Comparing Ways to sell on Amazon – 5 Amazon Business Models
There are in fact multiple ways to sell on Amazon. But most Amazon sellers tend to fixate pretty early on a particular one of the ways to sell on Amazon.
If you google “How to sell on Amazon”, chances are high that in fact what you’re going to be shown is how to private label products on Amazon (I know – I’ve looked!).
What ‘How to Sell on Amazon’ Usually Means
Model 1: Retail Arbitrage
Model 2: Online Arbitrage
Model 3: Wholesale
Model 4: Private Label/Custom Product
Model 5: Agency model
Comparing the Models
Do it YOUR Way
Most posts, videos or podcasts that come up in response to “How to sell on Amazon” really mean: “How to do Private Label on Amazon”.
Private Label IS a great way to sell on Amazon – if it’s the right model for you.
What is NOT usually made clear is that private label means doing a large amount of work, spending very considerable sums and being willing to take a considerable risk.
I know because I’ve done it multiple times and helped others do the same for about 4 years now.
You have to know how to do product research on Amazon; pick or design products; get them ordered (probably in China)and imported, then how to do an aggressive launch.
Each of these skill sets is quite big – but the biggest by far is product selection or design and working with a manufacturer. It’s a great skillset to develop but not to be underestimated.
The other main ways to sell on Amazon
Leaving aside non-physical products, like Kindle books or other Media products, there are in fact many more ways to sell on Amazon than the ones you may have deep-dived into.
Let’s discuss each of these main ways to sell on Amazon in turn.
The most famous of all ways to sell on Amazon
This is probably the most famous/well known of all ways to sell on Amazon. Made famous by Chris Green, one of the most popular ways to start Amazon is also one of the cheapest, simplest and quickest. No wonder it’s popular.
How Retail Arbitrage works
You basically go round retail stores (for example Walmart) “scanning” the barcodes of established brand products using your trusty Amazon Seller app and your smartphone (or a barcode scanner for the more dedicated).
If you can find a profitable difference between the price a product sells for on Amazon and the cost to you of buying it in-store (accounting for the costs of selling on Amazon, such as the Amazon sales commission and Amazon fulfilment costs), you’ve hit on a winner.
You then buy as many units as you think you can sell/as you can afford. Then, when you get home, you will label the products if needed, put them in a carton and ship them into Amazon’s warehouses (under the FBA or “Fulfilled By Amazon” programme). Amazon will then store the products and when a product is ordered, it will fulfil the order (pick it from the warehouse shelves, package it and deliver it).
The upsides of Retail Arbitrage
It’s very affordable indeed to start with – you can start with under $100. Plus your cash can turn over pretty swiftly, especially at peak sales times. You can probably get your cash back, multiplied, within a month to start with. That said, even RA will require you to keep a decent amount of capital tied up in stock (products) if you want to scale this up to a decent revenue.
It’s the simplest model in most way and thus requires the least training and setup.
Retail Arbitrage Disadvantages
RA is a simple system, but the downsides are many. Above all, it’s a lot of manual labour/travelling around. The real issue is that once you find a product line that sells well, you generally find you can’t restock that product. Certainly not consistently; often, not at all. This means you’re constantly scanning for new product lines and can’t really build on past success.
This means that it’s very hard to build a consistent income, and a lot of work to scale up.
Plus you are squarely competing on price – so there is no possibility of getting premium prices. If the buy box price goes down (the main and most visible price on Amazon), you have to sell it at that price.
Retail Arb accounting isn’t easy
A little-discussed fact is that you end up with a large number of product lines in your Amazon seller account just to make a decent revenue. And that means you actually end up with more complex shipping and financial records than many private label Amazon sellers. Book-keeping for RA is not easy.
In short, it’s the opposite of the famed “passive income” that internet marketers promise. Unsurprisingly, RA businesses are basically unsellable. Mostly because it’s not really a business – it’s actually just a hard job (if potentially a very profitable one).
