7 Reasons I Prefer Arbitrage to Private Label

privatelabelRecently, Travis Ross, friend of the blog, asked an open-ended question about Private Label that sparked a good discussion.  Using that as a springboard, I’m going to follow up with a more thorough explanation of why I personally choose not to Private Label and why I advocate the arbitrage model.

Let me start with a couple caveats:
1)  Even though I don’t do something, it doesn’t mean I can’t learn.  I follow several eBay groups and a couple Private Label groups.  I want to be able to learn from them even though I’m not currently interested.  And, sometimes it reminds me why I love what I do, over and against some of the other options.

2)  Everything I write after this notwithstanding, there are plenty of people who are truly successful when it comes to PL.  This should be read as simply my perspective, not an indictment of any other business model or any other person.  I’ll give a shout-out to Andy Slamans at Slamazon and Scott Voekler at The Amazing Seller.  If you’d like to learn PL, they are a great place to start.


 

Private Label, at its core, is partnering with a manufacturer to create a product and then putting your own personal label on the product.  Arbitrage is finding pricing imbalances and profiting on the difference.  In practice, this means buying low and selling high.  The two primary ways we discuss on this blog are Retail Arbitrage (in brick and mortar stores) and Online Arbitrage.   To visualize the difference: buying Nike shoes on clearance and reselling on Amazon at a higher point is Arbitrage.  Having a manufacturer in China create shoes and label them Mikey shoes, and selling them on Amazon is Private Label.


 

Here’s 7 Reasons why I prefer the Arbitrage model:

