During the last decade, in particular after the outbreak of COVID-19, selling products on the Internet has become a profitable business. The bright example is the Amazon marketplace – a formidable platform which allows both customers and sellers to ripe its numerous benefits.
Is There Enough Room for New Sellers?
You may have second thoughts about starting an e-commerce business, but take a look at the statistics. The study shows there are almost 10 million sellers on Amazon; however, only around 20% of these have product listings and show life signs every now and then. Besides, only a third out of these 20% optimize their listings.
It means there is still plenty of space for newcomers to seize the advantage of e-commerce. Anyone can build a business that will generate high and regular income in a relatively short time. But to achieve it, you have to take into account a number of factors.
The first and foremost point to consider before getting started is to choose the best selling model for you. There exist several selling models: dropshipping, arbitrage, private label, and wholesale. All of them have their pros and cons, but the first two often pose difficulties for a new seller as they resemble each other.
How Does Dropshipping Function?
Dropshipping implies direct delivery of items, i.e. the ordered products are sent from the manufacturer’s warehouse immediately to the customer.
Key points of the strategy:
- The seller finds the best item for sale;
- The customer buys the item;
- The seller orders the items from the supplier and provides the data to the buyer;
- The manufacturer sends the item to the customer.
As you can see, the algorithm is quite simple and doesn’t require much intervention from the seller.
Another crucial point of the dropshipping selling model is income. Your profits depend on the margin that you put on the product. The difference between your and the supplier’s prices constitutes your actual income.
Benefits of Dropshipping
Taking up the dropshipping strategy provides you with several benefits:
1. No Need to Keep Warehouses, Manage Inventory, or Fulfill Orders
The manufacturer keeps all the items and is responsible for the delivery of the product to the end customer. That’s why you don’t have to worry about managing the inventory or planning logistics.
2. Selling Products Under Someone Else’s Brand
This means you don’t have to start from scratch and earn a reputation. Customers are already aware of the brand’s quality and service, so you’re expected just to meet their expectations.
3. Easy to Increase Product Offers
If there are more products from the supplier that you’d like to sell, you just get the supplier’s permission and place the products on the website.
4. Low Start-up Costs
If you don’t plan to sell on the existing marketplaces, all you need is a basic e-commerce website and a sum of money to purchase the products form the supplier as soon as a customer makes an order.
5. No Huge Losses
In case of low demand for products, you will not lose anything as you buy products from the supplier post factum.
Drawbacks of Dropshipping
Despite the simplicity of the strategy, various difficulties may occur. You will encounter that:
- You are not in full control of your business. The fulfillment of orders depends almost entirely on the supplier. Thus, unreliable suppliers may tarnish your reputation as a seller. And if the customer has complaints, you are accountable for solving them.
- The item may not be available for purchase. In this case, you will have to communicate and negotiate with the supplier about the return of products. And this may incur additional costs.
- A customer can buy different products that are in different warehouses. If the delivery is carried out by different suppliers, this will increase the cost of delivery.
- You lack product information. You simply don’t know how many items are left in the supplier’s warehouse. Because of this, overlaps often occur.
How Does Online Arbitrage Function?
Online arbitrage resembles dropshipping in many ways. The only tangible difference between that is that you purchase the product before a customer makes an order. This means you will need some upfront investment to purchase products in advance.
The key stages of the strategy are the following ones:
- Search for a profitable item. It’s better to choose products that can be sold quickly;
- Search for the supplier of the selected product. The lower the purchase price, the higher your income will be;
- Purchase of a small batch of goods;
- Sale of purchased products.
Benefits of Online Arbitrage
1. Small Upfront Investment
Along with additional expenses, most sellers start with up to $1000 investment. In this case, online arbitrage allows you to work for yourself and steadily make a profit.
2. Little interference
You just have to find the offer, analyze it, and make a purchase. Most sellers don’t create their own listings at all and don’t bother with advertising.
3. Low risk
Unlike with wholesale, choosing the wrong product won’t bring huge losses. In addition, you can painlessly enter different niches and try working with different products.
4. Easy Scale-Up
It’s much easier to scale as you can order as much inventory as you want, not limited to what’s left on the shelf.
5. You get free packaging
Since the store delivers products to your home or location, items arrive safely packaged with bubble wrap, packing paper, and other materials that you can reuse.
Drawbacks of Online Arbitrage
Working with the online arbitrage scheme, you may encounter the following:
- You will have to constantly look for cheap suppliers.
- It requires additional space to store products. This is especially crucial if you order larger quantities of products.
- The selected product may not bring the expected profits. If you make a mistake with the choice of products, they can be kept in your warehouse for months.
- You need to invest more in advertising, because it’s important to sell all the items you purchased from the supplier.
- It’s very difficult to scale because you end up spending most of your time in search of profitable deals.
- Amazon prohibits sellers from selling certain brands without specific permission from the manufacturer. That’s why make sure you have all the licenses.
Key Similarities Between Dropshipping and Online Arbitrage
We have covered the two concepts in detail, which allows us to make final conclusions on their similarities and differences. The picture of similar characteristics looks like this:
- Both dropshipping and online arbitrage imply reselling items. The seller doesn’t have to promote the product or spend money on advertising.
- It doesn’t take much time or money at the start. The amount of upfront investment varies from $800 for dropshipping to $2,000 for arbitrage.
- If compared to wholesale, both selling models pose a lower risk of incurring huge losses in case of an abrupt decline in demand.
- Your profits constitute the difference between the supplier’s price for products and the price for re-sale set up by you.
Key Differences Between Dropshipping and Online Arbitrage
Despite all the similarities, online arbitrage and dropshipping have a number of differences. The models are different in the following aspects:
The amount of income
Online arbitrage brings more profits but requires serious investments.
Storage
With dropshipping, you don’t need any place to store items, as the supplier is in charge of fulfilling the orders and sends items to the end customer from their warehouses. Meanwhile, online arbitrage sellers do need additional space for item storage.
Manageability
As for dropshipping, the success of the transaction mostly depends on the supplier. The item may not be in stock or may be defective. In the case of online arbitrage, you control order fulfillment yourself (check and send products, add bonuses to it, etc.).
Adaptability
Since you act as an intermediary with dropshipping, it’s easier to adapt to new realities. For example, if the product isn’t in demand anymore, you have nothing to lose, and just switch to another product.
Scalability
Online arbitrage business is more difficult to boost because it’s tied to a specific product. On the contrary, scaling dropshipping is much easier. All you need is a team that will constantly monitor the market, list products, check the availability of products from suppliers, etc.
Useful Tip
Those in two minds often mug over combining the two options and take up dropshipping and online arbitrage from one account on Amazon. Yet, it’s not recommended to sell products in this way. You risk having your account blocked, which will lead to freezing money transfer and your product on FBA.
The Takeaway
There are a handful of online business models, online arbitrage and dropshipping being some of the most widespread online selling models. Each of them has its pros and cons. For experienced sellers, it’d be good to start with online arbitrage, which offers higher profits despite additional order fulfillment tasks. On the other hand, those interested in getting started with little investment would better take up dropshipping at the first stages, as it frees you up from many responsibilities and is easy to quit at any moment without big losses.
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