This is one of the less well-known ways to sell on Amazon. It’s RA’s less famous brother. Also one of the cheapest, and quickest ways to start selling on Amazon, it does involve more complexity and willingness to spend time with software and spreadsheets. But at least you don’t have to drive to multiple stores and wait in line…
How Online Arbitrage works
Instead of going to stores, you would visit the equivalent website – so walmart.com, not Walmart the store. Later on, you’ll probably subscribe to a service that throws up possible arbitrage plays and will organise the information better. In fact, in reality, from the OA businesses I’ve seen, this seems to involve quite a lot of software to do well.
Once you’ve found inventory online, you can get the products delivered to your house, or you can send it to a “Prep centre” -if needed- to make sure it’s labelled and packaged in a way ready for Amazon.
After that, it’s the same basic model as RA with the same downsides. Okay, it’s not the same manual labour, but otherwise, it’s just as unstable, inconsistent and – weirdly – complex to keep financial records.
This is one of the least-known ways to sell on Amazon but I believe it deserves to be much better known.
With a much more modest starting budget than private labelling, it does require substantially more than RA or OA (from $2000 to do comfortably).
Your cash should turn over at about the same speed or faster as RA or OA -in other words, you should be able to convert your products back into cash, profitably, within a few weeks of buying. This compares extremely favourably with private label as an alternative way of making money on Amazon.
How Wholesale works
This is what Dan Meadors of The Wholesale Formula outlined:
- Find a product doing well on Amazon
- Contact brand owner directly
- Become an authorised seller of the products
You basically use some of the same Amazon product research skills as private label sellers would and some of the RA skills. However, you’re looking for somewhat different things.
You choose a product based on 3 criteria:
- Amazon doesn’t sell the product
- Products with 3 or more sellers
- The product sells numerous times a month
Sourcing from wholesalers
Sourcing your products (finding and buying them) is more complex to start with than with RA or even OA. You’ll need to approach the brand owners of listings that are selling over 40 units a Month, despite bad listings (the pitch is that you can improve the listings and thus sales with your Amazon skills).
Of course, many of them will say no before you get a yes. So this approach requires some dedication and ability to take no’s (in fact you’ll have a similar experience with RA, but it’s not a personal rejection; just a machine telling you that this product won’t be profitable).
You then buy as many units as you think you can sell within a month (approx) – assuming you are buying in the same country as you are selling in (sourcing domestically)
As with RA or OA, you can get the products shipped to your house if you want to prepare them, or use a prep centre. You may even get your supplier to prep your products.
To find out more about this model from Dan and Dylan of The Wholesale Formula, click here from Jan 30 2020 for a free online masterclass
The downsides of Wholesale in many ways echo the upsides of RA.
Even wholesale will require you to keep a decent amount of capital tied up in stock (products) if you want to scale this up to a decent revenue (multiple product lines). And probably more than RA in the early days, since your minimum outlay on any given product line will be measured in $100s rather than $10s.
It’s a not as simple as RA, and you’re going to experience a lot of rejection when you approach brand owners. If you have good training, a structured approach and a community, you can overcome this both at a practical level and in terms of your mood and mindset. But that also comes at a cost.
Plus you are squarely competing on price – so there is no possibility of getting premium prices. If the buy box price goes down (the main and most visible price on Amazon), you have to sell it at that price. That said, if you work only with quality brands, they will enforce MAP (Minimum Advertised Pricing) in the USA or the equivalent, RRP, in the EU/UK.
Wholesale, done in this way, is much more affordable than private label to start with – you can start with around $2000 or maybe a little less.
Plus your cash can turn over pretty swiftly, especially at peak sales times. You can probably get your cash back, multiplied, within a month to start with.
This is a very, very big difference from Private label: the “working capital” needed (money that you have to invest in and keep in your business, rather like the deposit for a rental property/real estate) is a fraction of what you’d need for a similar revenue Private Label business.
If you’re not up to speed with cashflow and accounting, take it from me: this is a very very big upside. You can grow a big business with a fraction of the capital needed.
Lower risk of not getting sales
The advantage of working with existing products with proven sales means you avoid the risk of a private label product that it simply doesn’t sell. You also avoid the risk of not knowing what price you can sell a product at (unlike with private label). You can very reliably calculate your selling price, and thus your profit margin (since you also have a known buying price).
This is an advantage shared with RA or OA products.
