Dropshipping is better than retail arbitrage in 2024. It requires less time, can be done anywhere, and it’s more scalable in the long term. Online and retail arbitrage are similar to dropshipping in some aspects. The business model also does not need much capital to start, plus there’s not a lot of risks involved. However, arbitrage loses to dropshipping because it can be time-consuming. Moreover, the business model requires you to constantly look for new products.
Of course, it’s still possible for arbitrage sellers to succeed.
Ryan Grant started his online selling journey with $1,000 worth of cameras. Eventually, he managed to grow his retail arbitrage business by making over $2 million each year. In 2018, he earned $5.9 million by spending only 10 hours per week on his Amazon business. Today, Ryan is known as a business coach and speaker. He also blogs on his Online Selling Experiment website.
On Reddit, Future_Feedback_6116 says arbitrage success generally depends on “how you choose your products.” For example, sellers can buy products costing $30 to $50 and then earn a profit of $10 to $15.
Another user describes retail arbitrage as “high-speed chess,” pointing out that everyone sells the same products online. The Redditor also adds that sellers have to move “ultra fast because the minute that info leaks, it’s over.”
Meanwhile, dropshipping also has plenty of success stories online.
Pros and Cons of Online / Retail Arbitrage and Dropshipping
Category | Retail Arbitrage | Online Arbitrage | Dropshipping |
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Investment required |
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Risk Involved |
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Shipping & Inventory |
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Shipping Time |
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Product Supply |
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Listing Process |
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Profit Margins |
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Quality Control |
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Scalability |
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Supplier Dependent |
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- Low investment Difference Between Online Arbitrage and Retail Arbitrage
The key difference between retail arbitrage and online arbitrage is how products are sourced. Retail arbitrage involves buying products from brick-and-mortar retail stores. You’ll have to visit physical stores like Target, Walmart, or other local discount shops. Your goal is to find clearance sale products, buy them, and then sell them at a higher cost on Amazon, eBay, and other similar platforms.
Meanwhile, online arbitrage involves sourcing products from online retailers. This means you’ll have to find profitable products on ecommerce websites such as Amazon, eBay, or other similar platforms. As with retail arbitrage, you resell the products to make a profit. According to a Jungle Scout survey, 57% of online arbitrage sellers use software tools to find profitable deals and streamline their product sourcing process. You can use tools like Tactical Arbitrage or OAXray to scan thousands of products across multiple online stores.
Both methods also have their own sets of challenges. For retail arbitrage, the main challenge is the time and effort required to physically visit stores. A study by the Retail Industry Leaders Association (RILA) found that retail arbitrage sellers spend an average of 15-20 hours per week sourcing products. In comparison, online arbitrage can be done from the comfort of your home. However, the business model requires constant monitoring of online prices and stock levels.
Profit margins for both retail and online arbitrage can be slim. Aside from the massive competition, Amazon FBA (Fulfillment by Amazon) fees can cut into your profits. Referral fees range anywhere from 6% to 45%, depending on the product’s category.
Is Retail Arbitrage the Same as Dropshipping?
Retail arbitrage is not the same as dropshipping. With retail arbitrage, you physically purchase products from a retail store. You then put the products up for sale in your online stores. This requires an upfront investment and involves managing inventory. With dropshipping, you can list products in your online shop even without buying the items.
In essence, dropshipping shares similarities with online arbitrage. Both do not require business owners to buy the products and carry inventory. This presents a significant advantage, as it reduces the financial risk of having unsold inventory. Also, suppliers directly ship ordered products to buyers in dropshipping.
You can’t do that with online arbitrage. You have to buy the product first and then ship the product to the customer. The main concern here is that most online platforms ban this practice. Amazon and eBay no longer allow this and you can get your account permanently suspended if you get caught.
Also, dropshipping from Walmart.com to your customers in other channels is against the platform’s policy. However, dropshipping from suppliers to your Walmart customers is fine. Despite these challenges, dropshipping remains popular among online business owners. Mainly, dropshipping stands out because of its low barrier to entry and scalability.
Pros and Cons of Online / Retail Arbitrage
Pros of Online / Retail Arbitrage
Low Risk To Start
You can start with any amount and even sell things that you already have. If you are an Amazon retail arbitrage seller, you can use the Amazon seller app to scan the products and determine if they are profitable.
Quick To Set Up
No need to wait for approval from suppliers to sell their products. All you need to do is open your store, buy products, and list them on your store. With online arbitrage, you don't even need to buy the products. You can just list them online. It’s definitely the fastest way to experiment and get your feet wet in e-commerce.
