There are three types of Amazon FBA business, what I am calling ‘Retail Arbitrage’, ‘Private Labelling’ and ‘Brand Building’, and everyone gets confused between the three. So let me break them down for you. They each have pros and cons and if you’re going to start an Amazon FBA business you need to choose one.
Retail Arbitrage is very simple. You find products that are cheap in the real world (or online) and sell them for a profit on Amazon.
A mythical day in the life of a retail arbitrager:
You get up early because you have a long day of hunting products ahead. First stop, a car boot sale where you scan all the second-hand books trying to find gems. You are there a couple of hours and return home with a car full of books.
Next stop is your local supermarket to see what they have on discount. You find a certain toy is a half price and your app tells you it is selling well on Amazon. You buy every single one in the shop, and then you spend the next six hours driving round to all the other branches in a 100 miles radius and buying all their stock too.
Once home you start packing and uploading all your goodies to Amazon. You print off the pre-paid labels from UPS, book in a collection and go to bed. On the collection date Amazon picks up your parcels and a few days later they are on sale on Amazon.
- You need very little money to start.
- You know how well the items are selling before you buy them.
- You learn the ropes of Amazon and Amazon FBA. And you can use the knowledge (and money earned) to have a higher chance of success with the other two business models.
- It is very easy. There are apps that let you scan an item’s barcode and will tell you if you can sell it for a profit on Amazon (and how much you’ll make after fees). Profit Bandit is the most popular.
- You aren’t building a business. You will make money provided you put the time it, but as soon as you stop the business ceases to exist. That means that your business has very little value and will be difficult to sell.
- You can make a lot of money from it (6/7 figures), but it takes a lot of practice and dedication to get that good. Most people make far far less.
- You are reliant on Amazon’s good will. If you make a mistake by selling a product you’re not allowed to you could risk losing the account and business.
Retail Arbitrage is a real hustle where the hardest workers do the best. When compared to the other two it doesn’t look very attractive: you aren’t building a sellable business, the amount you earn is linked to how hard you work (like a job) and the more people who start doing it the harder your job will be. But, and it’s a big but. You don’t need much money to start, and that’s a really big advantage. Realistically I wouldn’t recommend trying either of the other two methods without at least £5,000 to invest. Yes, you can do it for less, but it is very difficult. Whereas retail arbitrage can be started with £100.
A lot of people treat retail arbitrage as a cheap ‘Amazon FBA University’. You get hands on experience with Amazon works and how to tell what sells, all without ever having to risk much money. Then once you have built up some decent profits and are an expert on the inner workings of Amazon you can start a private label business or a brand.
Private labelling is a bit more complicated. You find a gap in the market for a product and you get the product made cheaply under your own private brand. You don’t care what the product is as long as there is demand and little competition.
A mythical day in the life of a private labeller:
You get up whenever you like and check your previous night’s sales. You have earned money in your sleep! But you also have 10 customer service messages to respond to. You then check your current inventory levels and reorder what you are low on. One of your products is not selling and looks like it needs to be liquidated. You contact a liquidator to take it off your hands.
You then spend the next few hours searching for new niches. You are using a product like Jungle Scout to search the Amazon backend and find products that are selling well with bad reviews, indicating an unfilled demand. After a few hours you start to feel cross-eyed from too long staring at numbers so stop, but you have a few potential items: a pillow, some tupperware and a toy cactus.
Next you head over to Alibaba to find some factories who can produce the items for you. You spend the next few hours contacting factories and asking for samples.
You then spend the final hour before bed paying all your outstanding bills. You owe tax, factories and freight forwarders. All in different currencies.
- This is probably where people are making the most money on Amazon. The top few are earning 7 or 8 figures a year.
- Each product you add compounds your earnings. Meaning that your monthly profit goes up every month.
- Your risk is spread across a lot of different unrelated products. One failure doesn’t affect your business.
- You are totally reliant on Amazon. If they go bankrupt or the site closes then your business disappears.