However, wholesale beats RA or OA into a cocked hat when it comes to being able to reorder products that sell well. With RA, you have to go back to the stores you bought from, only to discover that in most cases, you just can’t buy any more reduced-price stock. You have no choice but to start again with a different product line.
With wholesale, you just pick up the phone and place another order. Done.
This also means you get a very consistent and predictable profit margin, since you know both your selling and buying price.
This means that it’s very easy, once you’ve built a relationship with even a couple of brand owners, to start building a consistent income.
Lastly, while it’s not as common or discussed as Private Label business sales, as long as you have solid contracts with your brands, and standardised processes for everything, you can actually sell on your wholesale business – sometimes for a good price.
The most Publicised of the ways to sell on Amazon
As I said, if you google “How to sell on Amazon”, chances are high that in fact what you’re going to be shown is how to private label products on Amazon.
I hope you’ve seen that this is only one of the ways to sell on Amazon. Nonetheless, it’s become famous for a reason. If you can make it work, it’s a way to build considerable wealth relatively fast (fast as in a few years rather than a few months)and cash out within 3-5 years. But you should go in with your eyes open. Vitamin D supplements is a great example. These are commonly used to treat and prevent vitamin D deficiency and private label vitamin d softgels is a lucrative market, since Vitamin D is important for overall health.
How Private Label works
Rather than starting with an existing physical product, like in Retail Arbitrage, we start with some online product research. Similarly to the wholesale, we do some online research on products, then we contact suppliers directly.
However, things are different right from the off. You are not really looking for products that are selling well already. What you’re really looking at is the individual little markets (or “niches”) created by keyword demand (consumers looking for products) and supply (other merchants selling products – your future competition).
So really we are starting with keyword research rather than product research.
I’ve created a huge library of podcast episodes on this topic, so I’ll hook you up as we go.
You’ll need a tool like Helium10 (paid but good) or Unicorn Smasher (free) to help you translate Amazon search results (which are designed to help shoppers) into useful info as an Amazon seller.
To get a free 10-step PDF guide to building a Private Label business, click here
Product Research for Private Label
You choose a keyword niche based on these kind of criteria:
- You can afford to launch it within your budget. Most people skip this, by the way (and crash and burn)
- There is healthy demand (shown in decent monthly revenue being made in the search results for the keyword)
- There is manageable competition -for you. With your budget, your experience, your time & your risk tolerance.
Budget is crucial
This is critical. You wouldn’t shop in a Rolls Royce shop if you had a budget of $10,000 for a car, would you? But an amazing number of would-be private label sellers do the online equivalent.
An approx rule of thumb is that if the monthly revenue of the lowest selling of the top 6 listings on the search results (the ones you can see without scrolling on a laptop) is much above your proposed budget, you’re going to find it hard to really compete.
Lots of people will tell you, by the way, that it’s easy to beat the competition by magic marketing hacks. Guess what? It ain’t that easy, sister. It’s 2020 and the obvious plays have been made. If it looks too good to be true, it probably is. That doesn’t mean you should give up looking, though. It means you should look harder and smarter.
Sourcing private label product
Sourcing your products (finding and buying them) is way more complex than with wholesale. You’ve got to figure out where to get your products made for you, with your logo on and your own packaging.
Like with wholesale suppliers, some of them will say no before you get a yes. So this approach requires some dedication and ability to take no’s.
However, the bigger problem for most of us is different. Most of us end up sourcing overseas, most likely in China. Quite simply in China, there is way more choice of suppliers than you need. It’s a quality problem to have but it is a big problem. You have to find ways to dig through all the possible suppliers to get to the ones who make the right kind of product; have good quality and at an affordable price.
Outsource your private label sourcing
I could show you how to do this for yourself using Alibaba as I’ve helped many others to do. Frankly, these days, now I’ve finally found trustworthy partners, I’d strongly suggest you outsource your outsourcing to a trusted provider out in China.
It will cost you 5-10% more but the quality of products will be infinitely better. And quality products really matter on Amazon in 2020. Plus it will save you an infinity of emails and midnight Skype email chats with suppliers (I exaggerate but it doesn’t feel like it at the time!).
When you’ve sorted the right supplier and product spec (which is a lot of work, by the way), generally you’ll buy as many units as you think you can sell within around 3-4 months – plus an amount for your “launch stock” to get through quickly to get launched. (first time with a new product line) (approx).
