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Online Arbitrage: What is it and How Does it Work?

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by Travis F.posted on 17.12.2020

Online Arbitrage: What is it and How Does it Work?

When it comes to selling on Amazon, one of the biggest hurdles people face is figuring out how to acquire products to resell on the platform. There are a number of strategies you can use, but online arbitrage is one of the easiest.

In this step-by-step guide, you’ll learn everything you need to know about online arbitrage. We’ll also let you in on some tips to ensure you choose the right products and execute this tactic effectively.

What is Online Arbitrage?

Online arbitrage is the act of buying products on one online marketplace and flipping them on another for a higher price. With this method, you don’t need to deal with suppliers and large order quantities. Best of all, you can do everything right from the comfort of your own home.

Oftentimes, a product is sold cheaper on some websites than others. When this occurs, you can take advantage of the price difference by purchasing a product where it’s priced lower and selling it somewhere else where it’s priced higher. If the difference in price is large enough you’ll be able to make a nice profit. 

For example, you might find a book being sold on eBay for $5, but when you check Amazon it’s selling there for $10. So, if you buy it on eBay and sell it on Amazon you’ll make a $5 profit.

It’s similar to retail arbitrage, which involves buying products from brick and mortar stores and reselling them online. The difference of course is that with this strategy items are purchased on websites. The overall goal is the same though.

How to Do Online Arbitrage: 5 Steps

When executed properly, online arbitrage is a great way to make money on Amazon. However, that doesn’t mean you can buy and resell any product and expect to be profitable. In order to do it right, you need to perform thorough research and perfect your strategies.

Here are the five steps you need to take to start a successful online arbitrage business on Amazon:

1. Generate Product Ideas

There are millions of different products sold on Amazon, so when it comes to choosing one to sell the process can be overwhelming. Luckily, there are tools available that simplify the process and make it easy to identify the best items to resell.

Using the AMZScout Product Database for Online Arbitrage

While there is a lot of software to choose from, the two tools we recommend are the Amazon Product Database or Online Arbitrage and Dropshipping extension. The Amazon Product Database helps refine your search based on products that meet your needs. 

1. Go to the AMZScout Product Database.

2. Start your free trial. Make an account by entering simple information (no credit cards necessary). 

3. Set product criteria. Built-in search filters help you define criteria. Filtering by the number of sales is one example. You can also try the ready-made criteria from Product Selections if you don’t know where to start. We recommend selecting product listings from 2 to 20 sellers. Sticking between two and twenty means the product is ready for resale but less likely to be overly competitive. 

How to find products with the AMZScout Product Database
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4. Get your results. Click Find Products to get a display of products.

See the results in the AMZScout Product Database
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5. Look through the list and mark items that appeal to you for further review.

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Brainstorm New Product Ideas with the Product Database

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How To Use the AMZScout Online Arbitrage and Dropshipping Extension

You can also find ideas through the Online Arbitrage and Dropshipping extension:

1. Install AMZScout’s Online Arbitrage and Dropshipping Extension.

2. Start your free trial. No credit card is necessary to start. Just enter basic information for the trial.

3. Browse Amazon to get product ideas. Go to Amazon.com and start searching for a niche. It can be:

  • Items you are interested in selling.

  • Products popular on third-party marketplaces (both retail stores and online options).

The search results will display boxes with additional information on different items. Use this information to define what you want in a product. 

How to find product ideas with AMZScout
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5. Check the TOP products. Each product page (with apps activated) will have an in-built window with important information about the product. Pay attention to items that are private label, ungated, or hazmat. These product types require additional certifications or permission from Amazon.

How to analyze potential products with AMZScout
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6. Find out how much potential profit it offers. Use the calculator to predict marginality trends quickly and determine whether the item is profitable to sell by entering the price.

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Using the AMZScout PRO Extension to Narrow Your Product List

Regardless of where you start, both tools are supplemented effectively by the AMZScout PRO Extension. Follow these steps to determine if the product has low competition and high profitability:

1. Install the AMZScout PRO Extension.

2. Open the PRO Extension:

  • A successful installation is indicated by Amazon opening automatically. 

