Bank of America recently estimated that Amazon accounts for 44% of eCommerce purchases in the US. Third-party sellers are behind over half of Amazon’s transactions so, when you work it out, that means they’re responsible for almost a quarter of all online sales!
With eCommerce and Amazon predicted to grow significantly for years to come. There are still plenty of opportunities for third-party sellers to make a name for themselves. That’s where online arbitrage comes in! It offers sellers a quick way to get started without huge amounts of risk or investment.
What is online arbitrage?
Online arbitrage is when you purchase a product online for a low price and you sell it on at a higher rate.
So, for example, you might find some popular products on AliExpress and list them on Amazon with a significant markup.
Although you’ll have to pay for shipping and other costs on each sale, you’ll be left with a small sum of money to take home. Repeat this dozens of times and you can build up a customer base that can be the foundation for an eCommerce business.
Sometimes established eCommerce businesses might use online arbitrage if they’re low on stock or looking to bolster a new product range.
At its core, online arbitrage is about spotting profitable pricing disparities across different online stores and marketplaces. The whole process takes place online and some sellers even do it without ever touching a product.
Many of those who take advantage of online arbitrage, sell on Amazon because of its large and loyal customer base. However, it works across other online marketplaces as well.
What do you need for online arbitrage?
Online arbitrage is a simple concept so you’ll have lots of competitors. A whopping 500,000 new sellers joined Amazon in the first half of 2020! To increase your chances of success, you’ll need to invest some time and resources into your business.
1. Invest in eCommerce software
Specialist eCommerce software helps you to save time, increase productivity and guide your purchasing decisions. In short, they improve your chances of success.
Here are some must-have eCommerce software for online arbitrage:
Tactical Arbitrage, Jungle Scout, FBA Wizard and other tools help you to source products from all over the internet and automatically compare prices so you can find the best deals. You can narrow your results by category, product type, availability and marketplace. When choosing a tool, check how many stores and marketplaces it can scan.
It’s also worth checking Google Trends to find what people are searching for. This is particularly useful if you’re going to be re-selling products that are new on the market. Consumers often aren’t sure how expensive new products should be and this gives you the opportunity to sell at a bigger margin.
Related article: How to Find a Profitable eCommerce Niche: With Examples!
Price tracking software
These tools display a product’s track record in just a couple of seconds. You can see past pricing, sales history and the number of sellers you have to compete with. It can help you assess how many units to buy and how much you stand to earn. You can also set up alerts. When a price drops, you can snap up stock. When availability is low, publish your listings and make a killing!
Repricing software enables you to maximize your profit and sales by helping your products win the Amazon Buy Box at the optimal price. The Buy Box is where over 82% of Amazon sales take place, so winning it on a regular basis will have a huge impact on your sales figures. Automated repricing software is essential if you’re selling on Amazon!
Related article: 10 Secrets to Winning the Amazon Buy Box in 2020
Having a great set of tools to hand can really supercharge your online arbitrage efforts. They also allow you to scale your business faster. However, product sourcing tools come with a steep learning curve so start slow and try out different free trials before choosing one.
2. Be aware of all your costs
One of the most frequent downfalls of online arbitrage is the tendency to focus on revenue rather than profits.
It may seem like you have tons of money coming in if you close a lot of sales. But when you deduct all of your costs, this may no longer be the case. To avoid this, you need to constantly be aware of what you’re spending and only stock items you can make a significant profit on.
Costs to factor into your online arbitrage planning include:
- Purchasing: Obviously, you need to factor in the cost of buying your inventory.
- Marketplace fees: Amazon charges sellers a monthly subscription of $39.99 per month, as well as referral fees. These usually cost between 8 and 17% of your final sale price. On top of that, items like CDs and books incur a flat closing fee of $1.80. Familiarize yourself with all the Amazon seller fees to avoid any nasty shocks later on.
- Fulfillment costs: Many use Fulfilled by Amazon (FBA) to ship products to customers. It takes a lot of work off a seller’s plate because Amazon takes care of picking, packing and shipping – as well as customer service. Using FBA also offers huge advantages like Amazon Prime access and increased Buy Box placement. However, it also comes with fulfillment fees, monthly storage fees and long-term storage fees. You’ll also have to pay to ship items to one of Amazon’s fulfillment centers. For those who don’t opt for FBA, you’ll have to tally all your packaging, shipping, warehousing and customer support costs separately.
- Other outgoings: These may include software subscriptions, wages and product lead lists.
Return on Investment is the key metric to keep at the forefront of your mind. Starting off, aim for a minimum ROI of around 40-60%. This way you’ll quickly see your profits snowball no matter the size of your initial investment.
3. Invest your time in profit-driving activities
With software helping you to streamline your processes, you can focus on other aspects of online retail, like eCommerce marketing. Here are some of the most productive ways to spend your time:
- Research, research, research: Spend lots of time reading up on new brands and browsing your product research tool. When sourcing products, always follow the data rather than your personal preferences. You should also vet every supplier to minimize negative feedback, which will hurt your sales on Amazon.
- Create a process: Set out step-by-step procedures to follow which allow you to consistently find products that will sell fast and earn money. Set certain criteria and stick to them. This will minimize bad decisions and can be shared with others when you decide to grow your business.
- Distinguish yourself: Lots of people are trying online arbitrage, so set yourself apart. Find an eCommerce niche, sell complementary items together in unique bundles or focus on refillable products that customers will order again and again.
- Focus on marketing: To boost sales you should try every eCommerce marketing tactic you can. Think about which marketplaces you’re selling on and find specific tips for them. Check out these tactics to help increase your sales on eBay, for example.
- Provide excellent customer service: Once you start building sales, you’ll learn how important excellent customer service is in eCommerce. Great customer service helps you to get more reviews on Amazon, eBay and everywhere you sell. Lots of five star reviews are really important for winning the Buy Box and will have a direct effect on your sales. Try using eCommerce help desk software to simplify your customer service on whatever channel you’re selling on.
- Ask for reviews: If you’ve sold a product to a happy customer, or resolved an issue and delivered a positive outcome, why not ask them for a review? It might seem obvious, but simply by asking nicely you can increase the volume of your positive feedback. Make sure that you don’t ask specifically for a positive rating however, as this is against most marketplaces’ terms and conditions.
- Accounting: You need to keep track of outgoings and profits to make sure you’re paying the correct tax and staying compliant!
Can you make a successful business with online arbitrage?
Lots of articles out there makes online arbitrage sound easy. But it’s not a get rich quick scheme. There’s a lot of work required and, no matter how good you are, it will be months before you build up enough income to sustain a business.
Online arbitrage is something that you should consider as a project within a wider business plan. If you find a niche, online arbitrage can help you to get started, but at some point you should find a more profitable way to scale.