  1.  You can begin very inexpensively.  I started with under $500 and I now do this full time.  I know other people who have started with about $100 and have become very successful.  This is nearly impossible to do with PL.  Not counting any education / courses, you still have the expenses associated with manufacturing a product, ordering a minimum amount, having it inspected, shipping it across the Pacific Ocean, getting it from the dock to you.  Even with the smallest minimum orders and zero education, you’re still looking at a sizeable chunk of money.  The majority of people I know would have never been able to get into the e-commerce game if they didn’t have the low cost RA/OA option as a gateway.
  2. penny computerI’m kinda dumb and lazy.  The idea of researching a market, finding a niche that is large enough to support demand while being uncrowded enough for me to gain a foothold, researching/negotiating/inspecting suppliers 6000 miles away, designing product, designing packaging, creating listings, creating ad campaigns, generating reviews, optimizing search, improving ranking, policing hijackers, etc., is just not something I’m the least bit interested in doing.  I’m so lazy I don’t even like to leave my house and drive to WalMart anymore!  I basically click a couple buttons on my computer and find good deals and then I check the history with Keepa, and I press buy.  The end.  I don’t care how or where it was manufactured.  I don’t pay for shipping or worry about it.  I don’t create the listing.  I don’t do anything.  I press buy and then it shows up at my door and I forward it to Amazon.  If I’m feeling particularly lazy, I just have it go to a prep company and never even touch the product.  I like this model.
  3. All of the wars!  If you spend any time reading the issues that PLers have, you’ll see that there are constant struggles against other people jumping on the listing, competitors downvoting good reviews and upvoting bad reviews, making false claims about counterfeit items, etc.  To be fair, this can happen with any business model, but it is both more common and more severe for the PL gang.
  4. Advertising.  If you aren’t familiar with this world, the basic business model involves giving away free product to get reviews (which gets abused if you make a tiny error), which improves the item’s visibility as it slowly makes its way to the first page of the search results where it can start getting organic traffic.  This goes back to me being lazy, but I have no desire to do this.  I’d rather let Colgate use their multi-million dollar advertising department to spend millions of dollars on commercials to grab market share, and then just ride their coat tails.
  5. eggs-in-basket1-300x200Diversifying.  One of the major appeals of Private Labeling is also a major downfall.  The appeal is that instead of always doing work to find new arbitrage products, you can do all of the work on the front end and then reap the rewards forever. That sounds great, but what it often means in practice is that people start with a single product and spend months getting it from concept to AZ warehouse, lots of money, and no guarantee of success.  They would point out that if you do your research correctly, you can mitigate the risk, but you cannot eliminate it.  Even if you find a great niche, there is nothing that says that your particular product will sell.  There is nothing that says a new competitor won’t move into that space or change their pricing and alter the market dramatically.  Just today I had a friend tell me about how he has about 2000 units of a PL product stuck in an AZ warehouse.  That’s not a problem I want to have.  I like to have my eggs spread out in lots and lots of baskets.  Why?  Because I’m just not that smart.  If I make a big mistake — and I do regularly — then I want it to affect 1% of my business, not 100% or 50%.  I want to make $4 or $40 mistakes, not $400 or $4000 mistakes.
  6. Scaling.  One of the comments you’ll hear from PL-supporters is that they prefer the business model because it allows for them to scale their business, which they claim cannot be done if your business depends on your running around and scanning items.  I see the point, but I disagree for a few reasons.  A.  Let’s acknowledge that this isn’t a tiny bit of a concern until you’re selling several hundred thousands of dollars a year in inventory.  If you’re selling $300,000-$500,000 a year by yourself, and you just can’t see a way to scale it to $3-5million with this business model, then fine, we can talk about where we need to add revenue streams to make it more viable.  But this is not where 99.9% of the sellers are at.  Most people are trying to make some extra money, make a part time wage, or support a family.  All of these, and more, can be done by yourself and by using the Arbitrage business model.  B.  You can scale — it’s just a different kind of scale.  I use two different VAs to source online products for me.  I just wake up and boom I have spreadsheets of potential products ready to go.  I mentioned prep and pack services earlier.  One of my goals in 2016 is to outsource my RA shopping to an employee.  Here’s a guy who sells 20,000 pairs of shoes a year from RA, by having a few people source RA for him.  So, in my opinion, there are solid opportunities to scale either business model.
  7. Insurance.  This is a big one for me.  I’ve asked repeatedly about insurance concerns regarding PL and the most common answer I get is “I’m not sure” followed closely by “It’s not really that big of a risk.”  I’m not saying that is what any of tconfusedquestionhe big name courses will say (I’ve never taken them), but that has been my anecdotal experience, and I know quite a few sellers.  For me, this is pretty much a non-starter.  I live in CA which is notorious for piercing the corporate veil of an LLC, meaning all of my personal assets could be at risk.  I live in a litigious country where people sue first and ask questions later.  They name everyone they can think of in a suit, and when it is my brand in the USA versus a manufacturer on another continent, I think there is reasonable concern that this could be a problem.  Until I have this issue resolved, I’m not sure I could even consider it.  I want to grant that I’m probably more cautious than most.  In my short life, I’ve already had a fluke hospital visit and a fraudulent automobile suit that could have cost me $150,000 and $500,000 respectively, but I had great insurance.

 

Note: It’s not like Private Label supporters haven’t heard these things before and don’t have responses.  I think I’m going to reach out to Andy or Scott and see if they’d like to contribute a guest blog that gives a different perspective. It should also be noted that there are risks associated with the arbitrage model, too, and we shouldn’t be blind to those.  My aim today wasn’t to tell you that one business model is better than another.  My aim wasn’t to tell you that you can only have one business model (either/or can be both/and).  My aim was simply to share my perspective on why I personally choose this business model and recommend it to others. I hope I’ve achieved that.

 

As Always, Best Wishes

Mike

3 thoughts on “7 Reasons I Prefer Arbitrage to Private Label

  • October 23, 2015 at 6:34 am
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    Well done, Mike!

    I am still laughing over the “dumb and lazy” comment. Right! And you’re “crazy like a fox.”

    So often people get caught up in the “I’m right and you’re wrong” attitude, and they forget that they should analyze business decisions carefully. You did a great job of explaining your choices – and the process of making them – in this blogpost.

    Reply
  • October 25, 2015 at 3:00 pm
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    I think the people making the most money with PL are those who write and sell eBooks and materials explaining how to do PL. I too have zero interest getting embedded in the PL research quagmire. All that work for ONE item.

    Reply
  • November 20, 2015 at 3:43 am
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    Great article Mike, thank you. Plenty of points to think about.

    Reply

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