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Amazon Business Models

The pandemic has played a major role in the rapid shift in consumer behavior from on-site shopping activities towards ecommerce. Many consumers are growing to rely on online platforms and retail chains to get their everyday groceries and essentials, due to how convenient it is.

More than half the sales on Amazon are attributed to third-party sellers. Ecommerce vendors from all over the world are bolstering their own businesses and moving forward by using key platforms like Amazon as their trading space.

In this article, we discuss some of the highly flexible Amazon business models that help sellers to grow in sales as well as revenue at such a rapid pace. Before that, let’s take a look at the major deciding factors you need to look at before you pick an Amazon business model for your own venture.

How Can You Choose an Amazon Business Model?

The following are some of the major factors you need to consider before you choose the best Amazon Business Model that’s suited for your ecommerce venture.

Budget

It all starts with how much you have and how much you’re willing to risk. No matter what business you’re involved in, there’s always an initial investment you need to make. As much as you’d like to be optimistic, there’s a certain level of risk associated with any business. Check and see if your budget covers that.

Time

Consider how much time you’re willing to spend each day, dedicating yourself to the business. If you have a permanent job already, you need to check and see how much free time you’ll be getting each week to monitor sales and manage orders.

Flexibility

To some people, selling online on Amazon is a side hustle. To others, it’s an actual full-time business. Depending on who you are, you might prefer working at home or growing the company by renting out an office space, storage house and staff.

Experience

Sellers with experience can usually rely on their past connections to get favorable deals from suppliers and source inventory without any hassle. If you’re just starting out however, there’s plenty of things you might have to get familiar with. In that case, check which business model you’re most comfortable with and which ones have the least risk.

What are the Different Amazon Business Models?

Retail arbitrage

This is a business model where the ecommerce seller looks for bargains, buys goods in bulk at a reduced price and sells them for a higher profit. It is a classic way of doing business. Instead of handling production or dealing with certain suppliers, you get to find a variety of opportunities where high-demand goods are underpriced. 

Not only does retail arbitrage help entry-level Amazon business start-ups earn a significant stream of cash flow over time, it also allows you to build an inclusive and vast inventory. You’ll also be able to discover which product categories are in high demand and offer the most profit.

The process is actually pretty simple. You can look for affordably priced wholesale items across the market, consider the original price and decide the price you can sell it for, after deducting the standard Amazon charges. It would be wise to check competitor’s pricing so that you aren’t overpricing or underpricing your own products.

Important points to note:

  • Retail arbitrage is a cost-effective way to begin selling as a third-party on Amazon. You get to pick and choose your own inventory based on demand, price and profit. At the same time you can deal in a wide-ranged inventory.
  • It is ideal if you are running on a tight budget and are unsure what to sell on the platform. As you discover which products fetch you the highest returns with the least expenses, you can narrow your inventory to those specific products. 
  • Since you are actually buying products firsthand before you sell them, you get to maintain a degree of control over the quality and pricing of the product. Throughout the process of inspecting the items for defects, buying them at affordable prices and repackaging them for Amazon sales, you have the final say in how business is done.
  • You get to take advantage of various tactics such as buying out stock from stores that are on the verge of shutting down, making bulk purchases during seasonal periods or buying from stores that are clearing out stock at the end of the year.
  • If your goal is to make a huge amount of revenue within a short period of time, then there are much more suitable alternatives. However, retail arbitrage is simply one of the least risky, moderate-return options.
  • Retail arbitrage involves scouring stores and markets in search of low-priced quality goods, inspecting them, bargaining, striking deals, transporting products to your own warehouse etc. 

In short, it requires massive time investment and sufficient funds upfront to meet those needs. You’d also have to handle refilling your inventory when it runs out – which you’ll also have to anticipate way ahead of time.