  • You will be prompted to create an account. No payments are collected, and you won’t need to enter a card. Simply enter basic information.

  • Find your products using your research process from above (AMZScout’s Products Database or Online Arbitrage and Dropshipping Extension).

  • Click the AMZScout icon to open it again.

3. Review your product information. For example, look at these areas:

  • Seller count (Typically, you should stick between two and 20 sellers. Any more means high competition, having one seller means likely unavailable for resale). 

  • A net margin of over 50% usually means you have good potential profit. 

  • If the product has been around on Amazon for a short or long time.

  • Other important factors based on your priorities.

Amazon product analysis with AMZScout
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4. Check the product score for reselling. Product scores (which indicate resale potential) should ideally be over seven for higher potential. 

How to check the AMZScout Product Score for reselling
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5. Evaluate the product sales performance. The arrow to the product's left will show you product history. Understanding sales and price changes over a period will enable you to make better selling decisions. 

Phone Cases Product History in AMZScout PRO
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One thing to remember is that your choices will be somewhat limited when using online arbitrage to source your products. You may identify an item that you want to sell, but if you can’t find somewhere online that’s offering it at a low enough price you won’t be able to sell it.

For that reason, it’s best to focus on niches rather than specific products. Pick a few niches that look like they have potential, and then start searching online for really good deals for those types of items.

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Find profitable products with the AMZScout PRO Extension

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Find profitable products with the AMZScout PRO Extension

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2. Find Products

Once you know what niche you want to sell in, it's time to start sourcing your products. There are a number of places to look, but the best sites are:

  • eBay

  • Walmart.com

  • Etsy

  • Craigslist

  • Facebook Marketplace

  • OfferUp

  • Let Go

4 large marketplaces for buying and selling products
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If a product goes on sale it could sell out fast, so make sure you’re checking these and other marketplaces daily so you don’t miss out on any opportunities.

When looking for items to sell, you ideally want to find something that’s being offered at less than half of what it’s selling for on Amazon. This is because Amazon takes a referral fee every time you make a sale on their platform. There are also storage and fulfillment fees if you’re using the Fulfillment by Amazon (FBA) program. So, you need to have enough profit to be able to pay these fees and still have some money left over.

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3. Validate Your Products

The rule above for determining whether a product will be profitable is a good starting point, but it’s not exact. If you really want to know just how much you’ll make off an item after all the fees, use AMZScout’s Online Arbitrage and Dropshipping extension.

Once this widget is installed, you’re able to calculate a product’s profitability right on its Amazon listing. Fields appear that allow you to fill in your costs, such as the price of the item and shipping expenses. Your FBA fees are automatically calculated and your net profit, profit margin, and ROI are displayed.

Use this tool to check any product you’re thinking about reselling on Amazon. If the tool shows that you’ll make a nice profit go ahead and buy it. However, if it shows that you’ll make little or no money you can move on and find a more profitable opportunity.

If you do this before purchasing any items you’ll set yourself up for success and ensure you’re making smart buying decisions. It’s also a valuable tool for dropshipping and private label sellers as well.

4. Decide How You’ll Fulfill Your Orders

If the AMZScout Online Arbitrage & Dropshipping tool determines a product will be profitable, purchase it, and have it shipped to you. After your items arrive you’ll have a decision to make.

Do you want to store your inventory and fulfill your orders yourself? Or do you want to use the FBA program and have Amazon do it for you?

How does Amazon FBA work
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With Amazon FBA, you’ll ship all your products to them. They’ll store them in one of their warehouses, and when you receive an order they’ll package it up and ship it to the customer. You’ll pay more fees by selling this way, but it’s also a lot more convenient.

Generally, if you only plan on selling a few items at a time you can probably perform these tasks yourself. But if you plan on growing your business and selling a larger quantity you might want to think about FBA.

