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Compare Amazon Business Models

What is the best sourcing method for Amazon

Ed. Note: You have asked me '"What's the best method of sourcing products to sell on Amazon?" So I contacted a trusted expert to write a guest column about just that. Greg Mercer is the founder of the uber-popular Jungle Scout product research software. Greg is extremely bright and has founded multiple (bullet-proof) companies and services for Amazon Sellers. P.S. I am an affiliate of Jungle Scout, but that in no way influenced my decision to post his exclusive article below - Greg's advice can stand on its own. - Jordan


Global retail ecommerce sales in 2016 grew 8.7% over 2015 to $1.9 trillion, according to ecommerce solution provider PFS (source). Amazon sellers like you and I make up a huge part of that growth.

But when it comes to sourcing products to sell on Amazon, there are quite a few different business models and avenues. 

Arbitrage, Retail or Private Label?

I have found 4 business models to be viable: Retail Arbitrage (RA), Online Arbitrage (OA), Wholesale (or Retail Distribution), and Private Label.

I'll lay out the pros and cons of each below.

Disclaimer: I own a large private label business. But I have many Amazon sellers in my network and I know a lot of people who have become really successful entrepreneurs using every one of these methods along the way. So, with my own personal bias aside, I'm still writing objectively.

Here we go:

Retail Arbitrage

Retail arbitrage means to physically buy products, usually at a highly discounted rate (e.g., in a store clearance aisle) and sell them on Amazon.

Why retail arbitrage works:

  • It’s a great way to dip a toe in the water as an Amazon seller, as it requires less early investment
  • You can hand-pick your items, some of which might be able to bring in huge profit margins
  • When you find really good deals or clearance, you can be really competitive, even against Amazon themselves
  • You can accumulate in-store rewards, points and cashback deals
  • If you’re smart, this model lends itself well to seasonality, for example, selling in the Toys and Games category in Q4

Cons:

  • You need to physically be there in person to get the best deals, and having a car is pretty imperative too
  • Certain products and brand names can not be sold on Amazon without approval
  • As an overall strategy, it’s most difficult to scale quickly because of the manual labor involved, esp. in seeking out the deals

Online Arbitrage

This is the online version of the above. That means we can wear sweatpants all day, right? Pros:

  • No costs for driving and potentially less time consuming as you can source from the comfort of your home
  • You can still accumulate those points and cashbacks
  • You can build your online sourcing skills (which will be useful if you ever transition into any of the following two business models)
  • You can buy in bulk and get it all shipped to you

Potential roadblocks:

  • Shipping can be a pain point -- especially when things get delayed
  • You are still tied to a specific location, waiting for deliveries
  • As with retail arbitrage, it is more difficult to grow considerably

Wholesale / Retail Distributor

Some sellers decide to take the above models one step further and become wholesale distributors. This can bring some new positive aspects to the table, such as:

  • Buying direct from the manufacturer means you can buy large quantities at discount
  • You will need to be an approved reseller (see 'cons' below), which means it would be less likely to get hit with counterfeit claims or run into issues with Amazon
  • Utilize purchase orders and save large upfront investments
  • You can get in early on liquidation deals
  • This model is great for utilizing Amazon FBA (no need to remove any price tags or stickers, you can get your inventory shipped direct to Amazon’s warehouse)

And the difficulties with this model:

  • You need to find products that are not being sold by Amazon
  • It can be difficult to get a foot in the door with becoming an approved reseller - you need to get good at negotiations and exercising your buying and selling power
  • You can face competition with other resellers who are also competing for the buy box on Amazon. Ed. note: Good manufacturers/brands will enforce their MAP (Minimum Advertised Price) so your competing authorized resellers won't price-gouge. And even though there are non-authorized resellers who are sourcing the product via arbitrage, those tend to run out of stock quickly.

Private Labeling

Being a private label seller doesn’t mean you’re an inventor, or a product designer. It means you are finding products that already exist with sufficient demand, and then sourcing them from a manufacturer and selling them under your own brand label. Ed. Note: I also recommend you identify faults with an existing product - look at the Amazon customer 1- and 2-star reviews for it - and tweak the manufacturing to improve it and/or bundle the item or add value to it, to differentiate yourself from other competing products on Amazon.

Here are the positives of private label:

  • Profit margins are generally higher (purchasing directly from the factory) and you can ship your products directly to Amazon’s fulfillment center (FBA)
  • You have more control – you source the product, put your brand on it, create the listing and manage your marketing
  • Selling private label on Amazon, as opposed to through your own ecommerce store, gives you access to a huge marketplace full of consumers who are ready to purchase
  • You are not competing for the buy box on Amazon, as you would be as a reseller of a known brand
  • You can do this from anywhere in the world, and if you are really entrepreneurial you can sell in different international marketplaces

And the difficulties:

  • Initial investment is usually a bit higher
  • It takes a longer time to get your product and brand name out there, and you have to create your own listing and photography
  • You still need to invest an amount of your time and efforts to get good results. For example, you will need to become savvy when it comes to sourcing, building relationships with suppliers and manufacturers, and learn all about importing.

