What is Retail Arbitrage?
We are living in a golden age for e-commerce. There are countless ways to make money online today, and one way is using a strategy called retail arbitrage.
Retail arbitrage has become increasingly popular in recent years, and there’s no sign that it’s slowing down any time soon. So if you’re looking to make money, you’ll definitely want to look into it.
Keep reading to learn everything you need to know about retail arbitrage, including how it works, how to get started, and how to rake in profits.
First things first: What is retail arbitrage?
Retail arbitrage is a strategy in which individual sellers purchase products from retail stores and sell them through an online marketplace for a higher price.
For example, you can start your own Amazon business just by reselling products on the platform.
With Amazon retail arbitrage, the goal is always to make a profit by selling products for more than you paid for them. If executed successfully, retail arbitrage could net you a lot of money.
However, retail arbitrage also carries a lot of risks, which we’ll touch on in just a bit. It’s not something you should rush into. For the best results, you need to know how it works before getting started.
Is retail arbitrage legal?
Chances are you’re wondering if retail arbitrage is legal or if it’s punishable by law. Rest assured that while this practice may sound shady, it’s actually perfectly legitimate.
In fact, this is an issue that has gone all the way to the U.S. Supreme Court, which concluded that retailers can’t prevent a seller from selling a product.
That said, there are some general guidelines to follow to stay out of trouble with platforms and other businesses.
Products must be obtained legally
It’s perfectly fine to sell a product you buy. Once you purchase an item, you become the owner and have the right to do what you want with it.
That said, the merchandise needs to be obtained through legal means. As obvious as it may sound, you can’t buy boxes of stolen goods and resell them.
Products can’t be counterfeit
If you’re reselling items for a profit, it’s critical that you check to make sure they’re legitimate and not counterfeit or private label knockoffs. This is important when selling clothes and accessories, as it can be difficult to tell if an item is authentic when you’re just scanning apps looking for products on which to make a profit.
Selling counterfeit merchandise could land you in hot water. It’s also unethical, and it can destroy your reputation as a seller. It’s something you want to avoid at all costs.
Follow platform-specific guidelines
It’s also necessary to check each marketplace’s rules for selling items. For example, if you sell items on Amazon as new, they must include an original warranty. Resellers are typically advised to sell items as like-new to steer clear of complications.
To avoid running into trouble, read the platform’s guidelines before starting so you know what to expect before selling products and stay in compliance. The last thing you want to do is get shut down for noncompliance.
Forming an arbitrage strategy
It’s a good idea to have a strategy in place before getting started with retail arbitrage.
There are a few ways to go about this. For example, you may snag a North Face jacket or vintage sweater for a low price online or even from a retailer like a thrift store. Then you may turn around and hawk it online for two or three times the price.
This would be an example of a one-off. In other words, it’s just flipping a product, not launching a business.
The other approach is to form an actual side hustle that produces steady cash flow. With this approach, you may buy products on an ongoing basis and sell them regularly to customers online.
Decide how much time you want to invest
Chances are you’re a busy person with a lot going on. The last thing you want to do is start a side hustle if you can’t budget the time. It’s common to start a side hustle that you think may take two hours per week only to have it turn into 10, 15, or even more.
Decide upfront what retail arbitrage means to you and how it fits into your lifestyle. It may be something you do part-time to make a few extra bucks. On the other hand, it may be an ongoing initiative that you turn into an actual arbitrage business. Only you can decide.
If your goal is to turn retail arbitrage into a steady gig, it helps to spend some time planning ahead and researching. Try to understand your customer base and the demand for your products. Figure out where your products are going to come from and how steady your supply can be.
You’re also going to need to focus on logistics. For example, think about where you’re going to store items and ship them. You may want to look into a service like Fulfillment by Amazon (FBA) to avoid backend complications. Using Amazon FBA and Amazon’s warehouse, you don’t have to worry about shipping—the company will handle it for you, saving a tremendous hassle and possibly reducing shipping costs.
If you’re thinking about launching a retail arbitrage business on Amazon, you should also check out Seller Central.
If your ultimate goal is to make money, then you need to outline some ways to make that happen. Do some advanced research and figure out the best time to buy products at the lowest possible rate and the best time to make them available online.
It’s also a good idea to determine if you want to do this seasonally, or around specific times of the year. For example, some people only choose to engage in arbitrage around the busy holiday shopping season or around other attractive calendar dates (e.g., back-to-school sales).