5. Win the Buy Box

Most of the products you acquire through online arbitrage will already have a listing on Amazon. This means you’ll be sharing a listing with a number of other resellers and will be competing with them for the buy box

The buy box refers to the section of a listing where customers can add a product to their cart or click the “Buy Now” button. When someone clicks these buttons Amazon awards the sale to a seller based on a few different criteria, including:

  • Price

  • Order defect rate

  • Customer feedback

  • Length of time selling on Amazon

How does the Amazon Buy box work
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If you want to succeed on Amazon you need to make sure you’re winning the buy box as much as possible. Here are a few tips to help you out:

  • Price your products as competitively as possible. The lower your price the more often you’ll be awarded the buy box. 

  • Use repricer software to automatically change your price based on certain factors. This helps make sure your price is always optimized.

  • Amazon favors sellers who use FBA, so fulfilling your orders this way will help you win the buy box more often.

  • Email customers after they buy from you to follow up with them about their purchase. You can also use this opportunity to ask them to leave you some feedback. This helps improve your customer satisfaction and increases the number of reviews you have.

Make sure to continually monitor where you stand in regards to the buy box and stay on top of all the factors that influence your ability to win it.

Online Arbitrage Pros & Cons

Any method you use to source your products will have its pluses and minuses. The key is to find a tactic that best fits your business model and budget.

If you’re thinking about online arbitrage here are some pros and cons to consider:

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  • Low Cost: When you buy from wholesalers and manufacturers you’ll need to buy in bulk. Minimum order quantities can be high which usually means a large initial investment. With online arbitrage, you can buy as much or as little as you want, meaning you can start your business with a much lower budget.

  • Less Risk: Because you aren’t forced to order large quantities at once there isn’t the risk of being stuck with a lot of stock that you can’t sell. If for some reason you’re not able to sell your items you’ll only be out a small amount of money. For this reason, online arbitrage is a good choice for new sellers.

  • Don’t Need to Deal with Suppliers: For many people, dealing with wholesale companies and manufacturers can be intimidating. But with online arbitrage, you’re just buying from other online marketplaces like eBay and Walmart. If you’ve ever shopped online then you already know enough to get started.

  • It’s Easy: The whole process can be done at home from your computer. Virtually anyone can do it. It’s also a lot easier than retail arbitrage, which forces you to drive from store to store looking for deals.

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  • Smaller Profit Margins: Because you’re buying from other retailers you’re going to end up paying more per item. This doesn’t mean you can’t still make a profit, but you’ll make a lot less than you would if you bought from a wholesaler or manufacturer.

  • It Can Be Hard to Find Deals: Amazon already has very low prices, so it can be difficult to find products that are selling for less elsewhere. This means you could spend a lot of time searching and only end up with a few items worth selling.

  • Hard to Scale: Since profit margins are smaller and it’s harder to build up your inventory, scaling this into a full-time business can be difficult. While online arbitrage is a great way to make some side money if you want to make selling on Amazon the sole income you might need to explore other strategies.

Overall, if you’re a new seller and you don’t have a large budget, online arbitrage is a low-risk way to get started. However, as your business grows you may want to consider other business models that will allow you to scale up your operation.

3 Tips to Help You Succeed

Before you get started on your selling journey, here are three more tips to help you out:

  • Use the Right Tools: We already mentioned some tools above that make selling on Amazon easier, but there are plenty more out there. You’ll find tools that help you identify the best keywords, spy on competitor’s inventory, and optimize your ads. Most tools are available for a free trial so you can try them out and see which ones work best for you.

  • Use Amazon Ads: Using paid ads on Amazon is the best marketing strategy and a great way to boost your sales. Plus, they’re super easy to set up and very affordable. Just choose which items you want to promote, select your keywords, set a budget, and you’re good to go.

  • Use FBA: As we’ve already mentioned, the FBA program offers a number of advantages. Not only does it mean you don’t have to store inventory or fulfill orders, but it also gives you a better shot at the buy box. If you can afford the extra fees it’s definitely worth it.

Conclusion

Online arbitrage is one of the easiest ways to get started selling on Amazon, and there are plenty of people who have built profitable businesses this way. If you take advantage of the many tools at your disposal and perform proper product research, then you can definitely find success with this strategy.

Get 10-in-1 Amazon Toolbox for Dropshipping, Arbitrage, and Wholesale Sellers

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Get 10-in-1 Amazon Toolbox for Dropshipping, Arbitrage, and Wholesale Sellers

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