Product Sourcing Can Be Done Without Leaving The House
With online arbitrage, you don’t have to drive around to find top stores for sourcing in your area. Instead, you can simply use software like Source Mogul. Staying at home can save you time, gas, and effort. It feels more like a proper online business compared to retail arbitrage.
You Don't Need To Buy Products Right Away
You can list the products first with online arbitrage. When someone makes the purchase, that’s the time you buy the product. This lowers the risk of your capital being stuck on products that won’t sell right away.
Cons of Online / Retail Arbitrage
Retail Arbitrage Can Require A Lot of Time and Effort
Doing product sourcing can be a pain. There's no escaping it. And you have to do it regularly. It's slightly better with online arbitrage but still has its own share of problems. In fact, an AMZScout survey says 70% of retail arbitrage sellers spend around 10 hours per week on product source.
Increased competition
The product search software doesn’t give sellers access to unique recommendations. As such, the more people use the same software, the more online arbitrage sellers you will have to compete with. It’s the same with retail arbitrage. Every year, new sellers come and try the business model. Most of these new arbitrage sellers are people who have taken retail arbitrage courses or have discovered online content that say how easy it is to start.
Low profit margins
As more competitors enter the space, it’s a race to who can offer the lowest prices in the market. This can cut into everyone’s profits. According to ProfitGuru, the average profit margin for retail arbitrage sellers is around 10%. This even becomes challenging to maintain with increasing competition.
You can consider using coupons and store credit cards to help reduce your price and increase your profits. You can also earn points to use when you need to buy additional products to sell.
Limited stock
With retail arbitrage, you can only sell what you are able to buy from the retailers. They’re not obligated to restock those clearance shelves with new underpriced items. Once you sell everything, you have to find new products to sell. No wonder, InventoryLab reports that 45% of retail arbitrage sellers face stock shortages at least once per month.
Arbitrage is Not Scalable
There’s no feasible way to grow your business. You’re always changing products, hustling, and hoping to get lucky. Getting lucky is not a scalable business strategy. It can be a great way to start, but at some point, you have to switch your business model. Jungle Scout says 60% of successful sellers eventually transition from arbitrage to private label or wholesale models to achieve scalability.
Pros and Cons of Dropshipping
Pros of Dropshipping
Don't Need To Pay For Products Right Away
You just need to list the products online and pay for them when a buyer purchases. According to Shopify, dropshipping allows you to start a business with as little as $100. As such, this business model can be very accessible for starting entrepreneurs.
No Inventory Cost And No Packing Required
As a dropshipper, you don’t have to pay for warehouse storage or pack any items. Your suppliers will handle logistics while buyers shoulder shipping and handling costs. BigCommerce reports that 33% of dropshippers say the elimination of inventory management is a major benefit in the business model.
Do Dropshipping From Anywhere
You can do dropshipping from home or even while you’re on a vacation. Your online store and chosen suppliers will keep working for you. All you need is a laptop and an internet connection to keep your business running. As such, an Oberlo survey indicates 60% of dropshippers prefer the business model because it allows them great flexibility.
You Can Sell As Much Products As Supplier Has In Stock
You’re not limited to the products that you bought on the clearance shelf. As long as your supplier has the inventory, you can keep selling the same item over and over again. You won't have to look for new products to sell all the time. By leveraging reliable suppliers with large inventories, you can earn continuously from your dropshipping business.
Add New Product Listings As Needed
No need to list new products all the time because in general, you're selling the same products. You just need to update stock, which is automatic if you are connected to the system of your dropshipping supplier.
Scalable and Predictable
It’s mainly a marketing numbers game. You just need to drive traffic to your store. As you invest in paid advertising, you just need to make sure that it later translates into product sales. When done right, your dropshipping store can run with minimal work from you. According to Shopify, successful dropshippers often reinvest 30% of their profits into marketing.
Cons of Dropshipping
Cannot Control Shipping Time
If your supplier is located overseas (such as Alibaba), then shipping will be slow. You may have the lowest price in the market but you can still lose potential sales if you can’t ship products quickly. In fact, an ePacket survey declares that 45% of buyers abandon their carts due to long shipping times.
Cannot Ensure Product Quality
You can’t do any quality controls as a dropshipper. You can’t check the products for any defects or inspect the packaging. Instead, you can just hope that your supplier does everything well. This can be risky because one bad batch of products can cause you a wave of bad reviews. In some cases, this can shut your store down.