- You have a high chance of purchasing a bad/unprofitable product on your first few attempts. If you haven’t budgeted for that, your business could be over before you even begin.
- You are very susceptible to competition. If another private labeller spots the same gap in the market as you then you end up competing.
- It is cash intensive. You are always purchasing new stock and prototypes.
- You have to manage a very large catalogue of different products. It is time intensive.
- You spend half your life dealing with Chinese/Indian factories.
Private labelling has somewhat of a bad reputation and many ‘serious businessmen’ see it as a get rich quick scheme. This isn’t helped by the hundreds of ‘gurus’ and extortionately priced courses out there promising to teach you how to do it. Some of which are good, but most of which aren’t far off a scam. But what no one can argue with are the results that the top private labellers are achieving. Amazon FBA private labelling has made a lot of millionaires.
But do not mistake the huge potential earnings for easy money. To be the best takes a lot of work and a lot of experience, you will not stumble across one niche that will make you a fortune. The trick is in continually adding products and non-stop research. For every private label millionaire, there are 1,000 people making £1,000 a month. And for every person making £1,000 a month, there is someone who chose the wrong product and lost their money.
I think of private labellers as modern day merchants. They spend their time hunting out opportunities where there are good cheap items for sale in one country, and not in another. Then they stick their brand on top to stop others from piggybacking on their hard-work.
Building a brand is by far my favourite type of Amazon FBA business. You pick a niche you are familiar with and then build different products under your brand name around that niche. You have a much smaller range than a private labeller, but your margins are much higher and they are all focused on your one niche and often lead to cross-sales between products.
A mythical day in the life of a brand owner:
You wake up whenever you feel like it and check your previous night’s sales. You have earned money in your sleep! Because you only have a few different products your inventory projections are done well in advance leaving your supply chain takes care of itself.
You then spend the next few hours contacting influencers in your niche. You scour Instagram, messaging everyone in your niche with over 1,000 followers. Asking if they want a free item and a commission on any sales they generate. You then start writing an article for your brand’s blog. An analysis of the latest event/gossip in your niche. Once done you post a link to it on every forum you can find.
It’s now thinking time. You grab a glass of wine and sit in your arm chair, thinking up ideas for innovative products or for new marketing stunts. You have an idea and send it to your factory/designer to get a prototype knocked up.
In the evening you jump in the car and go a social event for people in your niche. You’re not there to sell, just to make friends and remind them your product exists.
- You aren’t as susceptible to competition. People are buying your product because of the brand, not because it is cheap. Your margins are also higher.
- Your brand is independent of Amazon. So if Amazon goes bankrupt or closes your seller account, then you can move your brand and sell elsewhere. Any work gone into building the brand is still there.
- You will know your niche well before you start and will be able to easily contact and sell to initial customers.
- Your brand has value and therefore means it is worth more than a private label company making the same profit.
- Building a brand’s reputation takes a long time, like years. It is a commitment.
- If you choose the wrong niche it is hard to move.
- Bad reviews (especially early on) are really damaging. You need to be careful to be liked by the people in your niche.
- You need to make sure your products are really good. That means a lot more prototyping and back and forth with factories.
I’ve already said that brand building is my favourite type of Amazon FBA business and you’ve probably guessed that it is the one I focus on myself. Brand building has existed forever, but whereas once-upon-a-time you would need to invest in a storefront, a warehouse, a distribution network and customer service representatives – now Amazon FBA handles it all for you. That means that instead of needing £200,000 to start a brand, you can do it with just a fraction of the amount.
I often get asked is Amazon FBA is saturated. Well there are a lot of people using Amazon FBA, but the question doesn’t really make sense when talking about starting a brand. It doesn’t matter how many people start private labelling or retail arbitraging as long as there is demand in your niche, on or off Amazon.
Which is best?
As you can see, each option has merits and I have friends who are making very good incomes from each. I have stated my favourite but what do you think? Do you have any experiences with any of the above methods? And would you recommend them?