Dropshipping vs. Retail Arbitrage: Pros, Cons, and Which Is Better

Martin

According to the U.S. Department of Commerce report released in early 2022, consumers spent $870.78 billion with U.S. merchants online last year. This figure is up from $762.68 billion in 2020.

If you’re looking to start an ecommerce business, you’ve likely come across numerous options for business models. Certain business models are easy to get started but harder to succeed in.

Others are profitable but have a much steeper learning curve or a significant investment requirement.

BONUS: Is Dropshipping Profitable in 2022? The Guide To Success With Dropshipping

Two popular ecommerce business models are retail arbitrage and dropshipping.

If you’re wondering which model to pursue, keep reading to learn the difference between dropshipping vs. retail arbitrage and which is right for you.

Learn more: Dropshipping vs Ecommerce: What’s the Difference and Where to Start?

What Is Retail Arbitrage?

Retail arbitrage is the practice of buying a product for a low price and reselling it at a higher price. It’s barely a business model.

In fact, you don’t even have to have your own website to get started. Many retailers who practice arbitrage find items at rock bottom prices at department stores such as Target and Wal-Mart and sell on Amazon. The goal is to flip products to make a profit.

You can source products from garage sales, thrift stores, and even online outlets. The key is to find in-demand products at a low price.

Yes, while retail arbitrage may sound like a sketchy practice, it is perfectly legal to purchase a product from one store and sell it on another for a higher price.

People have been doing this to make money for years. Once you purchase a product, it’s yours to sell, unless it’s a product that you can only purchase through authorized retailers. 

Take Target’s owned brands, for example. Target has over 45 private labels that are only sold at Target stores.

If you took an All In Motion (sportswear) product and tried to list it on Amazon, the listing will be flagged by Amazon. If you’re not careful, this can lead to a freeze of your account.

Here, we explore the main differences: Shopify Dropshipping vs Amazon FBA.

Advantages of Retail Arbitrage

Many liquidation stores sell products at prices that are a lot lower than department store prices.

By buying up clearance merchandise, you can profit by selling these goods on your own sales channels at much higher prices.

Low Upfront Investment

Retail arbitrage requires little upfront investment. Don’t forget costs associated with product investment, marketing, and inventory management software when considering business models.

All of this considered, however, is still likely lower than the costs of starting another business from scratch.

Ease of Diversification

As an ecommerce retailer, it’s essential to offer a wide array of products. You’re not limiting your business to a particular niche when performing retail arbitrage.

You’re able to quickly diversify your catalog and sell a variety of products, which increases your chances of success. 

Faster Profit

If you purchase and sell a single item, you have money in your pocket.

This happens much quicker than it would if you’re building a brand with white labeling or curated products from other retailers.

It’s Easy to Get Started

It’s really easy to begin a retail arbitrage business. You simply sign up for an account with your favorite sales channel, find and purchase products, list them, and sell them.

And if you sell on Amazon, likely other sellers are selling the same items, so you don’t have to put a ton of effort into your product listings. 

This is also a great way to experiment with a sales channel. You can take your time familiarizing yourself with the tools and functionality available to you before you launch your own store or brand. 

Disadvantages of Retail Arbitrage

While it may sound easy enough, keep in mind that your retail arbitrage business is 100% dependent on your ability to continually find and purchase new goods to list on your sales platform.

For this reason, it’s very difficult to scale a retail arbitrage operation. 

Little Control Over Product Inventory

In arbitrage, you’re buying products from other retailers, so you don’t have any control over your product supply.

When the stock is sold out, it’s sold out. If you find that a particular item is popular with your customer base, you can’t simply purchase more to meet demand.

You must pivot to the inventory you have available. And by the time you find that product at a low price again—if ever—your customers may have moved on.

Short bursts of success are great for your bottom line, but it becomes more stressful and harder to retain momentum over time.

In traditional retail, you are in complete control of your inventory. This lack of visibility and control makes it hard to consistently grow a retail arbitrage business.

No Control Over Profit Margin

As the business owner, you can set your profit margin based on what you’re willing to invest in a product and what you’ll resell it for.

However, you don’t have much control over this. Most sales platforms have sellers’ fees for each sale, and you have shipping fees to worry about. So, your profit margin largely depends on the deals you can find.

In traditional retail, you can find comfort in wholesale pricing. However, you’re already paying a markup in retail arbitrage operations, even if you find the item on sale.

You’re instantly at a disadvantage compared to other retailers who purchase products wholesale and then add a markup.

Success in retail arbitrage requires patience, access to a wide range of products, and lots of research. 

Amazon’s Brand Registry Program

If you’re planning to sell products like this on Amazon, you should know about their Brand Registry program.

This program protects brands from trademark infringements and gives brands access to special tools to protect them from harmful listings.

Brands that are a part of this Amazon program have total control over listings that sell their products.

If you’re a retailer selling one of these products, you must have proof that you’re an authorized reseller of the specific brand.

For example, you can’t buy a bunch of Garmin fitness watches and sell them on Amazon without having permission from Garmin.

