pros and cons of using dropshipping retail arbitrage

Ecommerce retailers can source their products multiple ways. Some methods are better than others, depending on the business and the products it’s selling. You may have heard about dropshipping retail arbitrage, also called online retail arbitrage, and are wondering if it’s a viable sourcing option. We’re here to give you some details about what it is, the benefits and drawbacks, and which marketplaces are cracking down on it.

 

How Does Dropshipping Retail Arbitrage Work?

Dropshipping retail arbitrage is different than traditional retail arbitrage and standard dropshipping. We’ve outlined the differences between all three to help you better understand why dropshipping retail arbitrage is so unique.

 

What is standard retail arbitrage?

Standard retail arbitrage involves purchasing products from online retailers or brick and mortar stores, then selling those products for a higher price. For example, you may purchase a Kitchen Aid mixer at Target that is on sale for $199 and then sell it on your online website for $299. The products that you sell using retail arbitrage are publicly available to shoppers already.

 

What is dropshipping?

Conventional dropshipping is another product sourcing method that ecommerce retailers use to sell online. Essentially, it takes the products out of the online retailer’s hands. If you use dropshipping, here’s what it looks like:

  1. You establish a relationship with a dropship supplier and choose items you’d like to sell from their catalog of products.
  2. You list those products to your online store and sales channels.
  3. A buyer purchases a product from your online store.
  4. You send the customer’s order information to your dropship supplier.
  5. The dropship supplier charges you for the product.
  6. Your supplier ships the product to your customer.

At the end of the day, you never handle the product. It goes straight from your supplier to your customer.

 

What is dropshipping retail arbitrage?

Dropshipping retail arbitrage combines the two methods above to form a controversial new method that some marketplaces do not allow. It involves finding products from a specific online retailer (such as Amazon, eBay, or other retail sites), increasing the price, and re-selling to make a profit.

For example, you see a Bluetooth speaker that is selling for $50 on Walmart.com, but you know that you can sell it on your website for $75. You list the product on your website at the price of $75 and one of your customers buys it.

To fulfill your customer’s order, you purchase the speaker from Walmart.com and enter your customer’s address as the delivery address. Your customer receives the item, and Walmart has no idea that you are essentially using them as a supplier.

Dropshipping retail arbitrage is typically used from Amazon-to-eBay, with Amazon as the unknowing supplier and eBay as the seller, but it can be accomplished with any retailer and marketplace – sort of. Both Amazon and eBay are doing what they can to stop sellers on their platforms from using this method of product sourcing. We’ll get to that in a minute, but first let’s look at the advantages and disadvantages of dropshipping retail arbitrage.

 

Advantages of Dropshipping Retail Arbitrage

Perhaps the biggest advantage of sourcing products this way is there are almost no upfront costs or investment needed. Because there is no inventory to be maintained, you don’t have to purchase an inventory before you start selling. Additionally, because your “suppliers” don’t know they’re suppliers, there is no contract to sign or fees to be paid.

Another advantage is that you’re able to find products at great prices, allowing you to earn a healthy profit when you resell them. If you’re able to find opportunities like that repeatedly, then you can make a great living, but it’s not something you can always count on. When you’re unable to find great items that you can earn a good profit on, then you aren’t able to make any money.

 

Disadvantages of Dropshipping Retail Arbitrage

Disadvantages of dropshipping retail arbitrage include being at the mercy of market trends and economic conditions. You’ll have to be on constant alert for new bargains, sales, and discounts on products that are popular. You might find yourself scrolling through various websites looking for ideal items.

Another disadvantage is that you can’t really run specials and deals for your customers to take advantage of. When you’re taking products from other online retailers and putting them onto your own site at a higher price, your profit margin can be tight.

That makes it hard to offer your own discount pricing or promotions because the markup isn’t big enough to allow for it. After all, the price you’re paying is the same price that any other shopper can find online; you can’t go below that price without losing money.

 

Marketplaces are Cracking Down on Dropshipping Retail Arbitrage

Amazon and eBay are changing their policies to make it harder for sellers to use the dropshipping retail arbitrage method. While neither site has currently stated that the method is prohibited, it’s evident that they don’t wish to support the practice any longer.

Amazon is frequently asking sellers for “proof of authenticity” in their verification process. They’re looking for invoices and authorization letters to support the sourcing of products. If you aren’t able to provide the needed documentation, Amazon will likely remove those products, and they may even suspend your account.

eBay is essentially doing the same thing. In some instances, the marketplace is asking sellers to validate the ownership of the products listed, and like Amazon, they are shutting down accounts that are unable to provide it.

Essentially, brands, marketplaces, and supplying retailers want transparency in the supply chain. Dropshipping retail arbitrage increases the risks of consumer complaints, confusion, and returns, making all those involved feel like they must be vigilant in discouraging the practice.

 

What’s Right for Your Online Store?

Ultimately, the decision of how to source products for your online business is yours to make. However, if dropshipping retail arbitrage is a method you are using or one you want to use, it’s important that you arm yourself with all the information you can.

Please note that at this time, the ecomdash software doesn’t offer functionality to assist retailers with dropshipping retail arbitrage.

 

FREE GUIDE:
How To Start A Dropshipping Business
FREE GUIDE:
How To Start A Dropshipping Business

Dropshipping seems like an easy business model to start due to its low inventory risk. However, it does take some serious planning. Use our guide to get started today.

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