Low Profit Margin
Since you’re not buying in bulk, your supplier cannot give you the absolute lowest price that they give to wholesale buyers. In fact, dropshipping becomes unprofitable if there are too many sellers focusing on the same product. This happens often because the barrier to entry for dropshipping is very low. On average, dropshippers only earn a profit margin of 10% to 15%
Not Your Own Brand
Dropshipping makes it hard for you to stand out in the market. You are not using your own brand as you compete with other sellers. For the most part, you can only compete on pricing.
Spend More Time In Marketing
The low profit margins may limit your ability to advertise. It can be expensive to advertise in established marketplaces and so the costs can quickly add up for dropshippers with tight budgets. For example, the average cost per click (CPC) for Facebook ads is $0.97
Dependent on Supplier
Your business absolutely needs suppliers to be reliable. If your supplier messes up product quality, delivery, or packaging, you can get a lot of returns. This can destroy the reputation of your online store.
What are the different types of dropshipping?
There are new variations of dropshipping that have been enabled by technology. The most popular form of dropshipping is reselling products from a manufacturer or wholesaler.
A new dropshipping model has sellers creating new product bundles by combining different products together, such as craft supplies. Another variation is print-on-demand. Sellers can create new designs that suppliers can print on various items and deliver to buyers. This is expected to grow even more with 3D printing technology.
When doing dropshipping, remember to follow specific platform rules. Retail dropshipping is risky and illegal on many platforms. You can get your account suspended or worse, permanently banned. Wholesale dropshipping is the safer option as long as you follow specific platform rules.
Is Retail Arbitrage Allowed on Amazon?
Retail arbitrage is allowed on Amazon and there are thousands of third party sellers across the US. However, becoming a retail arbitrage seller on Amazon means being subject to existing guidelines that may prevent you from making good sales and profits.
Still, it can be a good jumping on point for those who want to explore other ecommerce business models. Besides, JungleScout says 36% of retail arbitrage sellers also have a wholesale business. 22% also run a dropshipping business while 21% do private label selling and 11% sell handmade items.
On Reddit, Amazing-Line8424 says arbitrage on Amazon has “become incredibly difficult” over the years. “Big brands have about 98-99% ownership of the buy box (Featured Offer),” the user also adds. This leaves smaller sellers about 1% to 2% opportunity, which means smaller profit margins.
Can You Dropship on Amazon Without Money?
You can dropship on Amazon without money as you:
- Sign up for an individual seller account on Amazon
- Find a reliable supplier that will not require you to submit a resale or sales tax certificate
You can list up to 40 products for free on Amazon using this strategy. Moreover, you can also use your credit card to purchase products from suppliers.
However, it’s not entirely possible to do no-cost dropshipping on Amazon in the long run. First, you’ll have to keep in mind that Amazon fees require you pay $0.99 per item sold. You may also have to leverage paid software to boost your chances of earning. Paying for advertising is another necessary step to attract traffic to your online store.
Redditor MedalofHonour15 shares a good Amazon dropshipping strategy to use a third party logistics (3PL) service. This can lead to generating an income of $2,000 to $3,000 per month.
Why Local Lead Generation Is Better Than Retail Arbitrage and Dropshipping
While retail arbitrage and dropshipping can be potentially profitable, we say local lead generation is a far better option. Yes, both business models can be easy to start with minimal investment requirements. However, the massive competition in the market and the constant challenge to provide a satisfying customer experience can make it difficult for most beginners to make any decent profit.
It’s an entirely different story with local lead generation. Competition is low since you’re using specific keywords and locations in your lead gen efforts. As you build niche business websites targeting a specific area (such as ‘towing San Francisco’), you get to zoom in and eliminate thousands of competitors. Generally, you’ll only be competing with 10 to 20 small businesses for the same keyword. Once you rank your website on top of Google search engine results, your site will attract major traffic. You can then rent out your site to local entrepreneurs who want to benefit from the traffic and leads.
Using this strategy, I earn $500 to $3,000 per month from each site I own. In total, I make up to $52,000 per month in passive income. With lead gen, you won’t have to do much work once your site reaches the #1 spot on Google.
If you want to learn how we do it, we have a local lead generation training program. We’ve taught over 7,400 students and counting. Our repeatable 3-step process can benefit beginners and advanced learners. Moreover, we provide excellent guides, videos, and weekly coaching sessions to ensure you’ll become a lead gen expert in no time.
