Amazon Business Models: How to Choose the Right One?
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This guide will help you get started, understand the basics of Amazon selling, and explain in simple words how it all works.
As an Amazon seller, you may wonder how should your Amazon business work. The answer lies in the business model you choose. Selecting the right business model is key to your success in the long run. It helps launch, establish, and structure your Amazon sales correctly.
However, there's no one-size-fits-all solution, and you must choose your business model wisely.
In this post, we'll explore the different Amazon business models and provide insights to help you choose the one that aligns with your goals and strengths.
What Are Amazon Business Models?
Amazon business model is the way of selling products on Amazon's online marketplace. That involves the kind of product you will sell, and the approach to sourcing and fulfilling the order to the customer to generate profit.
There are five popular Amazon business models sellers use: online arbitrage, wholesale, dropshipping, retail arbitrage, and private label. Below we will describe each model and key points to remember about each of them.
Online Arbitrage
Amazon online arbitrage (OA) is a business model of buying cheaper-priced products from one online retailer and reselling them for profit on another marketplace — Amazon.
How online arbitrage works
The main target of online arbitrage sellers is to find profitable deals. That means, finding a product on the online retailer, discounter, or other store to resell on Amazon with essential profit.
Online arbitrage is an excellent way to start selling on Amazon with low risk. That is because you don't have to invest a large sum of money in inventory upfront. However, it can be a time-consuming process to find products that sell for a high profit on Amazon due to high competition.
Key points to remember about online arbitrage
If you are going to sell with online arbitrage, it’s essential to keep in mind several points.
Easy entry
Online arbitrage is easy to launch and requires a short setup time — around 2-3 months. All you need to do is register on Amazon, find and order profitable products from the supplier, and start selling.
Also, online arbitrage is low-cost to start, the main cost is buying products. You can start this business with as little as $500.
Product research is a must
When you choose a product to sell, it's crucial to conduct in-depth research on product demand, competition, and potential profit margins before making any purchases.
Product research and sourcing can take time and effort, but it's essential to do it right to avoid costly mistakes. You can use Amazon seller tools like Seller Assistant App to simplify product research.
Keep an eye on profit margins
After factoring in all Amazon fees and shipping costs, your profit margins can be narrow. Consider Amazon referral fees, Fulfillment by Amazon (FBA) fees (if you use this service), shipping costs, and other potential expenses.
Calculate your break-even price and don’t go below it not to lose money.
Policies and restrictions
Be aware of Amazon's seller policies, product restrictions (you need Amazon’s approval to sell them), and flags (frigile, meltable, oversize products, etc.) that may apply to the products you want to sell.
Also, as an online arbitrage seller, you may resell products from various brands. However, some brands may not permit reselling, and they may file intellectual property complaints against you on Amazon. Violating some of these rules may lead to account suspensions, while others mean additional costs.
Use Amazon seller tools
Product sourcing is the main challenge of online arbitrage, and it can be simplified with product sourcing tools. These tools help quickly find out if the product is profitable, how many products you can sell, identify product restrictions and other potential risks, and more.
The popular option to use is Seller Assistant App. This comprehensive product sourcing tool shows all product information directly on the Amazon search, product, and inventory pages and helps select the high-profit items to sell.
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Wholesale
Wholesale is a business model of purchasing products in large quantities at a discounted price from a manufacturer, supplier, or distributor and then reselling them to Amazon customers for a profit. The profit is made by selling the products at a higher retail price than the wholesale price.
How wholesale works
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Wholesale differs from other business models by selling products in bulk. Wholesale sellers aim to obtain the lowest possible prices for popular products and the best purchase conditions since they resell these products on Amazon and aim to maximize profit per unit. To do so, wholesale sellers must contact the brand, manufacturer, or big distributor to get the best prices.
Key points to remember about wholesale
Wholesale is different from other business models, and there are several crucial things to keep in mind when selling with it.
Wholesale is profitable
Since wholesale sellers aim at buying popular products at low prices directly from brands, they can make a significant per-unit profit. Multiplied by the large number of purchased products they generate thousands of dollars when sold.
Wholesale is one of the most profitable business models but requires essential upfront investment.
Supplier network entry is a challenge
Popular brands often have an established sales distribution network, making it challenging to convince them to add you as another distribution channel. Persuading a brand to work with you requires building a relationship and demonstrating how your business can benefit theirs.
Minimum Order Quantity (MOQ)
Big brands and manufacturers often have high MOQs, which is the minimum number of products you must buy from them to complete an order. The fixed amount can be substantial, and you must be ready to invest a significant amount of money upfront.
