retail-arbitrage

What is Retail Arbitrage?

Business / By / October 16, 2023

Retail arbitrage is the act of buying products from a retailer and selling them on another marketplace for a profit. Retail arbitrage is the act of making a profit from selling a product that was purchased from a brick-and-mortar store. 

AspectExplanation
Concept OverviewRetail Arbitrage is a retail strategy that involves buying products from retail stores or online marketplaces at lower prices and then reselling them at a higher price through different channels, such as online marketplaces, e-commerce platforms, or local markets. Retail arbitrage relies on the price disparities that can exist between various retail locations or online sellers. It is a form of buying low and selling high and requires a keen eye for identifying profitable opportunities.
How Retail Arbitrage Works– The process of retail arbitrage typically includes the following steps:
1. Sourcing: Identifying products in retail stores or online platforms that are priced significantly lower than their market value.
2. Purchasing: Buying these products in bulk or at a volume that allows for profit when resold.
3. Listing: Creating listings for the purchased products on e-commerce platforms like Amazon, eBay, or your own online store.
4. Selling: Marketing and selling the products to consumers at a higher price than the purchase cost.
5. Fulfillment: Handling shipping, customer service, and returns as needed.
6. Profit: Generating a profit margin by capitalizing on price differentials.
Types of Retail Arbitrage– Retail arbitrage can take various forms:
1. Online Retail Arbitrage: Involves sourcing products from online marketplaces, often taking advantage of price fluctuations and special promotions.
2. Offline Retail Arbitrage: Focuses on physical retail stores, thrift shops, clearance sales, or liquidation events.
3. Clearance Arbitrage: Targets clearance aisles and sales events in retail stores to find heavily discounted items.
4. Seasonal Arbitrage: Capitalizes on seasonal products, such as holiday-themed items or back-to-school supplies, that may be available at lower prices during specific times of the year.
5. Wholesale Arbitrage: Involves purchasing products from wholesalers or manufacturers at bulk rates and selling them at retail prices for profit.
Tools and Strategies– Retail arbitrage relies on several tools and strategies:
1. Price Scanning Apps: Using mobile apps or handheld scanners to quickly check prices and profit potential in stores.
2. E-commerce Platforms: Leveraging platforms like Amazon FBA (Fulfillment by Amazon) for product listing, storage, and shipping.
3. Market Research: Conducting market research to identify profitable niches and products with high demand.
4. Inventory Management: Efficiently managing inventory to avoid overstocking or running out of popular products.
5. Cashback and Discounts: Taking advantage of cashback offers, loyalty programs, or discounts to increase profit margins.
Challenges and Risks– Retail arbitrage comes with its challenges and risks:
1. Competition: Facing increasing competition from other arbitrageurs.
2. Price Fluctuations: Dealing with price fluctuations that can affect profit margins.
3. Inventory Management: Balancing inventory levels and storage costs.
4. Seasonal Trends: Navigating seasonal trends and inventory that may become obsolete.
5. Returns and Customer Service: Handling returns and providing customer service.
6. Platform Rules: Adhering to e-commerce platform rules and policies, which can change.
Profit Potential– The profit potential of retail arbitrage depends on several factors, including the product niche, sourcing efficiency, pricing strategy, and market demand. Successful arbitrageurs can earn substantial profits, but it requires a deep understanding of the market, consistent effort, and the ability to adapt to changing conditions.
Ethical Considerations– Ethical considerations in retail arbitrage involve adherence to platform rules and policies, honesty in product descriptions, and fair competition. Engaging in unethical practices, such as fake reviews or counterfeit product sales, can lead to account suspensions and legal consequences. Ethical retail arbitrage builds trust with customers and platforms.
Legal Compliance– Ensuring legal compliance is essential in retail arbitrage. This includes proper tax reporting, intellectual property rights (avoiding trademark violations), and compliance with product safety regulations. Ignoring legal requirements can result in financial penalties and legal actions.
Future Trends– The landscape of retail arbitrage continues to evolve with advances in technology and e-commerce. Trends may include increased use of automation for product sourcing and fulfillment, sustainability-focused arbitrage to meet consumer demand for eco-friendly products, and international arbitrage as cross-border e-commerce grows. Entrepreneurs in retail arbitrage must stay adaptable to thrive in this dynamic field.
Global Impact– Retail arbitrage has a global impact by facilitating the movement of products across different regions and markets. It contributes to the circulation of goods, provides consumers with a variety of options, and fosters entrepreneurship. However, it also raises questions about sustainability and fair competition, which may shape future developments in this field.

Understanding retail arbitrage

Retail arbitrage can be rather lucrative in some circumstances. In a video uploaded to YouTube in 2018, a user known as “Bearded Picker” visited several Walmart stores to purchase 182 copies of the Monopoly for Millennials board game for $19.82 each.

Less than 24 hours later, he had sold 131 copies on Amazon for $77.29 each which netted a profit of $2,500 once overheads were deducted.

While Amazon is one of the more popular choices to resell purchased items, other marketplaces such as Facebook Marketplace, eBay, Jet, and Craigslist are worthy alternatives. 

When effective, retail arbitrage is a low-cost and low-risk way to sell items online.

Users can purchase a single item to test the waters or make it their full-time job. In any case, sellers avoid the expense of marketing, operating a physical shopfront, or purchasing bulk stock from a wholesaler.