Which model is for you?

There’s no one size fits all, it entirely depends on what you want to get out of your business.

For example, at Jungle Scout we hear lots of inspiring stories from our clients. From parents who want a steady income stream so they can stay at home with their children, to people who want to quit their corporate jobs, to entrepreneurs who want to invest and scale up fast.

I know at the start of this post I said “what are the pros and cons of each”, but realistically, the “cons” are just things that you need to learn how to do, spend a bit of time on or investment on. This is just part and parcel of being in business, and I don’t know about you but I love the challenge :-)

Can you transition from arbitrage to private label?

Sure you can. In fact, a lot of arbitrage sellers who want to take their businesses further and scale faster do this. The good news is, you’re already pretty savvy as an Amazon seller by this point if you are running an arbitrage business. This immediately puts you in good stead, over coming into private label without any Amazon experience.

Here’s my top tips for breaking into private label in 2017:

  1. Find the riches in the niches – Product research is so important. In fact, it’s important for sellers that fall into all four of these business models. But as a private label seller, your business relies on strong research to make solid purchasing decisions and ensure your investments are going to be profitable.
  2. Verify demand before you move forward – No private label product research is complete without verifying demand for a product idea you are chasing. You can get accurate and up-to-date estimated sales volumes with Jungle Scout. Plus, you can also verify demand for free by using our Estimator tool.
  3. Add value – A great way to find products that will earn you a lot of revenue is to find products where you can add value. Look out for products that are unique (usually the products you’ve never even thought of are the clear winners), where you can add value. Try bundling, increasing the pack size, improving the quality or adding a new feature. Top tip? Check the competitor’s Amazon reviews to find their customers pain points and ensure you resolve those issues with your product launch.
  4. Get some Marketing acumen – Amazon is a fast growing and ever-changing marketplace and us sellers have to keep up and adapt our strategies accordingly. This is so important for private label sellers. For example, you will need to ensure you understand the basics of Amazon SEO and listing optimization and you will need to consider running Amazon pay per click campaigns. You can also split test your listings to increase conversions and send out automated email campaigns to your private label customers.
  5. Get Started – Our mantra at Jungle Scout: "Taking action is better than not taking action." So long as you have done your research and have the drive and ambition to move yourself forwards, the only next step is to get started with that new product.

Final Words

All four Amazon sourcing modelsGreg Mercer JungleScout discussed hold potential and each has it’s own place within the industry. I hope that this article has given you a few things to think about, whether you are just considering becoming a seller, or if you already are one and thinking about trying out a different method of making money.

Have you made the jump to private label? I’d love to hear your experiences in the comments.

About the Author, Greg Mercer

As successful Amazon FBA seller, Greg went on to become the CEO of Jungle Scout, the premier Amazon Product Research tool.  He also founded Jump Send, and is the co-founder of Splitly and Fetcher. Together, they make a suite of tools to help Amazon sellers succeed.

{ 1 comment… add one }
  • Nicholas Hadzima February 15, 2017, 10:41 pm

    Hi Jordan….great review and advise from Greg. Steve Chao had him as a guest….smart guy that hit it right….I am slowly trying to pick my model….getting burned out with drop shipping(the wrong way). If possible, could you assist me on a question about Wholesale?

    I have Steve Choa’s course only because I can pay for it in 8 months…a lot of good content and good guy…he has a link for http://www.worldwidebrands.com/news, which is one time pay for access to 8,000 wholesalers. Have you heard of this site and if so any opinion. It seems fairly vast. Secondly, I realize I need to build a site. Your opinion, Shopify or Buildit as recommended by Skip McGrath..

    I have a Amazon site but only two items that I have as merchant fulfilled(walked away last Q4(personal junk)… did sell some new stuff I had at home….need to retire as chiropractor and hate working for someone after 31 year(divorce and child support have forced me to work for someone) but have to bust out of this rut….with Infinii, have PAC stuff and got Robyn Johnson’s material for one year at $250….so trying to gear up and start a site and try wholesale….could not afford Wholesale Formula at this time…thanks for the referral of watching their recent launch for upcoming training.

    Jordan, your awesome dude…listened to you first podcast because I just ventured into setting up itunes….finally…I learn so much from you and Skip….you are so down to earth and not use to normalo’s (normal) people. Thanks….just want to get my site up, get re-seller number and list a few things I have at home and get my chiropractic hands on the keyboard instead of spines…..thanks again…..your great

    Dr. “Nick” Hadzima

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