Dropshipping vs Retail Arbitrage – Pros and Cons
Dropshipping and retail arbitrage are both relatively easy online business models to get started with, which is probably why you are looking into them more right now.
But which should you choose?
What are the upsides and downsides to each and which would be a better fit for you?
In this post I'll be going over the pros and cons of dropshipping vs retail arbitrage, and I'll be giving my opinion as to which I think is the better choice and why.
Let's start off by taking a look at dropshipping...
What Is Dropshipping?
In a nutshell, dropshipping is when you sell products but don't keep any inventory, instead having the products sold shipped straight from the manufacturer to the customer.
How It Works:
- You find products you want to sell from a supplier (Ex: AliExpress)
- You list them for sale on your website (or on a platform like Amazon or Ebay)
- Customers purchase the product on your website and pay you
- You then purchase the product from the manufacturer and have it sent directly to the customer
The buyer, unless you tell them, won't know that you are simply dropshipping right from the manufacturer or not, and likely won't care either. To them you look like any other seller.
This is a very popular business model because of many reasons, some of the top ones being that it is low risk, relatively easy to get started with, and there is potential for good profits.
The common way to go about dropshipping is to set up your own website and list products from a wholesale website like AliExpress (also lots of US dropshipping companies you can choose from), as explained in this brief video I found...
Dropshipping on Your Own Website vs Amazon vs Ebay
Dropshipping can be done in a variety of ways. I mentioned dropshipping from your own website is one that is very common, and better for some reasons, but you can also dropship from established ecommerce platforms like Ebay or Amazon.
With Your Own Website: you have more control over things because... well... you own the site. You will have more branding opportunity here and will have a better chance of selling products once you get traffic... the downside being that you have to get traffic.
Paid advertising is the best route to take if you have your own ecommerce store and this is the method taught in just about every dropshipping/ecommerce course on the internet. What I'm talking about here is advertising your products on Facebook, Pinterest, Instagram, etc.
On Amazon: the upsides are that you don't need to pay for a website and there isn't quite the need to establish a brand, since your products will be sold through Amazon which is already a well-trusted brand.
Possibly the biggest upside is that you will get free traffic from the people who are already searching to buy on Amazon. You can get free traffic to your own website from Google and whatnot, but this is more difficult when it comes to selling ecommerce products.
Ebay: is the same type of deal as Amazon. The platform is established and you can get free traffic from people who are already searching to buy on Ebay.
Pros v Cons of Dropshipping
- Low risk - The risk is low when starting out dropshipping because of my next point, which is that it doesn't cost much to get started.
- Low startup cost - There are costs involved, such as paying for a website if that is the route you want to take, but overall it is very low-cost.
- No inventory - You won't need to store any inventory, which is another reason it is low-cost and low-risk. You don't have to invest in storage space or pack your living-room with boxes of products, and you don't have to worry much if a product doesn't sell since you don't purchase at wholesale prices until a customer pays you.
- Flexible product choices - With all the websites out there now that connect manufacturers directly to buyers, there are millions upon millions of products to choose from. And because you don't keep inventory, you can easily test out promoting different products, switching from one to the next very easily.
- Good profit margins - Generally speaking you can have some pretty decent profit margins dropshipping.
- Good future outlook
- Lack of control - You are at the mercy of your suppliers. It's not like you have a contract with them or anything, so they may discontinue manufacturing of a product at any time. This is something I encountered personally during my dropshipping venture a while back. The good news is that there are often times many manufacturers making the same products, which means you can just switch suppliers.
- Poor customer service - If a product gets lost in shipment or is taking forever to be shipped, it can be a hassle providing good customer service. You are a middleman and don't have control over the shipments.
- Higher cost than bulk wholesale purchasing - Buying 1 item at a time costs more than purchasing large quantities at wholesale prices. That said, with retail arbitrage you won't be getting wholesale prices at all (or rarely).