Research your products
Wholesale sellers buy products in bulk and must invest significant upfront costs. Therefore, it's essential to ensure that the products you buy are profitable and won't create issues when selling them, such as intellectual property complaints, restrictions, or product flags, which can lead to financial losses.
Avoid risks with product sourcing tools
To effectively research and validate wholesale products, sellers use product sourcing tools.
One popular tool used by wholesale sellers is the Seller Assistant App. This all-in-one tool provides comprehensive information on product demand, competition, and potential profit margins. It also offers data on product restrictions, intellectual property complaints, and other potential issues that can affect the profitability of a product. By leveraging this tool, wholesale sellers can make informed decisions and avoid costly mistakes.
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Dropshipping
Amazon dropshipping is a business model where a seller lists products on Amazon without physically holding the inventory. The dropshipper lists the product on Amazon, receives an order from the buyer, and then requests the supplier to ship it directly to the consumer.
How dropshipping works
With dropshipping, the seller selects a profitable Amazon product and finds a supplier that agrees to ship it directly to the customer. The seller then lists the product on Amazon and notifies the supplier when a customer places an order. The supplier ships the product directly to the customer, and the seller acts as a middleman between the supplier and the customer.
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The profit is generated by the difference between the supplier's lower price and the seller's higher price.
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Key points to remember about wholesale
Amazon dropshipping is an attractive business model due to its ease of entry. However, it has some challenges that sellers must be prepared to address.
Easy-to-start model
Dropshipping is a low-cost option to start an Amazon business without the hassle of managing inventory. You can start it in a few months and don’t need to invest in inventory upfront.
Amazon dropshipping policy
Amazon has certain limitations when it comes to dropshipping. They require dropshippers to identify themselves as sellers of record and issue all product-related documents in their name. Dropshippers must remove all third-party retailer signs from the product and packaging. That can be challenging for sellers without the inventory capacity.
To solve this issue, sellers can ask their suppliers to send orders to a prep center to remove third-party retailer signs and repackage products in their name.
Do product research
When you select a product, you must ensure the product will sell, the deal will be profitable, and the product is not gated or has other issues. Finding profitable deals can be challenging and take much time due to intense competition among dropshippers on Amazon.
Using product sourcing tools like Seller Assistant App helps dropshippers solve this issue. The comprehensive and cost-effective tool provides essential product data and helps identify profitable products quickly.
Consider IP complaints
As a dropshipper, you often resell other brands’ products. However, some brands have policies against reselling their products, and they may file intellectual property complaints to Amazon. That may result in listing or account suspension and money loss.
To avoid this issue, sellers can use Seller Assistant App's IP Alert feature, which alerts them about problematic products.
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Carefully choose a supplier
The fact that dropshipper doesn’t deal with the inventory has two sides. It’s convenient to avoid dealing with the inventory, but you have little control over the product quality and shipping times.
To reduce these typical risks of dropshipping, you must choose a reliable supplier that will ship your products on time and in saleable condition.
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Retail Arbitrage
Amazon retail arbitrage is a business model where you buy products from retail stores at a discount and resell them on Amazon for a profit.
This model is great for sellers who like shopping and visiting brick-and-mortar stores. However, it is a very time-consuming business because you must roam the stores physically.
How retail arbitrage works
Amazon retail arbitrage differs from other business models because you find products by physically visiting the retail stores. Since the idea is to find products that are priced lower in a retail store than they are on Amazon, you need to find stores that offer products at low prices. That could be stores having sales or clearance, liquidation stores, and promotional or discounted offers. When you find such products and make sure they are profitable, you list and sell them on Amazon.
Related: Best Product Ideas for Amazon FBA in 2024
Key points to remember about retail arbitrage
Low entry-level model
To start a retail arbitrage business on Amazon, you don’t need special knowledge or computer skills (like with online arbitrage). You register an Amazon account, find a cheaper-priced product at a retail store, and list it on Amazon. The startup cost can be around $500.
Product research in-store
With retail arbitrage, you must use a barcode scanner to scan product codes with mobile ap in-store to match them with Amazon products. That is necessary for the app to show you which listing corresponds to your product on Amazon, its profitability and other data that help decide if you should buy a product you find in retail store. You must do it quickly because you must instantly buy the products (next day, the discount may be gone).
Time-consuming model
It takes much time to physically travel from one store to another to find profitable deals and choose the products. You must scan their barcodes and check products one by one on the go.