They can also leverage the brand equity associated with well-established items.

The retail arbitrage process

The following steps show how the retail arbitrage process plays out.

Bargain hunting

For many individuals, the process starts by pouring over newspapers, brochures, magazines, and websites to find coupons and promotional codes.

Some also make use of services such as BrickSeek which collates deals from various retail chains.

Scanning products

Once in store, sellers redeem any coupons or discounts and may purchase items in bulk.

Many will also use app-based scanners to read shelf barcodes and determine which products are potentially most profitable.

The Amazon Seller app calculates various fees and estimates profit, while others such as Keepa and Jungle Scout provide more advanced analytics and historical sales and revenue data.

Targeted store visits

New resellers may be tempted to hit as many stores as possible or blow their entire budget on a single product, but seasoned individuals take a different approach.

With experience, they’ve learned to study discount patterns and clearance schedules of various stores and use aforementioned tools such as BrickSeek to monitor product specials in real-time.

In some cases, these sellers will access distributor apps or databases to ensure a particular item is in stock before they leave home.

Creating an online store

Fulfillment by Amazon (FBA) is arguably the most popular choice because sellers can leverage Amazon’s brand trust and take advantage of the company’s “done for you” fulfillment. 

However, as we noted before, there are a plethora of choices with respect to where one can sell retail arbitrage products.

Some of these will likely feature much less seller competition and may be better suited to smaller or one-time orders.

Retail arbitrage best practices

To conclude, let’s take a brief look at three retail arbitrage best practices:

Exhaust each store before moving on

Some sellers visit as many stores as they can in a day, but a better approach is to spend an hour or two in one store and conduct a methodical search.

Indeed, it is better to exhaust one store each day as opposed to a superficial look of 10 stores where bargains could be overlooked.

Look for ranks and reviews

While scanner apps show the potential profit of a product, what they sometimes omit is market demand.

Thus, it can be useful to assess the item’s  Amazon Best Sellers Rank (BSR).

Specialized calculators help sellers better understand how sales revenue correlates to popularity and, even if not selling on Amazon, BSR gives sellers a general idea of an item’s popularity.

Develop relationships with employees

This may seem a waste of time, but often, employees are the first to know when a certain product will be marked down for clearance.

Some whom a seller has built rapport with may even be willing to bring stock out from the storeroom which has not yet been put on public display.

Key takeaways:

  • Retail arbitrage is the act of buying products from a retailer and selling them on another marketplace for a profit.
  • When effective, retail arbitrage is a low-cost and low-risk way to sell items online. Users can start small and avoid most of the expenses associated with owning or operating a traditional brick-and-mortar store.
  • Some retail arbitrage best practices include exhausting one store per day before moving on, understanding the relevance of BSR, and developing relationships with store employees to get first access to discounts.

Key Highlights

  • Retail Arbitrage Defined:
    • Retail arbitrage involves buying products from a retailer and reselling them on different marketplaces for profit.
    • This practice leverages price differences between buying and selling platforms.
  • Lucrativeness of Retail Arbitrage:
    • Retail arbitrage can yield significant profits, illustrated by examples like purchasing Monopoly for Millennials at Walmart and selling on Amazon.
    • Online marketplaces like Amazon, Facebook Marketplace, eBay, Jet, and Craigslist are commonly used for resale.
  • Benefits of Retail Arbitrage:
    • Low-cost and low-risk method of selling items online.
    • Avoids costs of marketing, maintaining a physical shop, or bulk purchasing from wholesalers.
    • Utilizes the brand equity of established products.
  • Retail Arbitrage Process:
    • Bargain hunting through coupons and promotional codes.
    • Scanning products with app-based scanners to assess potential profitability.
    • Targeted store visits based on discount patterns and clearance schedules.
    • Utilizing tools like BrickSeek to monitor product specials.
    • Creating an online store, often using Fulfillment by Amazon (FBA).
  • Retail Arbitrage Best Practices:
    • Spend time exhaustively exploring one store instead of superficially visiting multiple.
    • Consider market demand and Amazon Best Sellers Rank (BSR) for product popularity.
    • Build relationships with store employees for insights on clearance and stock availability.
  • Key Takeaways:
    • Retail arbitrage involves buying and reselling products for profit on different platforms.
    • It’s a cost-effective and low-risk way to sell items online, leveraging established brands and platforms.
    • Effective strategies include thorough exploration of one store, considering product demand, and fostering relationships with store employees for valuable information.

Connected Business Model Types And Frameworks

What’s A Business Model

fourweekmba-business-model-framework
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Level of Digitalization

stages-of-digital-transformation
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.

Digital Business Model

digital-business-models
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.

Tech Business Model

business-model-template
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

AI Business Model

ai-business-models

Blockchain Business Model

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A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Asymmetric Business Models

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In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Cloud Business Models

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Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).

Open Source Business Model

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Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

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The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Marketplace Business Models

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A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

B2B vs B2C Business Model

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B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.

B2B2C Business Model

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A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

D2C Business Model

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Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

C2C Business Model

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The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.

Retail Business Model

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A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Wholesale Business Model

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The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Crowdsourcing Business Model

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The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Franchising Business Model

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In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

Brokerage Business Model

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Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.

Dropshipping Business Model

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Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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