What Is Retail Arbitrage?
In a nutshell, retail arbitrage (RA for short) is when you purchase products at a retail store and sell them for more somewhere else, in this particular case we are talking about selling them at higher prices online.
The best way to go about it is to find discounted items at retail stores that are selling for higher prices on Amazon or Ebay, buying them, and then listing them on Amazon or Ebay.
- Find discounted items at retail stores
- Check their prices on Amazon or Ebay
- Buy if good profit margin
- List for sale on Amazon or Ebay
As mentioned in the video, there are a variety of apps you there that make this process really simple.
If you just want to sell on Amazon then you can use the Amazon Seller's app. What you would do is find discount products, scan their bar-codes on the app and it will tell you what that product is selling for on Amazon.
Retail Arbitrage On Your Own Website vs Amazon vs Ebay
Doing RA by listing products for sale on your own website isn't something that be very effective, which is why everyone is doing this on Amazon or Ebay usually... or even other platforms like Craigslist.
The reason you don't want to set up your own website for this business model is because 1) you won't have any set products and your inventory will be constantly changing, and 2) when you are looking to purchase products you are comparing to prices on platforms like Amazon/Ebay in the first place.
This is something I want to talk about briefly so that we don't get things confused.
Dropship arbitrage is when you find products selling for cheaper on one website than they are on another, and then 'dropship' them from the cheaper one to buyers buying on the more expensive one.
For example, you could find a product selling for cheap on Ebay and list it on Amazon, then dropshipping to buyers directly from Ebay.
It's the same as normal dropshipping, just you aren't buying directly from manufacturers.
*Ebay and Amazon don't like this and they are making it more difficult for people to do so.
Pros v Cons of Retail Arbitrage
- Low risk - Just like dropshipping, RA is also a very low risk business to get started with, largely because of the low startup cost...
- Low startup cost - If you do this the smart way and sell on Amazon or Ebay, you don't need any website. Pretty much all you are spending money on is inventory, which you can purchase in small amounts to start out.
- Easy to leverage existing traffic - When selling on Amazon or Ebay you can, and many people do, list your products and do nothing... leveraging the existing organic traffic that these platforms get to sell your products. With your own website, which is what I suggest for dropshipping, you can't do this.
- Hit or miss - Finding products selling at good enough discounts to be worthy of RA can be a hit or miss. You never know what products you might find.
- No good branding opportunity - Because the products you will be selling will likely change often, and vary greatly, there isn't much opportunity to establish your own brand, unless you want to try to become a brand that sells a bunch of random products... which likely isn't going to work.
- You store inventory - You will be purchasing the physical products first and will need to store them while you wait for them to sell on Amazon or Ebay. Clear your living room.
- Getting more difficult to sell branded items - Amazon and Ebay are cracking down on this hard in some cases. That said, Ebay is making it harder for people doing dropshipping and RA, as talked about on eSellerCafe (another good reason to have your own site if you do dropshipping).
Which Is Easier to Get Started With?
If you compare dropshipping on Amazon to doing retail arbitrage on Amazon then I would definitely say that dropshipping is easier to get started with (because no inventory and everything can be done online), but as you know I suggest focusing on dropshipping from your own website, which makes things a bit more complicated.
Dropshipping Startup: If you plan to dropship on Amazon or Ebay then it is very simple.
- Create a seller account
- Find products you want to sell on website like AliExpress
- List them for sale
But if you dropship from your own website there are a few extra steps involved. You will obviously have to pay for some sort of website service (ex: Shopify), you will have to drive traffic to your product pages (ex: Facebook ads), and you will have to deal with payments from customers.
Setting up a website really isn't difficult. I would say the biggest hurdle (by far) if you dropship from your own website is traffic generation. Driving targeted traffic and running a profitable dropshipping business can be a challenge for some.
Retail Arbitrage Startup: If you do this then you will want to sell on Amazon, Ebay, etc. and it's less complicated.
