Amazon Retail Arbitrage vs Private Label (Which One is Better)

Choosing between Amazon Retail Arbitrage vs Private Label is a straightforward decision. New entrepreneurs can try Amazon retail arbitrage in the beginning because it is a low-risk way to get started and test the waters on Amazon FBA. Once you have enough capital and have grown tired of running around brick-and-mortar stores to find good deals, you can go to private label.

Both business models can be profitable and it's a business that is best for someone who enjoys selling physical products. However, there are just too many variables and I think it's just not for me, even though I have a successful Amazon private label business.

I found that even if I execute perfectly, things beyond my control can ruin my business. So instead of these two business models, local lead gen is my recommended online business because you have better control of the outcomes in your business.

Amazon Retail Arbitrage vs Private Label Head-To-Head Comparison

With Amazon Private Label, you create your own brand and sell products you source in bulk from a third-party manufacturer. The manufacturer takes care of putting your brand on the products, packages them, and ships them to an Amazon FBA warehouse or your own fulfillment center.

With Amazon Retail Arbitrage, you buy a set of low-priced branded products you resell at Amazon for a profitable price. You buy these products from a physical retail store such as Walmart, Best Buy, and Home Depot.

You can also source your products online, which is another form of arbitrage called Amazon Online Arbitrage. Whatever arbitrage option you choose, both of them sell products with existing brands.

The simple difference between retail arbitrage and online arbitrage is where do you source products. In retail arbitrage, the seller buys from a retail store, while in online arbitrage, it’s from an online store like Alibaba.

That's the major difference between private label and retail/online arbitrage - brand ownership. These business models are vastly different; they differ in the amount of money and time involved, the requirements to start, the opportunity to scale, and more as you'll see later in the article.  

Pros and Cons of Retail Arbitrage vs Private Label

Pros of Amazon Retail Arbitrage

• Low initial investment. You don't need to invest a lot to start in retail arbitrage. Signing up for an Amazon seller individual plan is free. You only pay $0.99 per item when it is sold. You also pay the shipping fee to an Amazon FBA warehouse if you use FBA. Any other fees are added to the selling price and paid by the buyer. There’s no minimum number of items required to sell so you can literally start with any amount. You can even start selling products that you already have. But it can help if you put in more at the start because you will have more products to sell.
• You don’t need to register a business entity. Just complete signing up to Amazon seller central and you are ready.
• There's little risk in retail arbitrage because you only put in a small amount of money.
• It’s fast to set up because there's little required from you. This means you can get your initial investment back quickly and roll it over to your next purchases.
• No minimum order quantity. You just buy what's available and what you can afford.
• There's already brand awareness for your branded product. You don't need to spend on brand marketing. That has been done for you.

Cons of Amazon Retail Arbitrage

• Product gating. You can't sell products gated by Amazon. Amazon needs to approve you first before you can sell those products so you need to check before buying. 
• Limited stock of products. Once you sell all your stock, you can no longer sell that product. You don't have an agreement with the retailer to supply you with those same products.
• Long payment cycle. Getting paid will take 3 weeks to 1 month. If you don't have extra funds, you'll need to wait to receive your payments before you can restock your store with new products.
• Almost no chance to win Buy Box. The Buy Box is a critical source of sales. You can't win it if you're on the individual plan. As a small retailer, you will rarely win it so you have to compete by lowering your price.
• You need to put in a huge amount of time and effort to find and buy products. This is not a situation of you set it up once and profit from it over and over. You're always out there scanning products and hoping you can find new products to sell. You need to have a lot of stamina and perseverance.
• Difficult to delegate. It's not impossible, but it's going to cost more compared to private label, because of the time needed to find products and set them up on Amazon. It's hard to delegate buying in retail outlets. You need to have an intuition for the categories of products to scan.
• Difficult to scale. It's difficult to scale without hiring more people. Your expansion depends on being able to hire the right people. It's not impossible, but it's hard to scale using technology or implementing systems.
• Your income is not predictable. There's no way to predict your revenue because your products and profits vary from month to month. 
• Profits are lower because you are competing with other sellers selling the same product. Your profits can disappear if there are too many sellers offering the same product.
• You don’t own your brand because you're selling other companies' products. 
• There's a high level of competition because it's easy to start in retail/online arbitrage. And because it's profitable, many wholesalers, brands, and even Amazon itself enter to compete in the Amazon marketplace.

Is Retail Arbitrage Profitable?

Fortunately, retail arbitrage is still profitable even with the intense competition. 

A young YouTuber named Stephen Yaz made about $1,000 trying out retail arbitrage for 30 days. So you can still make a profit, but the question is, is it worth it?

Retail arbitrage can be worth it if you enjoy shopping for good deals. Even Gary Vaynerchuk mentioned he enjoys flipping because he enjoys the hunt. So it can be worth it if you enjoy what you are doing.

But Stephen Yaz opted against continuing with retail arbitrage because of the time it required.

I mentioned Mike Rezendes of Reezy Resells in a previous blog post and he has stopped doing retail arbitrage and built his own brand of skateboards. According to him, his experiences during the pandemic made him re-evaluate his business and that led him to start a new venture.