You must replenish inventory physically
With retail arbitrage you must go to the physical store to get more inventory when you need to restock it. That can require additional time, effort, and mileage.
Scalability can be a challenge
It can be difficult to scale retail arbitrage because your offer is typically limited to the number of goods available in the retail store. You're reliant on finding discounted products, which can be inconsistent. Additionally, finding retail arbitrage deals, researching products, and listing them on Amazon takes a lot of time, especially as your inventory grows. This can become a bottleneck to scaling.
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Private Label
Private label (PL) is a business model where sellers create and sell products under their own brand instead of reselling existing brands. These products are typically manufactured by a third-party manufacturer but customized, packaged, and marketed by the seller to establish their brand identity on Amazon.
How private label works
Private label differs from other models by creating your own brand. You can either manufacture the products yourself or hire a company to make them for you. You must identify profitable product opportunities through extensive market research, find reliable manufacturers, and develop your brand including a name, logo, and packaging design.
Since a PL seller is the brand owner, they have control over how the product is designed, produced, and packaged.
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Key points to remember about private label
Private label brand is an asset
One of the advantages of the private label model is that you own both the brand and the product. This makes PL a valuable asset. If your Amazon business is successful, you can sell it. Because your brand is an asset, Amazon business aggregators prefer to buy private label businesses, and the purchase price is often higher.
Lower-competition model
A private label product is trademarked, and you have exclusive rights to it. Therefore, online arbitrage sellers or other brands cannot sell these products. This means you can be the only seller in the Buy Box with very little competition. As a result, you can set higher prices, and the profit margins in this business may be higher.
Long startup time
Compared to online arbitrage, starting a private label business takes more time and effort. You need to select a product and arrange for its manufacturing. Typically, it takes 4-6 months to launch a PL product. It may also take some time for the product to become popular among customers, which means it could take extra time before you start seeing profits.
Higher investment and risks
Launching a private label product requires a significant investment of money to produce and promote it. On average, Amazon sellers spend $2,500 or more to launch private label products.
Since a private label product is new to the market and has no sales history, it is difficult to predict how well it will sell. Therefore, there is a risk involved when investing money in a PL business. However, there is no risk of Amazon account suspension due to intellectual property rights violations because you own your brand.
Complicated product research
With the private label model, you need to do in-depth product research to select a product that will generate high sales volumes and bring in a profit. You need to niche it down and identify its sales potential to ensure success. The Amazon marketplace is saturated, so finding gaps and differentiating your product can be tough.
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Which Business Model Is the Most Popular?
Based on research, the most popular Amazon business model currently is private label, followed by wholesale and arbitrage.
However, you must remember that popularity doesn't guarantee success. Each business model has its own set of challenges and considerations.
Popularity ranking of Amazon business models
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Private label: 54% popularity
Reasons for popularity
- Brand ownership
Sellers control their brand identity and messaging, fostering customer loyalty.
- Higher profit margins
Lower competition because other sellers can’t resell your brand and potential to set their own prices.
- Product differentiation
Can customize existing products or offer unique features.
Challenges
Require essential upfront investment, product development, and manufacturing, extensive product research, and ongoing marketing.
Wholesale: 25% popularity
Reasons for popularity
- Higher profit margins
Purchase goods in bulk for a lower price per unit and resell them at a higher price which makes increased profits.
- Established brands and demand
Leverage existing brand recognition.
- Scalability
Can quickly scale business with bulk products and higher profits.
Challenges
Require big upfront investment, finding a supplier can be challenging, must do in-depth product research to avoid money loss.
Retail arbitrage: 25% popularity
Reasons for popularity
- Low initial investment
Can start with minimal capital by finding deals.
- Variety of products
Can source discounted items from offline clearance or liquidation stores.
- Simple model
Easy to understand and implement
Challenges
Requires time, effort, and attending physical stores for product sourcing. Volatile profits depend on finding good deals. Highly competitive market with slim margins.
Online arbitrage: 21% popularity
Reasons for popularity
- Fast and easy setup
Can be launched within 2-3 months and you don't need a lot of upfront investment.
- Wide product selection
Access to a vast online inventory. Can find deals on any online marketplace or retailer.
- Helpful tools available
Can use seller tools like Seller Assistant App to simplify product sourcing and make it more efficient.
Challenges
Product sourcing is time-consuming. Requires knowledge of online platforms and deal-finding tools. Competition can be fierce, and prices can change quickly.
Dropshipping: 19% popularity
Reasons for popularity
- Low barrier to entry
Quick and easy to start. Requires minimal capital upfront investment compared to other models.
