As sales increasingly move online due to the “new normal” of the pandemic, those who invest their time and money in retail arbitrage could find themselves bringing in substantial income, whether as a side gig or new full-time venture.
What’s retail arbitrage? Simply put, it’s the practice of buying products from retailers when they are on clearance and then turning around and selling them on Amazon and other online retailers for a profit.
But as you grow your business, you’ll need to find a way to make it easy for customers to find you and buy your products. At some point you’ll probably start thinking about platforms, including one of the most commonly used: Amazon FBA (Fulfillment by Amazon).
In this post you’ll find:
What Is Amazon FBA?
“You sell it, we ship it.” That’s Amazon’s sales pitch for Fulfillment by Amazon (commonly called Amazon FBA).
Fulfillment by Amazon allows sellers to ship their products directly to Amazon fulfillment centers. You, the seller, are responsible for sourcing your products and creating the listing, but Amazon will handle the storage, delivery, customer service, returns, and other logistics.
Of course, there are costs associated with the service, but for resellers who move a lot of products, FBA is worth the investment because it takes over most of the administrative tasks and allows sellers to instead focus on creative expansion of their businesses, such as selecting new product categories or becoming a private label seller.
The best resource for getting started with using FBA is Amazon’s own website, but we’ve covered the basics below.
How to Get Started with Amazon FBA
Getting set up with Amazon FBA is a relatively painless process:
1. Create an Amazon Selling Account
When you’re getting your toes wet with retail arbitrage, it makes sense to sell as an individual seller. This option is “free” — you actually have to pay $0.99 per item sold, but there’s no monthly fee associated with the account — which allows you to determine if this is a business you really want to keep up with.
If you sell your first set of products and decide you want to keep doing this, you’ll likely want to open an actual Amazon seller account, which costs $39.99 a month plus selling fees.
2. Set Up FBA Services
Once your Amazon seller account is set up, you’ll be able to log in to Seller Central. That’s Amazon’s name for the site where you monitor your sales activity, including listing new products, updating pricing, responding to buyer queries, managing inventory and more.
From there, you can elect to add FBA to your account. Amazon will guide you through the steps for easy setup, and it should only take you a couple of minutes.
3. Set Up Your Listing
Creating a listing for your product is crucial to your success when selling on Amazon. Amazon has dedicated resources in Seller Central to help you get started, but in general, a good listing consists of:
- The product ID, such as Universal Product Code (UPC), International Standard Book Number (ISBN), European Article Number (EAN) or Japanese Article Number (JAN);
- A product title;
- The SKU;
- High-quality photographs of the product (more on this below);
- Product dimensions;
- An optimized description with helpful facts about the products and SEO-friendly keywords/search terms (more on this below);
- Correctly selected categories.
Want more guidance on how to create a listing in Seller Central? Check out Amazon’s simple listing tutorial.
4. Deliver Your Products to Amazon
Now it’s time to prepare your products to be delivered to Amazon fulfillment centers. (You’ll do this before you even sell anything.) Make sure your products are in compliance with all of Amazon’s guidelines for package prep. The guidelines are pretty specific, so it’s worth spending some time with them.
Once you’ve prepped your packages, determine which Amazon FBA fulfillment center you should be shipping your items to. Certain carriers offer discounts to FBA clients, which means you’ll save money over shipping to customers yourself if you use those carriers.
Amazon has extensive resources about shipping your inventory to fulfillment centers that is worth a read, especially if you’re getting started.
5. Let Amazon Do the Rest
Assuming you’ve listed your products well, your items should start selling as soon as they’ve arrived at the fulfillment center. Amazon workers will pick them for delivery and ship them to their customers. If customers have any inquiries or want to return the items, Amazon will handle that process as well. You can instead focus on finding more inventory and creating your listings.
Pros and Cons of FBA for Amazon Sellers
Signing up for an Amazon seller account — and subsequently for Fulfillment by Amazon — is easy enough, but does that mean you should do it? Weigh the pros and cons of using FBA before sending out your first shipment.
Pros of Using FBA When Selling on Amazon
Spoiler alert: FBA is popular with third-party sellers because it is typically the easiest and most convenient way to increase sales.
In fact, according to Big Commerce’s “The Definitive Guide to Selling on Amazon,” roughly half of all Amazon sales come from third-party sellers, and 66% of the top 10,000 sellers are using FBA.
You may have to invest some money in the service, but for most sellers, the benefits typically outweigh the costs.