As you can see, there are a lot of issues to think through before launching a retail arbitrage business. Doing some advanced brainstorming can help you save time, reduce risk, and maximize profit margin.
What you need to start retail arbitrage
As with most things in life, it pays to do your due diligence with retail arbitrage. Rushing in could result in wasting money and winding up with a lot of products sitting around that you can’t get rid of.
Here’s a breakdown of what you need to be successful with retail arbitrage.
Retail arbitrage requires a little bit of money, as it involves buying products from retailers. Unless you get free products somehow, you’re going to need to spend money upfront to acquire items.
How much you spend depends entirely on what you’re selling and how much you’re buying. If you’re buying small items, you may only need $100 to $200 to start. If you’re buying a larger shipment of items, then you may need to save even more.
A great reputation
Buying products online can be a scary experience. It’s very easy to get ripped off or to purchase a product that you’re just not happy with. Unfortunately, this happens all the time.
As such, people like to buy from a store or retailer they know. For this reason, a seller’s reputation is one of the most important elements in successful online businesses.
If you’re selling on a platform like Amazon or eBay, focus on making a few small sales to get your ratings up. Then keep selling and satisfying customers by offering great products with timely deliveries and flexible customer service and support.
The more you sell, the better your reputation will become. Eventually, your reputation will help drive sales.
The right products
When it comes to retail arbitrage, what you sell matters. Think about products in high demand for which customers may be willing to pay a high selling price.
For help, check out the Keepa Amazon price tracker, which provides fresh insights about how products are moving through Amazon arbitrage, including their sales rank. Check and see what items are popular before you buy anything. It’s also a good idea to look at competitors so that you can see what you’re up against.
Timing is key with retail arbitrage. If you want to capitalize on certain trends, you have to move quickly. Some trends may only last for a few hours or a few days before they die out.
Keep your eye on what’s moving and have products ready to go. That way, you don’t miss out on opportunities when they arise.
For example, think of last-minute school supplies or holiday gifts and accessories. These opportunities don’t last forever. It pays to move as quickly as you can.
Retail arbitrage requires a lot of patience. You may struggle at first and wind up in the red before you are able to produce a strong profit margin.
Form a business plan and stick to it if you want to be successful. As with any business, retail arbitrage can take time to master.
How to do retail arbitrage
Here’s a quick breakdown of how to get started with retail arbitrage.
- Pick your strategy
- Find products
- Have a backup strategy
- Make a budget
- Pick the right platform
- Start buying and selling
- Save and invest
1. Pick your strategy
Don’t beat yourself up trying to form an arbitrage strategy. Pick a plan and go for it. You can always scale up or down as needed. But if you don’t get started at some point, you may never end up giving it a shot.
If you think you may want to pursue retail arbitrage, put the wheels in motion and start before the desire fades away.
It’s good to vet ideas, of course. But eventually, you need to take action.
2. Find products
Once you decide to move forward with retail arbitrage, look around for products. Visit thrift stores, consignment shops, and retailers like Walmart or Target. The trick is to identify gems that you could turn around and sell for more money.
Look for products available as clearance items and try to get items at low prices. You may also want to take a gamble and bank on prices jumping at various times.
3. Have a backup strategy
Buying products and reselling them can be risky; there’s no easy way around that. However, there are some things you can do to reduce risk.
For example, find a list of local businesses that may want to buy back your products. Or form listings on Craigslist to get rid of items. You can potentially even donate certain items and claim tax credits. If you’re thinking about doing that, talk to a tax advisor to make sure you stay on Uncle Sam’s good side.
4. Make a budget
Next, decide how much money you want to spend on retail arbitrage. If you’re not careful, costs could easily spiral out of control. That being the case, it’s critical to set limits.
Take a look at your budget and determine if this is something on which you want to spend $100, $1,000, or even more. By doing this early on, you can prevent yourself from buying items that are more expensive than your budget allows.
Oftentimes, people start very small with retail arbitrage, buying items that don’t cost much and using the money they collect to buy more and more.
For example, you may buy some small radios for a few dollars and flip them by selling them out of your truck at the beach for higher profit to people who want to listen to a ballgame or play some tunes while soaking in the sun. Once you’re out of stock, you may take the $50 or $60 that you make, buy a higher-ticket item, and scale from there.
5. Pick the right platform
If you want to sell items online, shop around and assess different vendors. There are many to choose from, including the Amazon seller app, eBay, Facebook Marketplace, and Nextdoor, to name just a few.
Compare different fees as you go. It’s also a good idea to think about the types of customers shopping on these sites. Nextdoor is great for selling household items like tables and chairs, Amazon is great for selling electronics, and eBay is great for collectibles.