- Create a seller account
- Find products on sale at stores and see if they can be sold for more on Amazon, etc.
- Buy and list for sale
- Wait (relying on organic traffic from Amazon, etc.)
And of course there is the step you have to take which involves clearing out a section of your house to store inventory.
However, you also have to consider the fact that retail arbitrage requires you to leave the house, whereas dropshipping can be done completely from your computer.
So which is the easier choice?
All in all they are both very easy to get started with. It's hard to choose an answer for this. I'd say it's pretty much a tie.
The Better Choice
While retail arbitrage is still a good low-risk way to make money selling online, and although it might be easier to get started with in some ways, my top pick would most definitely be dropshipping.
The dropshipping business model has more potential long-term and there is a better future outlook for this type of business--which is why it is listed as one of my top income ideas for making money from home.
Some of the reasons this is my pick include...
#1 - Scalability
Dropshipping is a much more scalable business model than if you are doing retail arbitrage.
With dropshipping you can focus on one niche and find good products that sell well within that niche due to having such a wide product selection available. Once you find a winning product (one that sells good), it's usually just a matter of increasing traffic... which usually means increasing your ad-spend.
With retail arbitrage you might find a product that sells great, but who knows how long that product will be on sale at the local Sam's Club. With this business model you are completely at the mercy of the retailers and the sales they have.
#2 - Branding Opportunity
You will also have much more room to build a brand with dropshipping. You will be able to have more stable product selections and keep the products you are selling niche-specific.
There is pretty much no branding opportunity with RA... you are just selling a bunch of random products for the most part.
#3 - Product Control
As already mentioned, with RA you don't have nearly as much control over what you will be selling as you do with dropshipping.
With RA you basically just shop around for good deals and sell whatever comes your way... which is fun and can be very lucrative... but lacks control.
#4 - No Inventory
And of course a major upside to dropshipping is that you don't need inventory, while with retail arbitrage you might need to move your washer & dryer out in the garage to make room for those 17 leaf-blowers you found a really good deal on at Home Depot.
#5 - More Income Potential
There certainly is still a lot of money to be made with retail arbitrage, and there are many who do RA and make a lot more than people who do dropshipping, but generally speaking there is more income potential with dropshipping due to the ability to scale more and establish a brand.
- Retail arbitrage will sometimes provide you with more profit margin if you find a really good deal and buy in bulk--although probably not that often since there is an extra seller involved.
- Since you ship your products with RA, you will be able to provide better customer service.
There is no doubt that there are some upsides that RA has over dropshipping, but all-in-all dropshipping looks to be the much better choice long-term.
If you want to get started with dropshipping then the easiest way to go about it, as mentioned, is using a platform like Shopify and finding products on AliExpress, which is the method most online dropshipping courses teach.
That said, you can do this however you please. You could, for example, take the cheaper route of using Woocommerce with a WordPress website, but Shopify just makes things so much easier and really isn't expensive anyhow.
And Don't Think You Are Limited to Just One or The Other!
There is no good reason you can't do dropshipping and retail arbitrage at the same time.
I would focus on dropshipping and suggest doing some RA if you find some incredible deals, but it's up to you. RA is perfect for doing on the side because of how easy it is to tap into the traffic that Amazon or Ebay is already getting... it's more of a business model where you can list your products and then sit back and wait.
A big reason I'm not too heavily promoting retail arbitrage here is because of the future outlook. As mentioned, Amazon and Ebay are cracking down on this and making it harder to sell certain brands, making the opportunities more limited... but there is definitely still opportunity out there.
So which is a better choice for you? Do you have experience with either? Leave your comments and questions below 🙂
I hope you enjoyed this comparison post and hopefully it helped give you a better idea of which you want to get involved with.
PS: Affiliate marketing is possibly the easiest of all to get started with. This is when you promote products online and earn commissions. If interested check out the Wealthy Affiliate training program.