Cheaper, Faster Shipping
It’s no secret that Amazon corners the market on ecommerce. With more than 300 million active customers, Amazon regularly ships millions of orders each day. The sheer size of its business has given Amazon the leverage it needs to make deals with shipping carriers for discounted shipping rates.
Those savings are passed on directly to Amazon’s network of third-party sellers who participate in FBA. Instead of paying exorbitant shipping costs for every item you sell on your own, you can get supremely discounted shipping rates when shipping your products to Amazon through FBA.
And because of Amazon’s massive network of fulfillment centers, it can guarantee faster shipping at cheaper rates (and even offer free shipping) to its customers.
If you’re competing with another person in the retail arbitrage game who is not an FBA client and the two of you list the same product for the same price, you stand to benefit because your shipping costs are likely lower and your delivery date likely sooner, thanks to your involvement with Fulfillment by Amazon.
Less Administrative Work
Coordinating shipping for all your products, tracking orders and responding to client questions are important, but they’re also time-consuming. Selling through FBA means Amazon handles all of that for you. You’ll get that time back, and you can use it to buy more inventory, run your own website, start another part-time gig or just relax with your family and friends.
No Need to Store Inventory
When you’re just starting on Amazon as a seller, you can probably rely on that extra closet space or a spare bedroom to store your products. But once your business expands, you run the risk of your house becoming overrun with inventory — or needing to invest in a storage or warehouse space, which eats into your profits.
Participating in Amazon FBA means you’ll avoid all that by shipping your products to a fulfillment center as soon as you get your wares.
Better Access to Prime Customers
Amazon Prime membership comes with plenty of perks: expedient and free shipping, access to Amazon’s original programming (and an extensive library of movies and TV shows) and, of course, select brands that are not available to everyday buyers.
That third item is very important to FBA sellers. The 90 million Amazon Prime subscribers in the U.S. have exclusive access to specific brands that only FBA sellers are allowed to list. As a result, joining FBA means you’ll expand your opportunities for inventory and you’ll get access to motivated buyers whom not all sellers on Amazon can reach.
Prime customers spend $600 more on Amazon each year on average, meaning it’s crucial to reach this market.
Great Customer Service — That You Don’t Have to Provide
In 2020 and beyond, having a top customer experience can make or break a sale. Customers expect to be treated fairly and honestly, with quick actions to remedy any less-than-ideal experiences.
Providing customer service that meets these standards can be challenging for third-party sellers. But if you use FBA, you don’t have to worry about this aspect of the business. Amazon offers customer support 24/7 via phone and email and will handle all customer queries regarding their orders. Amazon also handles the returns process so you don’t have to put any thought into it.
Handling returns well is crucial for your business. According to Practical Ecommerce, 95% of customers who make returns online will make additional purchases from that seller if they have a positive return experience.
The Ability to Sell Through Other Channels
Amazon also offers its FBA users Multi-Channel Fulfillment (MCF), which helps you sell your products through other channels — whether it’s another, more niche online retailer or your own website — while still allowing FBA to handle fulfillment of those orders. Of course, nothing in life (especially at Amazon) is free, so expect to pay additional money for this service.
Cons of Using FBA When Selling on Amazon
For a large number of sellers, Amazon FBA is worth the initial investment of time and money, but there are some downsides you should be aware of before you sign up.
The biggest downside to selling via FBA is the cost. The point of becoming a third-party seller is to make money, so initially it might not feel great to pass along some of those earnings to Jeff Bezos. However, if you’re smart about the time savings that using FBA can afford you, you can actually use that time to your advantage to make more money in the long term.
So what is the cost of using FBA? Unfortunately, it varies. The typical pay-as-you-go model includes two fees: 1) inventory storage fees and 2) fulfillment fees. This covers the cost of storing your items in the fulfillment center and having Amazon pick and ship your orders (even when the order is sold with Prime free two-day shipping).
Lots of Additional Fees
But depending on your scenario, you may end up paying more. For example, if your units are just not selling, you could wind up paying long-term storage fees. If you send inventory to the fulfillment center but do not properly prepare and label the products, Amazon can charge unplanned service fees to cover the cost of doing that work for you.
You may also have to pay fees for processing returns and removing orders, which is likely to happen if you want Amazon to return or dispose of an item, such as an item that is not selling and is ultimately costing you in the long run.