- Hands-off inventory
No need to deal with the inventory. The supplier handles storage and shipping.
- Flexibility
You can work from anywhere with an internet connection and set your own hours.
Challenges
Lower profit margins due to competition and Amazon fees. Limited control over product quality and shipping times. Reliant on reliable suppliers.
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How to Choose the Right Business Model?
When it comes to Amazon seller business models, it's not a one-size-fits-all solution. Choosing the right business model depends on your resources, sales experience, and product type. Below you can find some tips to help you select the goals, and risk tolerance.
5 Tips to choose a business model
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Tip 1. Start small and test
Start selling with one of the business models that are easy to set up and doesn’t require high upfront investment. That will help learn to sell on Amazon without much risk. Dropshipping or online arbitrage are good options if you want to start selling on Amazon.
Tip 2. Consider your budget
Look at the startup costs associated with each model. Private label and wholesale models require more upfront capital than online arbitrage, retail arbitrage, and dropshipping models.
Tip 3. Assess your product knowledge
Estimate your product research skills. While online arbitrage and dropshipping require in-depth product research, you can use product sourcing tools like Seller Assistant App that can essentially simplify this task. The same type of tools can be used to validate wholesale products. On the other hand, with the private label, you need to do extensive market analysis and understand the product manufacturing process, branding, and marketing.
Tip 4. Evaluate your time commitment
Consider the amount of time you are willing to commit to your Amazon sales. While online arbitrage and dropshipping can be a part-time or full-time business, retail arbitrage and private label are very time-consuming business models. Wholesale will take time when you launch it, but it may occupy less time when it’s already set up.
Tip 5. Don’t stick to one model
Choosing the right business model is an ongoing process. As you gain experience and scale your business, you can adapt your business model type to your new needs and goals. For example, many successful Amazon sellers have grown their online arbitrage business to wholesale.
Can You Use Multiple Business Models?
Many sellers use more than one business model in their Amazon sales. That allows applying different approaches to sell different products, test, and scale businesses. Some combinations of business models to consider are below.
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Wholesale + online arbitrage
While typically selling in bulk, wholesale sellers can sell some high-profit products in smaller quantities with online arbitrage. That can be trendy or seasonal items. Wholesale sellers can also test product sales by online arbitrage to check the demand.
Online arbitrage + wholesale
Successful online arbitrage sellers often grow their business. That way, they scale it to wholesale because they begin selling in bulk. However, some of their products are still sold with online arbitrage.
Dropshipping + wholesale
While many think that dropshipping is unable to generate high income, some dropshippers manage to essentially grow their business. Similarly to online arbitrage sellers in the example above, they combine big-volume sales with their dropshipping business.
Retail arbitrage + online arbitrage
Some sellers look for discounted products to sell on Amazon both in brick-and-mortar stores and online. That way, they combine retail and online arbitrage.
FAQ
What is Amazon business model?
Amazon seller business models define how you source and fulfill products on the platform to generate profit. Different models, like private label or arbitrage, offer distinct advantages and risks, and many sellers combine multiple models for optimal reach and profit.
What are Amazon business models?
Popular Amazon business models include private label (creating your own brand), wholesale (buying in bulk and reselling), arbitrage (finding lower-priced products and reselling them), and dropshipping (supplier ships directly to customers). Each offers different pros, cons, and profit margins.
What is Amazon FBA business model?
In the Amazon FBA model, sellers send products to Amazon's warehouses for storage and fulfillment. Amazon picks, packs, ships, and handles customer service for a fee, allowing sellers to focus on sourcing while benefiting from Amazon's logistics expertise and reach.
How to sell on Amazon business models?
There's no single "how-to" for selling on Amazon, as diverse business models exist, each with unique steps. Choose a model like online arbitrage or dropshipping, research its specifics, set up your seller account, source products with Seller Assistant App, and manage fulfillment (FBA or self-fulfillment).
Final Thoughts
In conclusion, understanding the nuances of Amazon business models helps you set up and scale your Amazon sales. The optimal model depends on your resources, sales experience, and product type.
Regardless of the model you choose, you must select the high-profit products to sell. The most effective way to do it is using product sourcing tools. One such popular tool is Seller Assistant App. It is an ultimate product sourcing extension that can assist in finding profitable products.
With its advanced features such as FBM&FBA Profit Calculator, Quick View, ASIN Grabber, Restrictions Checker, and other product research functionalities, you can automate product data collection. This will provide you with crucial insights into product profitability, competition, demand, and other essential product information. By leveraging this information, you can select high-margin items for your store.
