, the processes are similar, but certain key factors might lead you to one over the other.

The Basic Differences

The primary distinction is that with retail arbitrage, products are bought from retail stores or localised marketplaces.

Online arbitrage on the other hand tends to uncover opportunities from other ecom stores or distribution platforms.

What Are the Advantages of Retail Arbitrage?

Convenience and preference provide the main advantages.

If you are someone who likes to shop around for bargains, have no problems wandering around stores for much of your days, and are able to store your purchases at your home, then retail arbitrage is a perfect match for you.

While you can still use Amazon to store and ship your purchases out to the final buyers, you will still need to process your purchases and ship them to Amazon for that fulfilment.

As you are buying localised products, it is possible that the offers you find are more unique, and this could lead to lesser competition and better prices on your chosen marketplace.

What Are the Disadvantages of Retail Arbitrage?

The main disadvantage of retail arbitrage is that you are operating a ‘churn and burn’ approach to ecommerce. You are finding short-term and low quantity offers in the most part, and so you are not developing any sustainability in your business.

With local offers, you tend not to buy large volumes, so stock levels are extremely transient.

this in turn leads to a much higher administrative burden, with new listings being needed all the time.

A picture of pros and cons

What Are the Advantages of Online Arbitrage?

Online arbitrage provides a much wider opportunity for offers and product lines.

It is much easier to specialise with online arbitrage, and it is also much easier to send your purchases directly for fulfilment by Amazon or through a fulfilment centre.

What Are the Disadvantages of Online Arbitrage?

The most difficult part of online arbitrage is finding unique opportunities.

If you use online deal finder services, then you are one of many seeing those same offers.

Also, as many online sources attempt to stop the resale of their products through online marketplaces, it can be difficult to buy sufficient quantities without having accounts flagged for ‘suspicious activity’.

Is Retail or Online Arbitrage Illegal?

In essence, when you buy a product, you are at will to do whatever you choose with that product.

However, if you mis sold the product or misaligned a brand, then you certainly could be entering risky territory.

In some cases, a brand will aggressively protect their reputation and issue Cease & Desist orders to anyone attempting to sell their products.

If this happens, it can lead to problems with Amazon and ebay, often potentially leading to account closure and profit retention.

The best way to evaluate the product for eligibility is to see that there are at least 3 other people selling the same item, with at least one not being the brand or Amazon.

This does not however give 100% guaranteed protection as some listings can fly under the radar, so a current listing does not absolutely equate to a legal listing.

a picture of directions that say illegal and legal

What About Selling Cross-platform?

One form of online arbitrage is to buy from ebay and sell on Amazon, or the other way around.

This is certainly frowned upon by both parties, and while many will still attempt this, there are automated processes built into these platforms to detect this practice.

One tactic that is used by some is to use Amazon Prime as a way of getting free shipping to ebay customers. this is most certainly frowned upon, and it only takes one complaint, and the walls can come tumbling down.

What Profit Margins Are Needed?

If you think that Amazon will take an average of 20% (all factors included), it is easy to see how the margins can be eaten into.

If you are managing your own shipping, again this is a cost that needs to be absorbed.

You will also need to factor in a margin for returns and refunds (which will inevitably occur).

so, all in all, if you can buy a product at 40% below an Amazon listed price, you might then expect to take about 10% in profits.

a picture of a profit margin diagram

How Best to Deliver Products to Customers?

Whether choosing online or retail arbitrage, you still have the same choice for delivery (or fulfilment).

Delivering Direct to The Buyer

Sending products directly to buyers can be preferential.

You are able to provide much better, secure and appealing packaging.

This should lead to lower returns and greater customer satisfaction.

The limitations are that you will need to store the stock yourself, and you will find that smaller parcels can be better as the shipping is cheaper.

Another benefit of self-fulfilment is that returned products are returned to you, and more likely to be salvageable than with FBA (fulfilment by Amazon).

a picture of a 3D Character delivering packages

Using Amazon FBA for Deliveries to Buyers.

There are advantages of using Amazon fulfilment. The cost of delivery is often much lower, they store all of your products, and they manage customer returns.

amazon will also pre-pack, fixing any barcodes or protective wrappings to each product.

The negative here is that you have no control over returns, and most often, any returned items are ‘disposed of rather than returned.

At this moment, only Amazon offer fulfilment, although ebay are rumoured to be starting this during 2022.

Using a 3rd Party Fulfilment Centre.

If you are listing your products across many marketplaces or are only using marketplaces that have no fulfilment services, then you can choose a 3rd party fulfilment centre.

This is basically a warehouse that stores, picks, packs and ships any sales for you.

this process is often automated, with the fulfilment centre picking up the sales directly from your accounts and entering tracking numbers for you.

The downside of this over doing it yourself is that there is a small fee, but this is mostly quite reasonable given the advantages they provide.

a picture of the amazon fba logo

The Final Choice

If you are happy to run your business as first-hand, then both online and retail will suit, but maybe operating the entire storage and shipping from your home.

This will give you a deeper awareness of the processes and set more meaningful expectations.

If you are working and using retail or online arbitrage as a side hustle, then you might want to choose Amazon or 3rd party fulfilment, along with a focus on online arbitrage. This mix will give you a much less first-hand operation of the daily tasks, but you could expect margins to be slightly lower due to the lack of overall control over returns and product storage.

If you truly want to build a business that can grow with you over time, then a more hybrid approach will give you a far greater experience to build upon.

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