Selling on Amazon: The Three Models

You’ve heard that Amazon sellers have been striking it rich. How hard can it be? Buy some items on sale, sell them on Amazon for twice the price, and make a mint. Right?

Before you dive into the Amazon game, though, make sure that you know the rules. There are three types of sellers, and choosing the right business model depends on understanding the pros and cons of each.

Level 1: Retail Arbitrage

The most basic level, and that which many people envision when they think about “selling on Amazon,” is retail arbitrage. Arbitrage sellers buy merchandise from one location and sell it at a different location. It’s the equivalent of standing on a street corner hawking the wares that you bought elsewhere for less.

For example, suppose you find a fantastic sale for CamelBak water bottles at a local Walmart for five bucks each. They normally cost 13 dollars. So you buy all 30 on the shelf and list them on Amazon for ten dollars apiece, netting yourself a nice profit even after paying Amazon’s fees.

Advantages: This is the easiest level to start with, since you can do it without any real business skills and without a major initial investment. In addition, because you’re selling products that already exist, there is no need for you to design, test, or brand the product. In fact, you don’t have to build a brand at all. You just find a great buy and price it well so that consumers will jump at it.

Disadvantages:  At the end of the day, because you didn’t build a brand, you don’t have one. You will always be limited by your ability to source your product at a desired price. You’ll never be able to sell your business since you don’t really have a business; you’re just a middleman. Worst of all, profit margins for retail arbitrage are relatively low… and there’s still a lot of work involved.

Bottom Line: So is retail arbitrage ever a good idea? Sure. It’s great as a hobby or a side hustle to make a few bucks in the short term. It’s also a helpful gateway to the next levels of Amazon selling, as it can teach you how to successfully navigate the Amazon Seller dashboard, label products correctly, ship products to Amazon fulfillment centers, and respond correctly to issues that arise from competitors and consumers.

Level 2: Private Label

The next level of Amazon selling – and the first one that provides you with a real business to call your own – is private labeling. This business model entails purchasing products that are manufactured by a third party, branding them, and then selling them under your own brand name on Amazon. (This is similar to private labeling in grocery stores.)

At this level, you are still selling other people’s products, but you can create your own brand identity. That means you choose your brand name, develop the values and voice of your brand, create your company mission statement, and select items that fit with your brand identity. You will also create your own logo, product packaging, website, and social media pages. You are in almost total control of your brand.

You also manage your own inventory. When it comes to retail arbitrage, you often sell a product until your inventory dries up, and then you need to find another product. Private labeling, on the other hand, enables you to order inventory as you need it, bundle products together, or expand your range of product offerings to grow your business.

So instead of buying CamelBak water bottles at Walmart, you might find a factory in India that makes water bottles and ask them to send you a sample. You’re impressed with the design and functionality of the water bottle, so you put in an order to the factory and list them on Amazon under your own brand name. You design your own logo, create your own website, and manufacture your own packaging for the water bottles with your brand’s name on it. If the water bottles take off, you may try to find supplies to create other products that match your brand’s values – like wickable clothing, rugged watches, or running belts.

Advantages: Your profit margin is a lot higher than if you were selling these items through retail arbitrage. You can do a lot of the real work up front; once you have an agreement with a supplier, you no longer have to source individual items as you would in retail arbitrage. And in the long run, you are building your own sellable asset. 

Disadvantages: There is a higher barrier to entry than with arbitrage. First and foremost, you need a larger initial budget for your first production run and all that goes along with it. Your manufacturer will require cash up front – enough to meet the minimum quantity that they expect you to order. This introduces higher risk, especially since your product lacks the proven track record that arbitrage products typically have. That’s why product research and development are crucial for the private label model to be successful, and why you’ll need patience and perseverance. Also keep in mind that there’s nothing to stop other sellers from doing just what you did, and selling the exact same product under their own brand names. Which is why you’ll sometimes see listings that look like this, with a dozen copies of the same product sold by different companies.

Bottom Line: If you already have some business savvy, and preferably some experience with Amazon Marketplace, you may want to consider private label selling. You’ll be building your own brand from the bottom up, but without having to come up with your own product ideas from scratch.

Level 3: Creating Your Own Product

Both retail arbitrage and private labeling entail selling something that already exists. Most private label goods are sold by multiple Amazon sellers under their own brands, and any products sold through arbitrage are available at the store where the seller originally purchased them.

But what if you have a great idea for an exciting new product? Would selling it on Amazon be a lucrative way to start a business?

The answer is… sort of.

Let’s say that you have an idea for a great water bottle that fits on a runner’s calf. You know that this would be a great product for runners around the world, so you design a prototype that includes all of the features that runners look for in a water bottle: a bite valve, an ergonomic design, a hand strap. You then list this item on Amazon and wait for the sales to roll in.

Advantages: On the upside, this model has the best margins and the least amount of competition; since you’ll be the only one selling this unique item, all purchases of the product will be from you. It’s much easier to sell this product both on and off of Amazon, which diversifies your business. You might be able to crowdfund for your product, which can help with your budget for the first production run. Most importantly, you are building a business based on something that is uniquely yours, and if it takes off, that has intrinsic value.

Disadvantages: The most obvious disadvantage of this model is that you have to come up with a winning product. That takes creativity, but also a lot of old-fashioned hard work. You’ll need to design the product, find the perfect manufacturer for it, communicate what you want effectively, test the design, and then deal with everything else that a private label seller deals with. On top of all of that, you will need to build a need for the product. Remember that most people do not visit Amazon’s website in order to find something new (a water bottle that fits on a runner’s calf); they already have an idea of what they’re hoping to buy (a water bottle with a hand strap). That means that they won’t know to search for your product, since they won’t know that it even exists. While marketing can sometimes resolve this issue, you might find that your product needs to first take off in general before it takes off on Amazon.

Who would ever think of searching for a doughnut-shaped water bottle?

Bottom Line: While this level of selling requires a higher level of risk, the potential for reward is high as well. Make sure that you understand the basics of running a business before attempting to sell your own unique products on Amazon, since if you take into account the manufacturing costs, fees, and other add-ons, you may discover that you’re not making quite as much as you thought. Still, this model is the one that allows you to build a business that is truly yours, rather than one that depends so heavily on the creativity of others.

Keep in mind that running a successful online business is never easy. You will always need to devote a large amount of time, energy, patience, and money in order to grow your business. But for those who are willing to put forth the effort, selling on Amazon has the potential to be a lucrative business choice.

This is part 1 in a series that addresses various aspects of becoming a successful Amazon seller. This post discusses the three potential business models you can choose when deciding to build your online business. Part 2 will examine the dangers implicit in the world of Amazon sellers, and Part 3 will share the essential prerequisites you will need to run a successful Amazon business. See all the articles in the series here.