Eventually, as with RA or OA, you can get the products shipped to your house if you want to prepare them, or use a prep centre. You may even get your supplier to prep your products and ship directly to Amazon warehouses.
When items Amazon will then store the products and when a product is ordered, it will fulfil the order (pick it from the warehouse shelves, package it and deliver it).
Private Label Launch
You then finally get to the famed “product launch”, on which topic much ink has been spilt. There is a minor industry in launching Amazon products in itself. But I would suggest from experience of the serious players that in essence, it comes down to two simple factors:
- price aggressively low (or otherwise offer great value)
- spend aggressively on advertising (but be very targetted)
I want to stress that this fundamental strategy holds whatever your advertising methods are. You can’t “hack” your way out of this.
Sure you can hire magic unicorns to run Facebook ads going to chatbots, offering discount coupons via WordPress and going to your Amazon listing.
It comes to the same thing, my friend. You need to aggressively enter a market to take your share of the pie. Low price (or some other very concrete value); high ad spend.
Amazon isn’t just going to roll over and automatically show your product. The consumers can’t even see it exists yet – hence the need for advertising. And you need to make sure that when consumers see the product, they want to get it.
Low price is a primitive way to do that and only for the launch period. However, it’s needed because you need to show Amazon that when it bothers to show your product in the search results, consumers click on the listing and buy the product. Do this often enough and Amazon will make very sure your product is visible.
That’s why we do a launch at all – to make sure Amazon will show your product to the right people…who go on and give you money for it!
Gradually, to come out of launch into “everyday” operation, you just gently increase the price very gradually and pull back on ad spend, over the course of several weeks.
At this point, if you’ve done a great job of market research and have differentiated your product and product listing, you should have solid and consistent sales. If your product quality is good, you should get positive reviews, reinforcing the sales of your product.
And, provided you got a realistic selling price from your market research and that you didn’t overpay your manufacturer for your product (a very common mistake), you should be making good profit. 30% margin is typical for a well-chosen and well-sourced product, but 40% is not uncommon if you do really well.
Meaning if you make say 300 sales a month of a $20 product ($6,000 in sales a month), you should keep between $1,800 and $2,400 (that’s before any overheads like your software subscriptions, Amazon seller central monthly fee etc.).
The downsides of Private Label
The downsides of Private Label are basically the opposite of Retail Arb.
Where RA is cheap to start, PL is expensive to start. You’ll need at least several $thousand from experience, preferably at least $10,000 to be comfortable. Re-ordering means having money set aside sometimes before you’ve received all the money back or profits from previous orders.
It has to be said that not every new PL product is going to kill it either. If you pick the wrong market, if your product sourcing didn’t give good quality; you’ll find it hard to make sales. A bad product will in fact simply fail (and, to be fair, it deserves to, I guess). If you overpaid for your product, relative to the value to the consumer, you won’t make a profit even if sales are okay.
Again, if you launch several products in a year, you’ll find that the winners way outway the dud products that don’t sell well or aren’t really making a profit. And you’ll get much better at the skills over time. But you’ll need to get past at least a year, maybe 18 months to 2 years, to get multiple products in many cases. So it’s not for the faint-hearted.
The cashflow of this model means you’re tying up money for several months at a time. This means that launching new product lines, the most reliable way to scale up your revenue and profit, requires a substantial investment ($1000s) per product line. And you’ll need to end with very considerable money in your business as working capital.
A business doing around $500,000 a year in revenue at around 40% gross profit margin and turning its inventory twice a year (so you’d buy 6 months’ worth of inventory at a time) should be expected to make around $25-50K pre-tax profit. That sounds like a nice sum and it is.
By the way, in case that revenue sounds crazy, a recent mastermind newcomer has gone from starting 15 months ago from scratch to turning over $150K a month on Amazon. When it takes off, Amazon really takes off. That’s why we make the effort!
However, you will need around $70,000 tied up in the business in this particular example.
Think of buying a house or flat that you rent out to tenants for a nice income stream. If you remove that $70,000 from the flat, you’d have to sell the asset to do that. No equity in the house, no income stream.