Additionally, Amazon charges higher fees for storage and fulfillment around the winter holidays (October to December), handling fees for larger items and additional fees for clothing.
Strict Guidelines With Little Wiggle Room
Amazon has strict guidelines that can be overwhelming to stay on top of. Orders must be properly prepared and labeled — or you risk accruing those unplanned service fees.
If you don’t trust yourself to catch all the small details, you may not want to use FBA. (But if that’s the case, retail arbitrage may not be for you because this business is all about the small details.)
Easier Return Process = More Returns
When selling via Amazon FBA, not only do you have to worry about those returns processing fees, but you also have to consider an increased number of returns. Amazon makes the returns process incredibly easy (that’s part of that positive customer experience), but that also means more customers will probably take advantage of it, resulting in more frequent returns of your products than you might potentially encounter if selling on your own.
Commingling Merchandise Has Risks
FBA sellers have the choice to commingle their merchandise, which means Amazon may use your item to fill an order for another seller’s product for the sake of convenience and cost-savings. Conversely, if your item is stored in Indiana and another seller is storing the exact same product in Washington, if someone from Oregon buys the item, Amazon may fulfill that order using the Washington fulfillment center’s product. You’ll still get the money for the sale, but the other seller now retains your Indiana-based product.
Opting for this can save you time on labeling and prepping your products. However, you lose the ability to guarantee the quality of your product. If an unscrupulous seller lists a damaged or counterfeit product that’s ultimately sold under your name, you’ll be on the hook in terms of who gets the negative reviews and potential slap on the wrist from Amazon.
Sales Tax Conundrums
Sales tax can already be difficult to navigate when selling on Amazon and other e-commerce sites. But when you ship directly from your home, your business technically operates in a single state.
However, with FBA, your products may end up in different distribution centers all over the country, which leads to a murky tax situation about the states to which you should be paying taxes.
Whether you use FBA or not, you should get a professional accountant to handle your taxes when running a retail arbitrage business.
Quick Tips for Selling on Amazon
Whether you are using FBA or going it alone, it’s helpful to keep a few things in mind to stay ahead of the competition — or at least keep pace.
Optimize Your Listings
If you’re deep into the online retail arbitrage rabbit hole, chances are you already know what SEO, or search engine optimization, is. Just in case, here it is in a nutshell: The art of SEO is making your content as good as it can be so that search engines can “crawl” it and display it to readers ahead of competing pieces of content. SEO efforts include writing with strong headings and keywords, adding alt text to images and earning links from reputable sources, among many others.
But it’s not just articles on websites or your own blog posts that need to be written with SEO in mind. Amazon has its own algorithms to show potential customers results based on their search queries, meaning you want to optimize your product listings so that they show up high in relevant searches.
SEO experts all over the internet offer up their best tips for optimizing Amazon listings, but at the end of the day, familiarizing yourself with Amazon’s own tips for listing optimization is your best bet.
Take Quality Pictures
High-quality product photos will instill more confidence in potential customers who are browsing your products. Take photos from multiple angles with a professional-grade camera (or a new smartphone, at the very least), and make sure you have good lighting.
Need help? Take a cheap photography class for beginners in your community, and you can write the class off as a business expense come tax season.
Customers are more confident in a purchase when they see it has positive reviews — and lots of them. Including a thank-you note inside your package encouraging your customers to leave a review about their experience is an easy way to earn some reviews from happy customers that you might not otherwise receive.
Try Bundling Products
You might have some of the funniest Bob’s Burgers face masks around, but if Belchie fans are scouring Amazon’s pages for the perfect face mask, you may be losing out to all the other sellers in the market. Instead, bundle yours with a cheap Bob’s Burgers poster to make your listing more unique. You’re likely to sell your bundle more frequently—and you can charge more for it.
Invest in the Right Tools
Paying for Amazon FBA is not where the investments stop. To grow your business, you should consider purchasing a quality algorithmic repricer that automatically adjusts your prices as the market fluctuates, so you don’t have to manually monitor all your products.
If you want your products to start showing up in the coveted “sponsored” section on listings, you’ll also have to throw some money at Amazon Marketing Services (AMS).
Timothy Moore is a market research editing and graphic design manager and a freelance writer covering topics on personal finance, careers, education, pet care and automotive. He has worked in the field since 2012 and has been featured on sites like Codetic, Debt.com, Ladders, Glassdoor and The News Wheel. He lives in Ohio with his partner and their three-legged dog.