Before selling branded products on Amazon’s marketplace, always check your account’s eligibility first.

It Can Be Hard to Find Inventory

When it’s time to find inventory, you’ll want to do your research before you head to the store.

However, no matter how prepared you are, you’ll still spend time driving to and fro to do the shopping.

It’s now easier to get the things you need thanks to buy-online pick-up-in-store options. However, there are drawbacks to this method as well.

For one, you have to place an order online, wait for the fulfillment, then drive to arrive at the store during your pickup window.

Depending on how busy the store is, you may have to wait quite a while to get your order.

Second, stockouts are a possibility. You may see an item online and travel to the store for pickup, only to discover that it is sold out.

You may find yourself traveling to several different stores to find what you’re looking for.

High Potential to Get Stuck With Inventory

Buying at a low price doesn’t always benefit your business. Many big box stores will discount products that they can’t sell or return to the supplier, and those clearance items become the stars of your product catalog. 

Retail arbitrage can be risky if you end up with inventory that you can’t move. You’ve already purchased the products at a price higher than wholesale.

If you spend money on items that you can’t sell, you’ll have to discount your pricing more to get rid of them. This means you’ll start bleeding money. 

Challenging to Encourage Customer Loyalty

While retail arbitrage doesn’t require you to pay for warehousing stock, you will pay for dissatisfied customers.

As we’ve already mentioned, retail arbitrage makes it almost impossible to focus on products that you know your target audience loves.

For this reason, it’s difficult to encourage customer loyalty. As an arbitrage retailer, you’re simply trying to sell anything you can find at “the right price” — so your product catalog is almost entirely made up of commodities.

Your customers can find these items at other places, which means there’s nothing keeping them from visiting your competitors.  

With the right marketing efforts, you can develop a following. However, the second you’re unable to provide the right products at low enough prices, you’ll experience a decline in customer loyalty.

If your customers notice that your inventory is inconsistent, they’ll purchase from another store instead.

Switching Up Your Product Catalog Is Not Always Practical

Traditional retailers are able to attract new customers with brand new, popular products.

When items are new and in high demand, you’ll have a hard time securing inventory at a price to secure large profit margins.  

This means that, as an arbitrage retailer, it’s nearly impossible to reach some customer bases.

You’re stuck selling the products you can find that are on sale — you won’t be able to easily pivot to selling what the market wants. 

What Is Dropshipping?

Dropshipping is much different than retail arbitrage because you don’t have to buy or store inventory.

You only pay for what you sell. The following is a simple overview of the dropship business model:

  1. You find a dropshipping supplier and become a retailer.
  2. You build a product catalog from the supplier’s products and list the items for sale on your store.
  3. You pay your supplier and provide shipping information when a customer makes a sale. The following is a simple overview of the dropship business model:
  4. Your supplier ships the order directly to your customer

Advantages of Dropshipping

Your profit becomes the difference between what you paid your supplier for an item and what price you charged your customer.

Your cash isn’t tied up in inventory with this method because you’re not buying products that you may or may not be able to sell.

Dropshipping also frees up time that you would spend fulfilling products and work with shipping carriers.

Depending on the sales platform, you can easily integrate your store with a dropship automation platform like Inventory Source to automatically list products and manage online orders. Check our ultimate Inventory Source Review.

Low Inventory Cost

When it comes to retail, inventory is a significant contributor to startup costs.

Dropshipping lowers this cost, as you only have to purchase items after a customer has paid you for them. It also eliminates the risk associated with overstock.

If you have limited capital, you may want to consider dropshipping, as it allows you to get started with zero stock.

Test Products With Little Work

As a dropshipping retailer, you can test a variety of product options without a lot of risks, since you don’t have to invest in inventory and storage.

You can easily test new products on the fly or stop selling slow-moving ones, which gives you more room to make decisions that work for your business. 

Lower Order Fulfillment Costs

When dealing with a catalog full of many products, order fulfillment costs can be high.

You have to consider the costs of warehouse space, organization, picking, packing, shipping, and tracking.

Here’s our guide and list on how to find the best 3pl companies.

When dropshipping, third parties take over these tasks, which lowers the associated costs.

Scalability

Unlike retail arbitrage, dropshipping is actually scalable. And as you scale, your business model doesn’t have to change very much.

Using a total retail operations platform like Flxpoint, you can take the time to work on your sales and marketing efforts and more while your day-to-day business tasks are automated. And as you scale, your business model doesn’t have to change very much.

Wholesale Dropshipping vs. Retail Arbitrage: Which Is Better?

Considering dropshipping vs. retail arbitrage? While retail arbitrage can be a quick way to make a profit, it comes with the risk of long-term instability.

Dropshipping allows for a more sustainable business in the future, even if it requires more time, effort, and resources upfront. 

Regardless of which you choose, both options are more flexible and scalable than traditional retail.

If you’re willing to put in the work, selling online can be a lucrative venture. Maybe it’s time to do the research, draw up a business plan, and make your dreams of an online business come true.