With an FBA business, you could theoretically just remove the money from the business without selling it. But you’d kill the business. (By the way, this is true for any capital-intensive business, like property/real estate, having a stocks and shares portfolio etc.)
Sure, if you can reduce the inventory you hold to say 4 months, meaning your turn your stock over 3 times a year (not just twice), you can reduce that money to somewhere around the $50K mark. But it isn’t small.
This is a reality few people discuss. Does this mean the model “doesn’t work”? Not at all – any more than the idea that “property/real estate doesn’t work”; it just means that you need substantial capital to make it work in reality. The comparison with property/real estate for me feels the most realistic from my small endeavours in that field.
The upsides of White Labelling
So if it’s so demanding of capital and so much hard work, why bother with Private Label?
Good question. The reason is contained in the difficulty: defensibility.
It’s hard to do this model well out of the gate, although, like any skill set, you get better rapidly after the first year. For that reason, among others, I find that it’s often in the 2nd or even 3rd year from starting that PL business owners see the real upside from the off.
It’s a hard start – but that puts a much bigger barrier to entry in the way of others trying to copy you.
The upsides of Private Label are pretty much the opposite of Retail Arbitrage too.
Like with Wholesale, broadly, you email your supplier and place another order. The order is going to be usually for much more stock because manufacturing takes longer than taking the products off the shelf. If you’re ordering overseas, you also need to allow for sea shipping (from China to US or UK/Europe, that’s around 2 months) – although you can air ship light products in about a week.
eCommerce Product Defensibility
The real upsides of private label are all around defensibility and differentiation.
Because you are the only seller on your listing, if your listing sells your products well, you get 100% of those sales. You don’t have to compete for or share the buy box.
You can differentiate your product, which, while not easy, can mean you position it as premium and sell for more than the average in your market. Done correctly, this can be highly profitable.
If you need to change the product specification, packaging etc. to compete with a changing market, you control all of that as the brand owner.
You own any Intellectual Property like your trademark, copyright in listing images and text and- if you can afford it – potentially design patents on your product.
Lastly, it’s a well-proven path that you can sell your private label business. Like any business for sale, it needs clean documentation and good business habits. But the defensibility of the business means you can effectively sell on the future income stream of your business with a fair level of certainty. Meaning it should sell for a decent sum (usually 2-3X annual profits) and reasonably swiftly too (in a few months usually).
Low startup capital; high skill & complexity
This is probably the least discussed option in the Amazon echo-Chamber. Possibly because those running agencies would rather teach others how to sell on Amazon than become their competitors. But, as any listener to the Amazing FBA Podcast will know, there are many current and former Amazon sellers running agencies. And – in the words of the song – I should know; I’m one.
How An Amazon Agency works
There are a large variety of possibilities here. The most common seems to be running a brand’s Amazon account for them, meaning you would set up the Amazon account (if needed), set up listings, ship in inventory, and possibly run Amazon ads. Some just specialize in parts of that, such as just doing photography, or just doing listing optimization with keyword research and compelling copy (words on a listing).
There is also a variety of ways to get paid. A photographer or copywriter would usually get paid by the job or by the piece (per photo, per 100 words, etc). But for full Amazon account management, you would normally agree some kind of “rev share” (Revenue share) agreement, possibly plus a monthly retainer.
The Advantages of an Amazon Agency
On the surface of it, this model looks very attractive. It’s very affordable indeed to start with, in theory – you could theoretically start with a few $100.
Also, there is no absolute correlation between the sales you make and the capital you need to support those sales (unlike all the other business models on offer here).
Amazon Agency Downsides
So why isn’t everyone just doing this?
Well for starters, existing retailers, brands and wholesale businesses aren’t going to be willing to work with just anyone. They will want proof of your skillset and businesslike approach. In reality, I know a lot of agency owners, many very successful; but I know pretty much none of them who hasn’t been selling on Amazon for at least a couple of years.
The nature of the beast means that it is labour-intensive – you’re getting paid for the value you add to the products and what Amazon already does, meaning that you’re not getting to leverage Amazon’s automated system in the way a physical product retailer does (nor the production capability of your factory if you’re private labelling, or your brand’s production capability if you’re buying wholesale).
