If you’ve ever shopped for items at TJMaxx or on eBay, you’ve encountered retail arbitrage. It’s a prolific practice, and nearly impossible to avoid. One of the reasons retail arbitrage is so common is because there is consumer demand and – for sellers – it’s profitable. When it comes to leveraging retail arbitrage for selling, many people do it to supplement their income, while others turn it into a business. But what does retail arbitrage mean? Is it really that profitable? And, how do you start a business using retail arbitrage?
Retail arbitrage, as a concept, is actually very simple; which is likely why it’s so common. At its core, retail arbitrage is simply purchasing products from a retailer at a lower price and reselling it for profit. If done right, buyers-turned-merchants can sell the products at a much higher profit margin than the original discounted price.
For example, say Target has a sale on board games. The original MSRP is $30, but on sale, the price is $15. You purchase all the board games they have in stock at the discounted rate and resell them for $29 a piece. You make a $14 profit on every board game you sell (excluding taxes and shipping). This is retail arbitrage. You can apply this method to absolutely any consumer good. The most common items that resell for strong profits include: Toys, appliances, electronics, and clothing.
It sounds like a brilliant strategy, right? Especially if you’re looking at it as a method for starting a small business. And, if you’re looking to do this on a larger scale, there are ways to secure discounted products in bulk (versus buying single items off the shelves at Target). Large retailers liquidate their products while the demand is still high which provides an efficient way to purchase large quantities of popular goods to resell back to consumers—but is there a catch? Let’s look at some of the challenges and best practices when it comes to retail arbitrage.
The first thing you need to know about retail arbitration is that it’s a perfectly legit way to make money. In fact, there was a Supreme Court ruling on the topic. The Court determined product resales are not prohibited if they were legally acquired. In other words, if you bought the merchandise, you can resell it.
There aren’t many limits on retail arbitration, except customers buying power. For instance, some sellers drastically mark up their prices over the original retail price. While this may work for some items and some customers, it’s not always ideal. It also doesn’t necessarily guarantee the greatest profit. Sellers should always assume their customers are smart; they typically do their research, especially when purchasing online. Often, they know the in-store price and went online to search for a better value. Simply put, if you mark your prices too high it’s almost guaranteed people will notice. On the flipside, if you mark them too low and you risk not turning a profit, especially after factoring in shipping and taxes.
Another challenge of retail arbitrage you may face is from the retailers themselves. Some sellers receive harassment from retailers that don’t want their products resold. While they legally can’t take action, this can be stressful for some. Additionally, if you’re reselling on Amazon, brand gating may occur. Brand gating is part of an application process in which third party sellers reselling a brand name product must fulfill certain guidelines. These guidelines are in place to protect buyers against counterfeiters and unauthorized sellers across the site. Amazon protects legitimate resellers because they help generate profits for the site. But they also protect big retailers: If a brand has brand gating in place, you need its permission to resell the items. If the retailer doesn’t grant permission, resellers will be forced to list that product on another site.
And, finally, the biggest challenge of retail arbitrage is the obvious one: You risk losing money on your investment. Especially if a product was on sale due to a default or recall. In order to make money, you must have a good product at a good price. You also have to consider that others take a cut of your profit. You’ll pay tax, shipping, and fees to the site you’re using, plus your original purchase price. Always remember there are middlemen in reselling. Choose your products wisely and understand your margins.
Don’t let the challenges discourage you, there are still huge benefits to retail arbitrage. One, of course, is the potential for profit. But it’s also important to remember that retail arbitration is incredibly easy to start. You can begin with as little as $200 and a few products from your local Walmart.
Here are the four steps you need to take to get started:
Though you can resell anything online, you may consider doing some market research. Visit sites like Amazon and search through the bestseller categories.
Before you even register for a seller account on any site, you have to source products. Scour your local retailers for discounted items that are likely to resell well online. For the best results, select items that are in higher demand. Keep in mind you’ll get just a little inventory to begin with and it requires keeping an eye out for big sales. As mentioned earlier in the article, you could also check out online liquidation sites and buy pallets of inventory in bulk from top retailers. Again, you can sell anything, but items with higher demand will sell faster and easier.
Amazon is the most popular selling platform. It’s also one of the easiest platforms to work with. With the seller app, you can scan sale items in-store to see comparison prices on Amazon. The app also shows fees, shipping costs, and other details. This helps you determine whether or not you’ll make a profit from the scanned items. However, do your research as each site has its own rules, fees, and features. Some sites are better suited to furniture reselling due to included shipping costs. Others only charge per item sold. Take time to find the best sites for retail arbitrage and choosing your products for the best chance at success.
Setting your prices is relatively easy. In most cases, you can set the price at or just below market value. You may also check comparison prices on the site you’re using. Plus, don’t forget to factor in your shipping costs, taxes, and seller fees. You should maintain a profit minimum of at least $3.
If you’re a high volume reseller, you may consider shipping your products to FBA warehouses. FBA warehouses are Fulfillment by Amazon warehouses, which handle shipping for you. This way you can ship items in bulk for the same price, and let Amazon handle individual shipping.
Retail arbitrage has the ability to create big business, and it’s simple to get started. The first step is to source products. As mentioned above, you can search your local retailers for discounted or clearance products, but there is a better way. Retailers, especially those in e-commerce, see product returns at a rate of about 30%. These companies often sell returns by the pallet through auction marketplaces. Many of these products are resold directly from the retailer at 30 cents on the dollar. This leaves a lot of room for profit and it’s completely open to certified resellers. Potential resellers should know that certification isn’t difficult to acquire so don’t be intimidated.
Learn more about buying return pallets, or get your business started by visiting B-Stock. We’re the source for dozens of retailer marketplaces across the country. So if you’re ready to start your retail arbitrage business, start buying heavily discounted products at B-Stock.