Mike is an example of an Amazon seller who showed it is possible to make a full-time income from retail arbitrage. He was able to make $8M in 15 years. But like him, there are many Amazon FBA sellers who have quit selling on Amazon even if they were making good money.

How Do You Get Started with Amazon Retail Arbitrage

Here are the steps for you to get started with Amazon Retail Arbitrage.

1. Sign up on Amazon Seller Central. Start with an individual FBA account.
2. Look for products to sell in big-box retail stores, thrift stores, and liquidation stores. Use the Amazon Seller App to scan products and see if they are profitable. You can also look online for potential deals.
3. Confirm that you can sell the product for a profit. Make sure it’s not a restricted or gated product. Use the Amazon Seller app’s profit calculator to make sure you can sell at a profit. Then buy the product.
4. Add the product to your seller catalog.
5. Pack and ship the product to Amazon.

Pros and Cons of Amazon Private Label

Pros of Amazon Private Label

• Product gating is not a problem because you own the brand. 
• You have a virtually unlimited supply of your product. As long as it's profitable, you will always be able to sell it and continue to profit.
• Even though retail arbitrage and private label have the same payment cycle, a private label merchant can make an advance or get a loan against the pending payment. There are sites like Clearco and AccrueMe that provide this service. These sites require a business entity and a minimum sales volume, so most retail arbitrage sellers won't qualify. 
• You win the Buy Box automatically because you are the only seller of your brand. You have no competition.
• You need to spend a lot of time, money, and effort building the business at the start. The good news is if you do things right, you can spend less time on the business and let your team handle the day-to-day for you.
• You can delegate many of the tasks in a private label business. For example, ordering products to sell can be as simple as emailing your supplier. No need to scour retailers every day for the latest sales.
• Because many of the tasks are simpler, a private label business is simpler to scale. 
• Income is more predictable because you can predict demand every month. You are selling the same product so you can have a good idea of the demand and expected sales.
• This Amazon business model gives big profits if you picked a good niche because you're the only seller. You control the price and there's no middleman between you and the manufacturer.
• You own the Brand. If you build a successful product line, that can open up new product lines. If your brand succeeds, you can sell the business.

Cons of Amazon Private Label

• Starting a private label business requires a high initial investment. You will need about $12,000 to $15,000 for a $6 product to start an Amazon private label business. The actual amounts may vary with different products and suppliers, but this is the amount I ended up needing in an Amazon FBA case study I conducted. I thought I would only need $3K for the initial order of $500 units, but because manufacturing and shipping the product to Amazon took 90 days, I ended up needing to place additional orders to make sure I don’t run out of product to sell. Also, I needed to pay for shipping, storage costs, and marketing, so I ended up putting in more money at the start. 
• You must register your business. Your supplier and Amazon will require that you have a legitimate business entity to get started.
• The high initial investment leads to higher risk. Because your brand is untested, there's a high probability that it will fail.
• A private label business takes a long time to set up. You need time to develop your brand concept, create a marketing strategy, and find a manufacturer who will make your product for you. You will need to vet each other and after that, your manufacturer will need to set up the production line for your product.
• You are required to make a high minimum order. You are the only one buying your product from the supplier and they need to cover their costs.
• There's no brand awareness so you will need to spend a lot of time, effort, and money just to create awareness for your brand. You need to understand Amazon's product ranking algorithm and leverage every resource available to you - Buy Box, product reviews, Amazon PPC, best seller rankings, and even outside traffic 
• One thing private label and retail arbitrage have in common is the constantly tough and growing competition. Merchants from overseas keep entering the space. Even if you own your branded product, other brands, including Amazon, will compete against you.

Is Private Label FBA Profitable?

Amazon private label FBA is profitable when done with the right product research and business execution. I made as much as 32.88% profit margin on my first Amazon private label product. That said, there are so many risks that can wipe out your profit. Some even feel private label is dead.

Even if you execute perfectly, things outside your control can still cause big headaches: your supplier could produce a bad batch of products that leaves you with bad reviews, Amazon can lose your inventory, which leaves you with zero product to sell, or the supply chain could get wrecked again leaving you without products to sell.

That's one disadvantage of Amazon FBA - they can screw up and lose your inventory. Even if Amazon pays you back, more damage has been done in terms of lost sales and lost momentum for your private label products.

How Do You Get Started with Amazon Private Label

Here’s how to get started with Amazon Private Label. Remember that it will take a longer time to get started with Private Label. 

1. Select the right product. This is a very important step. You need to do intensive product research. Study the different categories, use various research tools like Jungle Scout, and look for a product that is selling well and improve on it.
2. Crunch the numbers and figure out if it makes sense to push through with that product. You need to figure out your cash-flow, break-even price, ROI, inventory turnover, etc…
3. Set up your company.
4. Find a reputable supplier that you can trust.
5. Develop the product with the supplier. This is going to take time - could be as much as 90 days.
6. Create the product listing
7. Prepare your funds and make your first order.
8. Prepare your marketing plan and product launch plan.
9. When you start selling, check your stats and review your results. Find any adjustments that you need to make to sell more of the item.
10. Remember to replenish your inventory when it’s running low and consider the time that the supplier needs to deliver your product..
11. Repeat step 1 to grow and expand.

You can find more details about getting started with this Amazon FBA case study.