You can also check out our list of the best selling apps.
6. Start buying and selling
Once you have a strategy in place and a platform picked out, start buying and selling products to customers.
As you do so, keep an eye on your bottom line. If you start to sink into the red, try to get out of it and profit as quickly as possible.
7. Save and invest
Once you start bringing in money, it’s a good idea to start saving and put it in the bank.
It’s also important to note that you’ll have to pay taxes on what you make from retail arbitrage. By selling products, you’ll most likely need to file with the IRS as a 1099 contractor. So it’s best to avoid spending all of your money, or you could be on the hook when taxes roll around. You can check out our freelance tax guide for more information.
Once again, it’s a good idea to talk to a tax advisor during this process to make sure your tax situation is taken care of.
Once you’ve settled your tax bill, take whatever proceeds you bring in and save and invest. Start an emergency fund with your earnings and consider putting money into a tax-friendly retirement account to maximize growth over time. You can also use the money to pay down any debt you have from student loans or credit cards.
The pros and cons of retail arbitrage
Here’s a breakdown of the pros and cons associated with retail arbitrage.
First, let’s start with the advantages of retail arbitrage.
Relatively low risk
There is relatively little risk associated with retail arbitrage, largely because it’s legal. As long as you follow specific rules from various providers, you shouldn’t have any issues selling products.
Pennies to profits
One of the great parts about retail arbitrage is that you could wind up making a lot of money if you play your cards right. Find great products, buy them at fire-sale prices, and resell them for a higher profit.
Repeat this process enough, and you could potentially make a small fortune.
Very little overhead
Retail arbitrage requires very little overhead. You don’t have to open a storefront or pay employees. This can enable you to pocket most of the proceeds in a lean and efficient business model.
Retail arbitrage is something that you can scale up or down as you like. You don’t need to sell products all the time. For example, you may want to do this to help fund a vacation or to rack up some money to max out your retirement account.
It’s something you can use strategically to make money without the pressure of a full-time gig.
Here are some of the disadvantages to retail arbitrage.
It can get costly
Again, it’s critical to stick to a budget. Retail arbitrage can get costly, especially if you buy a large number of items at first without a clear plan as to how you’re going to sell them.
Be smart, go slow at first, and focus on making a few successful sales to start. Then, build from there. And whatever you do, avoid taking out loans to fund purchases. You’ll automatically slip into debt and wind up on the hook trying to pay down a loan.
This could be a perilous approach, particularly if you can’t resell the items you’ve purchased.
When launching any business, you’ll have to worry about customer complaints. If you’re not used to dealing with customers, it’s time to face the reality that some are going to complain no matter what you do, demanding refunds and threatening you with bad reviews.
To mitigate these issues, it’s a good idea to craft a seller’s policy and outline specific terms for the agreement ahead of time so that you can resolve disputes amicably. It’s also a good idea to brush up on basic customer service skills.
Remember: Reputation is everything when selling! People are ultimately buying your brand, not just the products.
Even though retail arbitrage is legal, that won’t stop some businesses from using threatening language or taking action to try to stop arbitrage sellers.
You may receive cease and desist letters or even phone calls. Know your rights and protect yourself in advance. Be ready for issues before they arise so that you know how to deal with them if they do rear their ugly heads.
Tips for retail arbitrage
Here are some things you can do to ensure an optimal arbitrage experience.
Buy general liability insurance
If you’re selling items online and bringing in a lot of online retail business, it’s probably a good idea to look into general liability insurance.
You may also want to form an LLC to protect your personal assets in the event of a lawsuit. Don’t risk losing everything over an online sale—it’s just not worth it. Pay for protection even if you don’t have to use it.
Write off expenses
Talk to a tax advisor about potentially writing off legitimate business expenses. If you’re treating this as a business, there may be some things that you can do to recoup some costs. A tax advisor will be able to assess your situation and determine what’s acceptable to write off.
Get creative about sales
Don’t feel limited to selling items online. Look into selling items in other places, too. For example, you can form partnerships with a retail store or local business that may want to sell items in their storefront. You can also sell items to people you know at a discounted rate.
One creative idea is to have a garage sale and sell items in your driveway. Neighbors will love browsing your selection of cheap televisions, watches, radios, fans, and neckties.
In fact, you may become known as the person in the neighborhood with all the best deals. Let’s be honest—everyone loves a good deal!
