5 mins read

What is Arbitrage Dropshipping? The New Business Idea for Entrepreneurs

July 9, 2024

Selling products online has become a popular and profitable business over the past few years, especially after the pandemic. There has been a significant increase in the popularity and profitability of selling products through digital platforms, such as e-commerce websites, online marketplaces, and social media platforms.

In this article, we will discuss ‘what is arbitrage dropshipping’ and understand the two popular business models of dropshipping and arbitrage, which resemble each other but are different.

Arbitrage Dropshipping: All You Need to Know

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What is Arbitrage Dropshipping?

It is a unique business model that combines the concepts of dropshipping and arbitrage. In this business model, sellers engage in arbitrage by sourcing products from one marketplace at a low price and then reselling them for a profit on another online marketplace.

For example, you purchased discounted bags at a clearance sale and sold them to people at a higher rate for profit.

The concept of buy low, sell high fits this business method. However, many do not recommend this business model to young entrepreneurs due to the high competition and tight margins. We will discuss this in detail later in this blog.

How Arbitrage Dropshipping Works?

Here’s how the arbitrage dropshipping model works:

Product Sourcing

As an arbitrage dropshipper, you first source products for low prices with high profit from any platform like Amazon, Ali Express, or any local retailer, etc.

Product Listing and Inventory Management

Once you source the products, now is the time to list the product on your chosen selling platform, which could be WooCommerce, Shopify, Wix, etc. The listing includes product images, titles, pricing details, and descriptions to attract potential buyers.

Order Fulfillment

The customer purchases the product from your online store/platform, then it’s your duty to deliver or ship the product to the buyer.

Profit Margins

An arbitrage dropshipper earns from the difference between the selling price and the discounted purchased price.

Difference between Arbitrage and Dropshipping

In dropshipping, you don’t hold product inventory. Instead, you import products on your online store for free from any supplier like AliExpress. When the customer places an order in your store, you forward its details to the supplier who then pack and ship the order directly to the customer.

In online arbitrage, you purchase inventory in bulk from online or offline retail suppliers at a discount rate and resell it to make your profit.

For a better understanding see the difference below:

Arbitrage

Dropshipping

On combining both online arbitrage and dropshipping, the term arbitrage dropshipping is formed, where an arbitrage dropshipper doesn’t store product inventory but sources products from a marketplace selling at a low rate and resells it at a higher rate on another marketplace.

This combination reduces risk and offers higher profit margins.

Role of an Arbitrage Dropshipper

Arbitrage dropshipper plays a key role in this business model. Some of the prominent responsibilities of arbitrage dropshipper are as follows:

Market Analysis and Product Sourcing

Keep himself updated with market trends and research to identify profitable products to source. Market analysis helps arbitrage dropshipper spot profitable product opportunities for sourcing and stay ahead of the competition.

Product Listing and Marketing

List products on the online store and promote them by applying various marketing strategies such as social media ad campaigns, email marketing, SEO, influencer partnerships, and promotional events.

Customer Service

Provide excellent customer service either by hiring people or managing himself to establish a reputable business. Customer satisfaction is the top priority because you are committed to delivering the best experience for your valued customers.

Finance Management

Maintain financial management by keeping track of expenses and profits. Financial management helps dropshippers make informed decisions and ensure the health of their business.

Advantages of Arbitrage Dropshipping

Low investment

This business model requires minimal investment since you do not need to store product inventory, like traditional arbitrage. You only find a product online at a lower price, then list it on another marketplace or your online store at a higher price to generate a profit. You can begin selling products by establishing a free seller account on online marketplaces or through social media.

High Profit Margin

The profit margin is higher in arbitrage dropshipping than in any other dropshipping business model. It can even generate 7 figures if you are lucky enough to get a trending product at a low cost and sell it out for a higher rate at least 10-20 times.

Scalable

Flexible enough to start from anywhere through any platform with an internet connection. This business can be expanded to different markets with the right marketing strategies and can be scaled by adding more profitable products.

Challenges in Arbitrage Dropshipping

Now let’s look at the challenges people face in arbitrage dropshipping and understand why it might not be an ideal business model:

Time Consuming

You constantly search for cheaper products, stay updated with deals and discount offers, and sometimes negotiate with the supplier for rates. Additionally, the customer reaches out to you if there’s a delay in delivery or any issue with the product. You act as a middleman to answer customer inquiries, communicate with suppliers, and resolve disputes to ensure customer satisfaction.

High Competition

Due to higher profit margins, the arbitrage business model’s market has become more competitive. You might find it difficult to stand among already established sellers, using the same strategies and offering competitive pricing, driving down potential profit margins.

Account Restrictions

Some online retailers and marketplaces restrict accounts that purchase for resale purposes. They might ban your account which would lead to loss of everything.

Less Control over Quality

Since you’re not buying products or handling shipping on you’re own, you have less control over the product quality and delivery time.

Refund and Return Issues

You assume responsibility for handling any return-related issues that may arise with the products you sell. There might be some issues with product damage or a mix-up with the product.

Commonly Asked Questions

Is arbitrage business profitable?

The answer is yes if you get the right profitable product to sell and work consistently as it requires skill, effort, and a good understanding of the market. However, its not a guaranteed path to getting rich.

Is arbitrage dropping and retail arbitrage are same?

No. In retail arbitrage, you purchase bulk products in advance and keep the inventory. Whereas, in arbitrage dropshipping, you don't store inventory. Instead, you find products online, list on your store and purchase it only when customer places an order.

Is the arbitrage business model illegal on Amazon?

No. Arbitrage is not illegal on Amazon, you can legally purchase an item, and you have the right to resell it for profit. But it's crucial to follow Amazon's seller policies and source products legitimately.

Final Words

Understanding the business model and the challenges can help determine which model aligns well with your goal. In this guide, we discussed the arbitrage dropshipping, retail arbitrage, and dropshipping business models in detail.

I believe arbitrage dropshipping is a low-investment and flexible business model for entrepreneurs to enter into the eCommerce world. But it does require time and effort other than any business model. So, one should only get into this business model, if he/she fits the prerequisites (challenges) of arbitrage dropshipping.

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So, that’s all for this blog. If you’re looking for a professional to build your online store or website, SavyCoder is just a text away to help. Approach via contact us or email at hello@savycoder.com.