The Best Way to Start an Online Business Selling Physical Products

It’s quite easy to become confused with all the terminology flying around when you’re researching eCommerce on the internet. I remember it felt like trying to decipher code. I wanted some sort of a glossary to explain what each term meant. So if any of you are in that situation, then read on.

There are different varieties of ecommerce business. I’ve explained the main ones below. But I’ve gone one step further and given you my take on the pros and cons of each.

Retail arbitrage

What is it?

It's fairly simple to understand. You wait for a sale in a store, you purchase products while they’re at a discount. You then list them online for a higher price. You pocket the profits.

Pros:

• Easy to do.
• Easy to understand.
• Don’t need your own website.
• Can take advantage of Amazon’s huge audience.
• Don’t need a lot of cash to get started.
• Good way to get into eCommerce.

Cons:

• Time consuming.
• Physical work.
• Low profit margins.
• Cannot bulk-buy - Often stores will impose a limit to how many products you can purchase in one transaction.
• Risky - There are some brands that are "brand-restricted" by Amazon (e.g. Hot Wheels), meaning you have to prove yourself and have a good sales history and customer service history before Amazon will allow you to sell such products. Other brands are “brand-gated” and do not allow resellers on platforms such as Amazon AT ALL (Lego is one of them). These rules can change at any time, so you might become stuck with inventory that you cannot sell. Some brands don’t allow resellers at all. Other brands will allow resellers, but you have to request permission from them first and will possibly have to pay a fee (usually a couple thousand dollars), so do your research first.
• Not scaleable - because you’re doing all of the work because it’s physical and you cannot outsource it online.
• Competitive - there may be dozens of other sellers all selling the same item, it quickly becomes a race to the bottom on price to win the sale which can reduce your already-low profit margins.

Online arbitrage

What is it?

Same as above, but the products are purchased online instead of from stores. 

Pros: 

• Easy.
• No physical work.
• low upfront investment. 
• Good way to get to grips with selling on Amazon.
• Free traffic - no need to run ads.

Cons: 

• Low profit margins - Limited amount of money to be made unless you make it a full time job. 
• Risky - Still need to do research to make sure that you’re allowed to resell that brand on Amazon.
• Limit to how many products you’re allowed to buy up in one go. 
• Competitive - be prepared to enter into price wars with competition for the more popular products.

A lot of sellers begin with arbitrage in order to generate a little bit of capital before turning to the more lucrative private-labelling. 

You can make both of the above work to your advantage by utilising Amazon’s FBA programme. If you’re doing retail arbitrage, you ship all of your inventory to Amazon’s warehouse, so that every time someone buys, Amazon fulfills the order on your behalf. If you’re doing online arbitrage, rather than having the products delivered to your home address, you could choose to have them delivered directly to Amazon. So there's even less work involved on your end.

Dropshipping

What is it?

This is when you don’t purchase or hold inventory. You would need to request approval from the manufacturer beforehand to make sure that they agree to do dropshipping. Then, you list their product catalogue either on your website or on Amazon. Once an order is placed, the details are passed on to the manufacturer who fulfills the order on your behalf. So in effect, you're acting as the middle man, marketing the product on behalf of the manufacturer and taking a cut for it. Most dropshippers use their own website for this.

Pros:

• Simple process.
• No investment other than website costs.
• Low barrier to entry.
• Instant return.

Cons: 

• Low profit margins - Because you're having someone else fulfill the orders.
• High barrier to entry - Have to find manufacturers willing to dropship.
• Requires large marketing budget - You’d have to find your own traffic to get people to your website, but marketing budgets will be limited due to low profit margins.
• You’re at the mercy of the manufacturer - when selling someone else's product line, you cannot control their catalogue and may find that your best seller could become end of line.
• Customer service issues - if there's a problem with the order, the customer is likely to take it out on you because you're the face of the business, even if technically the fault was not yours.
• Risky - if you're using the dropshipping method by selling on Amazon rather than on your own website, Amazon can ban your selling account at the first sign of trouble, i.e. an order not being fulfilled or late delivery and you could lose your business overnight.

Private Labelling

What is it?

Also called white labelling by some. This is when a manufacturer makes a product, but the marketer puts their own brand across it, so it looks as though the end product was manufactured by the brand. By all accounts, the product is exactly the same as someone else’s and, potentially, the only differentiating factor is the logo on the side. Think about it like outsourcing the production side of things.

Pros: 

• No investment cost for the seller with regards to infrastructure, technology or personnel - because you're not producing the goods yourself.
• Everybody wins - The manufacturers can often grow larger than the business that’s buying from them due to the volume that they’re selling. And the brand that’s buying from them can expand their offerings relatively easily. 
• Don’t need to find your own traffic - you can leverage the plentiful shoppers on Amazon. 
• Great profit margins - Better than any of the other business models already mentioned, sometimes up to the 60% mark.
• Full control - You own your own brand, you can do what the hell you like with it. 
• Better longevity and sustainability - People struggle to copy your business idea because you manufacture your own products.
• Differentiation - you can make your product stand out, pay attention to negative reviews from competitors and make yours better.
• Sellability - well-run private-labelling businesses are sought after by investors. You couldn't sell your business using the other methods mentioned above.
• Satisfaction - If you enjoy your job and think you have "job satisfaction", you ain't seen nothin' yet. Private-labelling is the highest form of satisfaction there is. You've created your own brand and you're selling it globally. Imagine telling your friends and family that.

Cons: 

• Larger upfront investment - Often, you’re buying in bulk to take advantage of bulk buying discounts. So depending on the minimum order quantity, you might have to buy 300 units for your first order (could be more, could be less). If you’re purchasing a product for a dollar, this is just 300 dollars. But if you’re purchasing something at $8 per piece, you’re looking at $2400 for your first batch.

I always recommend selling private label above all other eCommerce methods. The reason is because it’s relatively easy to do and you can utilize Amazon’s HUGE audience and don’t have to find your own traffic. Then in the future, if you decide to get your own online store, if you’re going to go to the effort of doing that, you may as well be pushing the method that generates the most profit.

Editor’s note: We cover how to start your own Amazon business by using the private-labelling method on our online course. So if you want to learn how to do this for yourself…

Click HERE to find out more.

By Kay Herdsman