  • The option isn’t compatible with upcoming ecommerce sellers who have other professional commitments and are unwilling to put in the time to find and procure affordable products.
  • Retail arbitrage is one of the least expensive business models to get started with on Amazon. More than 45% of retail arbitrage sellers begin with an investment that’s somewhere between $500 and $1000.
  • Profit rates with retail arbitrage are generally moderate and lesser compared to other business models. Up to a quarter of retail arbitrage sellers earn less than $500. The maximum earnings for a majority of these sellers is less than $5000.

Online arbitrage

Online arbitrage is simply a form of retail arbitrage that’s done entirely online. 

The core concept of this model is finding low-cost inventory on one internet platform to sell it to another platform at a higher price. Basically, you search for affordably priced inventory across multiple ecommerce platforms and websites to find great deals, buy them in bulk and then sell them at a better price on Amazon.

“The model is essentially a way of striking good opportunities through smart product sourcing. WIth the abundance and proliferation of ecommerce sites at every nook and corner of the digital marketplace, dominated by major giants like Amazon, Ebay and Shopify, there’re simply endless ways to get great deals at relatively minimal cost.”

Important points to note:

  • A key benefit of this model is that you wouldn’t have to roam around streets or have lengthy meetings and bargains with vendors to find a low-priced product to buy in bulk. You can do this entirely on the internet, which saves you plenty of time on travel costs. 
  • Additionally, you can instantly compare prices for the product on Amazon to see if it would be a profitable deal. All of this is so simple that even a beginner ecommerce seller could manage to do it really well.
  • If you choose to go this route, then make sure when you buy products in bulk online, that you can still remit a profit after deducting shipping costs and carrying charges.
  • Online arbitrage also allows ecommerce sellers to work discreetly and remotely with full flexibility, so that they can find deals, order inventory and make sales at their own convenience, all from the comfort of their homes. In other words, it’s a business model that suits various lifestyles and work routines.
  • The general costs of starting out with an online arbitrage business model is somewhere between $500-$2500. Most ecommerce sellers are willing to spend more on the venture because there’s less of a physical exchange involved.
  • Online arbitrage business owners earn just about the same as retail arbitrage sellers, with a small minority earning slightly more. Compared to retail arbitrage, there’s less cost involved which makes for higher profit percentages. This isn’t substantial though, since ecommerce seller still have to account for delivery and manage orders online.

Wholesale

Wholesale is a business model that involves purchasing large volumes of inventory directly from suppliers or producers and selling it on Amazon for better profit margins. Each item you sell will be priced based on the cost of purchase, Amazon charges and profit margins. The key difference between wholesale and arbitrage models is that the former involves buying directly from the suppliers or manufacturers in bulk. 

Most of the time, there is a minimum order requirement you need to place if you want to get products at a wholesale rate. Unlike online or retail arbitrage where the price is inherently low for each unit, wholesale rates are only available when you’re buying products in bulk beyond a certain threshold. This is why you need to have a deep understanding of the demand and sales history of the product in your particular market. Otherwise you might end up with leftover inventory that can end up jeopardising your income. This happens when you stock up on goods that tend to become outdated over time.

Important points to note:

  • The good thing about wholesale purchases is that you can find high-demand goods at a relatively low price. With a little bit of research and market testing, you can easily get to know which products pay off better and stick to those, developing a niche over time.
  • When you buy wholesale, you’d be dealing with specific suppliers alone. You don’t have to drive around looking for products where you can strike a good bargain. It saves more time to have a reliable supplier who offers you quality products at affordable rates than scour the market, spending hours and hours to find small-store deals.
  • A major drawback with wholesale is that you need to have sufficient large-sum funds to invest in massive orders, right from the start. It may reduce the overall cost when you place bulk orders but you still need to have enough money to buy out the stock before you sell and make a profit on it in the long run. This comes with a risk since you can’t be fully confident that you can clear out your stock soon enough.
  • It is not the most suitable business model for beginners on a budget, looking for cost-effective ways to make money without taking on any risk.
  • Most wholesalers on Amazon are willing to spend up to $2500 to get started with their businesses.
  • Earnings from wholesale business exceed $5000 a month for a majority of ecommerce sellers engaged in it. Profit margins for most are up to 20% on average.

