Is being a good bargain hunter an ecommerce business model? As long as you call it “retail arbitrage” it is!
Retail arbitrage is buying your inventory at a significant discount from online and offline retail stores, and then reselling them online at a markup. The hidden cost is the busy work — running back and forth between your local retail stores, constantly checking online markets over and over every day, looking out for any and every sale.
If you’ve always had a nose for good deals, retail arbitrage could be an optimal strategy for you. Here we talk about the pros and cons of this ecommerce model, as well as the best retail arbitrage product sourcing strategies.
What Is Retail Arbitrage?
In the retail arbitrage model, the seller usually lists products that they know they can get at a discount, and only acquire the product after the sale has been made. So, if Walmart is having a sale on pet toys, you list pet toys on your site. Then, after the sales orders start piling in, you drive out to Walmart to buy all the pet toys you need and ship them out yourself. You can apply this strategy to online stores as well, and sometimes even ship directly to the customer — a hybrid of retail arbitrage and dropshipping, explained below.
Aside from sniffing out bargains, the trick to retail arbitrage lies in the math. When product sourcing, you must always be conscious of your profit margin to determine whether or not it’s worth it to carry a product. On-the-spot arithmetic comes in handy — for each product, you need to calculate the listing/selling fees, shipping costs, and which markets or channels you can list it on.
The types of goods you can sell are rather limited as well — you can only use products that frequently go on sale, as finding big-ticket items at a discount happens once in a blue moon. Although there are exceptions, you can expect to mostly sell goods under $20. According to the Online Shopping Experiment, aim for goods with a profit of more than $3 per unit, and more than 50% return on investment. But be careful, because all that searching could be for nothing if you make some of these common retail arbitrage mistakes.
The Best Retail Arbitrage Product Sourcing Strategies
How can you find the greatest deals for sourcing your products? Here are some of the best ways:
1. Monitor the Prices and Markdown Schedules of Local Stores
The best product sources for retail arbitrage are usually the discount chain stores. The bigger the chain, the more they buy in bulk, the cheaper their prices. Here are some of the popular options in the U.S.:
- Big Lots
- Rite Aid
- Office Depot
- Home Depot
You’ll want to visit these stores often and pay close attention to their prices, particularly how they change over time. These stores usually run promotions and sales campaigns on a regular schedule, mandated by the corporate office. If you can figure out their markdown schedules, you can get a head start on listing products and make more detailed business strategies.
The trouble with finding a store’s markdown schedule is that they don’t want customers to know it. Sometimes you can find these insider secrets online: the Krazy Coupon Lady posted a helpful guide on the markdown schedules of some top stores, however it’s a couple years old. If worse comes to worse, you can always do it the old-fashioned way: record how the prices change over a month or two and graph the data.
2. Hit Multiple Locations When Chain Stores Have Sales
Another advantage of using discount chain stores for retail arbitrage is that you can hit multiple locations. If there’s a sale at the Target near you, that means there’s also a sale at the one the next town over. If a product’s selling particularly well, you can “expand your inventory” just by hitting all the store locations in your area.
3. Sign up for Email Newsletters
If you’re already an online bargain hunter, you probably already discovered the advantage of email newsletters. Online brands just like you use email marketing to strengthen their community, and the best way to get customers’ emails is by offering incentives like coupon codes or sales notifications.
Because retail arbitrage makes you both the buyer and seller, it pays to sign up for as many of these email newsletters as you can. You’ll get more coupons and stay in the know about upcoming sales, allowing you to plan out your own listings ahead of time.
4. Combine Retail Arbitrage with Dropshipping
In the last chapter, we talked about dropshipping — listing an item from a supplier and having them fulfill the sales order, for a small percentage. While dropshipping requires more of an ongoing (and official) partnership, retail arbitrage can, in theory, turn any online seller into a one-time dropshipper.
Consider this example. You see a product listed at a discount on eBay, so you list it on your Amazon page at a markup. When someone buys it from your Amazon page, you buy it on eBay and have it shipped to your customer. That’s even less work for you, since you don’t have to worry about manually acquiring or shipping the product.
The downside is, these scenarios are harder to orchestrate. After all, if you found the product for a significant discount elsewhere online, a big portion of your customer base will also be able to do the same.
Like dropshipping, sustaining a retail arbitrage business model is harder than it seems. Because the profit margin is so slim, your time is spent continually looking for more and more deals to build your profits dollar-by-dollar.
On the plus side, a retail arbitrage company can be managed independently and by oneself, making it an attractive option for work-at-home parents or entrepreneurs with little capital. After all, the ecommerce giant Zappos started out as retail arbitrage, with the founders running back and forth to the mall to buy shoes for their early customers!
Interested in learning more about product sourcing? Check out our guide outlining the best sourcing strategies for every ecommerce business model.