Have an attorney on standby
It’s a good idea to have an attorney on call to deal with threatening letters or cease and desist notifications. It can be hard determining what’s serious and what could potentially turn into a more complicated legal situation.
For example, suppose someone buys a bicycle that you sell and then gets into an accident. They may turn around and blame you for selling a faulty piece of equipment. This is where it can pay to have an attorney ready to help you handle the situation.
Watch out for selling fees
Some platforms have high selling fees, which could potentially eat into your profits.
Before you list any items for sale online, be sure to have a clear understanding of selling fees. That way, you won’t wind up giving up more than you need to when making a sale.
Become an FBA seller
Packaging and shipping items can be a real pain. It’s expensive, and it requires storing items and dealing with logistics. Give serious consideration to using a service like the Amazon platform FBA to reduce the hassle of shipping products to customers.
Further reading: Best books about retail arbitrage
There’s a lot to learn about retail arbitrage. And fortunately, there is no shortage of books on this topic.
If you’re looking for a manual on how to get started with arbitrage, begin with Chris Green’s masterpiece. Green explains how to make an effective business model and touches on a variety of important items.
One of the keys to mastering retail arbitrage is using Amazon FBA. In this book, author Scott Daily takes you through the process of how to use Amazon to drive profits.
If you’re new to product sourcing, start with Renae Clark’s guide to product research. You’ll learn all about sourcing items and discovering winning products.
In this book, author Matthew Scott takes readers on a step-by-step tour of the retail arbitrage process. Readers will learn key methods to source and sell products on marketplaces like eBay and Amazon.
For help on forming a retail arbitrage strategy, check out Mark Graham’s riveting book on making money online. You’ll learn some of the best strategies to grow your retail arbitrage business.
Similar ways to make money
People who have a money-making attitude should consider the following strategies similar to retail arbitrage.
Sell on Etsy and eBay
Why sell someone else’s products online when you can make and sell your own products?
Crafty types who can turn a ball of yarn into a sweater or a ball of clay into a vase should look into opening an account on eBay or Etsy. This can also give you better control over pricing, helping you drive bigger profits.
Sell produce at farmer’s markets
People who have a green thumb can make money growing fruits and vegetables in their backyard and selling them at local farmer’s markets.
It’s also possible to sell fresh produce to grocery stores. Some stores will actually pay you for your vegetables, too.
Online commerce is happening all around you. Every minute, people are buying someone’s product through apps like Door Dash and Instacart.
By signing up for the best delivery apps, you can get paid to pick up and deliver items to people in your community.
Frequently asked questions
Is online arbitrage hard?
Selling items at resale isn’t always easy. It can be difficult to buy products and flip them for a higher price. There is no sugarcoating this. Arbitrage can be extremely risky.
That said, arbitrage can also be a great way to make money for those who can master the process. It may take a bit of time and money to get started, but there is no denying it can be a pathway to profit.
What’s the best strategy for sourcing products?
Read as much as you can about product sourcing. This is one of the keys to mastering arbitrage. It requires knowing what products are in demand or on the verge of being in demand, recognizing great prices, and pouncing on opportunities.
The best retail arbitrage professionals are experts in sourcing products and discovering opportunities.
Can you resell products from a wholesaler?
Check your wholesale membership for specific rules regarding reselling. While it’s legal to sell products, certain companies may limit what you can do. It’s always a good idea to know what’s acceptable before you start doing something.
How can the Amazon seller app help with arbitrage?
The Amazon seller app is a one-stop-shop for Amazon sellers. For example, it offers a barcode scanner to help with certain tasks.
If you’re serious about selling on Amazon, you’ll want an Amazon Seller account, which is a professional account for Amazon users.
Is arbitrage dropshipping?
Arbitrage is a bit different from dropshipping, which involves making a sale and then tasking a third party seller with fulfilling the order. With dropshipping, the business doesn’t actually keep certain inventory—or any inventory, in some cases—in stock. The company is only involved in facilitating the sale without having to worry about fluctuating retail prices.
The Bottom Line
Becoming a profitable retail arbitrage seller takes a lot of time and hard work.
The best sellers are always on the hunt for the next most profitable product. Sometimes they sell new products, and sometimes they sell used products—it’s all about finding whatever is in demand.
Top sellers are also experts at crafting engaging product listings and finding different types of products on clearance to maximize profit.
If this sounds like something you may be interested in, why not try it out? Just think about how great that first sale is going to feel.
Form a strategy, research your options, and start small. Who knows? You might be on your way to achieving an awesome return on investment before you know it.