That also means it’s harder to sell as it’s a less attractive business – because you not only need to be very skilled, you’re much more hands-on.
Scaling the business is possible obviously, but it means hiring, training, managing (and possibly firing) the right staff. It also means creating a large system of processes, capable of handling multiple different client accounts.
You’ll need complex business-building skills relative to the other models we’ve mentioned.
The market for agencies is limited
Talking of “why isn’t everyone just doing this?”, while not as many people are doing this as trying to run Private Label or Retail Arb business, there is a very much smaller market – considering there are around 156 million Amazon Prime users in the world, buying physical products, whereas only between 24,000 and 50,000 Amazon sellers do over $1 Million a year (much smaller and I’m not certain they’ll be interested in using an agency).
There are lots of would-be Amazon agencies
So demand is limited, whereas I’ve seen the number of Amazon agencies in existence mushroom in the last couple of years (to January 2020). In my LinkedIn contacts, for example, there are literally hundreds. Many of my guests are mostly all agency owners of one kind or another.
This means that you will have to fight hard to create a web presence and or offline presence out of the warm traffic and conversion rates of Amazon. You’re in the real world of trying to get podcast, Youtube, or Google traffic. And then convince those visitors to trust you enough to speak to you, have meetings and potentially pay you.
No real business model is easy but there is sometimes an idea among the more cynical Amazon sellers that this is somehow an easy option. I can promise you from working with the many agency owners, it’s not. When a private label business takes off, and gets sold within 3 years, that is not easy either but it’s a very attractive proposition compared to slogging your guts out or building a complex team and system.
You’ll need a substantial team and systems building expertise
All businesses take teams and systems – but I know several Amazon sellers doing over £1 million a year in sales at comfortable margins with literally no team members.
Remember that if you run an agency, you are essentially getting paid for the value you deliver above that which Amazon delivers. To get a revenue of £1 million as an agency, you’re looking at several employees (or full-time contractors), with all the management skills and hassle that implies.
Here’s a useful comparison table…
It may remind you of shopping for software or complex physical products. That’s no coincidence. In essence, you are “Shopping for a business model”.
(Mix and Match your Models)
So far, we’ve been discussing the different models of selling on Amazon.
The best-known, Retail Arbitrage (RA) and Private Label (also known as “White Label” or PL), are often discussed in isolation, almost as if they are the only way to sell on Amazon. This is especially true for Amazon Private Label.
The reality is, as I hope you can see, that there are multiple ways to sell on Amazon. Depending on your capital, your experience and your patience (as well as your ambition), different ways of selling make sense for you.
But if you’re able to see the bigger picture, you’ll notice that there is a natural progression.
It’s still true Retail Arb is the easiest and least expensive way to start. But starting doesn’t mean continuing. There is in fact a lot to be said for starting with this, then moving on to other models. In fact, I’ve not surveyed them but informally, I know a lot of my Amazon private label seller friends started off with Retail Arb back in the day (several years ago in most cases) before moving on to Private Label as their main (and in most cases, only) business.
Certainly, as I’ve mentioned, many if not most Amazon agency owners (who make up a fair proportion of the interviewees on the Amazing FBA and the 10K Collective podcasts ) have also been Amazon sellers, mostly private label.
And while it’s less well known, I’ve had a couple of mastermind members who have been profitably buying wholesale and turning over £1 Million+ per year (over $1.2M USD) before they are now moving into private label.
Mix and Match
In truth, the reality is often more mixed too. Many Amazon sellers blend business models in a very personalised mix. There is a great deal of business sense behind this.
The simplicity and understanding of the value of specific brands brought from retail arbitrage can lead easily into a wholesale type arrangement.
In particular, The cashflow of wholesale arrangements, for example, can make for a stable profitable business platform that enables a bolder yet de-risked move into private label. Private labelling then makes for more defensible products; gives the owner more control; and, ultimately, makes their business more sellable (and probably more valuable as and when it does sell).
And, for those with serious experience, the sellable and highly outsourced private label business – but which demands so much capital be tied up – can be balanced out with a cashflow-rich but labour-intensive agency business.
The acid test is that I’ve seen plenty of people mixing all of these models because that was actually the best, most robust business and which balanced out the pros and cons of the “pure” business models.