Private label

The concept behind the private label business model is that you buy inventory from a third-party producer, brand them with your company’s logo and sell them on the platform. The products will essentially be unbranded. 

Eg: Let’s say you run a custom T-shirt company. You buy readymade, unbranded T-shirts of varying sizes and styles from a third-party manufacturer, in bulk. You then imprint the shirts with custom designs of your own. This is your “brand”, which you can then market and sell on Amazon. 

The key to succeeding as a private label lies in building your brand reputation through well-planned marketing, search optimization, promotion etc. It is a bit of a double-edged sword though. Unlike other models, you won’t have to suffer or lose customers because of another brand’s reputation. At the same time, you’re responsible for maintaining your brand image and won’t be able to benefit or attract customers of another brand either.

Important points to note:

  • It’s fair to say that private label business models are best-suited for ambitious ecommerce sellers who plan on growing their brand’s presence as much as making profits. So if you have a well-outlined plan of action, a unique or creative idea and enough daring to grow your brand on Amazon, go for it.
  • The private label business model is widely adopted by most sellers, making it one of the most popular ways of doing business on Amazon. All you need to do is scroll through the website and you’ll instantly notice well-reputed brands as well as obscure independent ones competing with each other across product categories.
  • Since ecommerce sellers have to buy standard products in bulk, brand them and manage orders, it is quite expensive to run a private label business on Amazon. A majority of private label business owners initially  invest more than $2500 when they start out.
  • There is tremendous risk for unknown brands but the rewards are just as high. More than half the private label sellers on Amazon are able to earn upwards of $5000 a month in sales.

Dropshipping

Dropshipping has become a major source of passive income for many Amazon sellers, including freelancers. It is a business model or, to be more accurate, a business activity that’s entirely detached from the hassles of inventory management, storage, shipping, etc.

In this particular model, you’d simply be acting as an agent on behalf of a supplier. All you have to do is receive and manage orders, promote the product on media platforms and represent the business. The supplier takes care of everything else from packaging, shipping all the way to delivery. In the end, you get a percentage of the profits from the sales.

While it is super convenient for passive sellers looking for lucrative ways to earn more money, it also has its downsides. You won’t have any say or control over the quality, methods or product that’s delivered on your behalf. At the same time, if the product is mediocre or if any issues arise in delivery, it could affect your reputation as a seller.

The key to succeeding with this business model lies in finding trustworthy suppliers who offer great products and have access to an efficient storage and delivery system.

It is also worth noting that dropshipping happens to be one of the least time-consuming ways of doing business on Amazon. It requires minimal time investment since the suppliers handle most of the work.  

Handmade

A lot of mom and pop stores, craftsmen and artists gravitate towards Amazon to sell their homemade products. This business model gives you complete control over the quality, size, quantity and value of your goods.

It is best-suited for dedicated ecommerce sellers with the time and resources to produce, manage and sell their inventory online, all on their own. Needless to say, there is tremendous risk that comes with running your own business when you have to take care of everything, from accounting to delivery. 

However, there’s also tremendous freedom you get to experiment with your product online, realise it the way you’ve envisioned and make it as good as you want it to be. To some business owners, that might be more important.

What you need to know before you get started:

If you’re planning on selling your own handmade products on Amazon, you must have some idea of how you want the business to turn out. It’s important to start out with a vision of how much time and resources you are willing to put into it, and what you expect the returns will be at the end of the year.

The product shouldn’t be a vague, unformed possibility in your mind that you might work on someday. Start thinking about particulars like design, aesthetics, functionality, resources, pricing and production. Work on a prototype and test it in the regular market before you attempt to sell it online. 

You need to get a reaction from local buyers before you go any further. The impressions and insights you gain from testing the product with consumers will inform the changes you make to the product, and how you market it online.

Important points to note:

  • There is immense scope and competition at the same time for handmade products on Amazon. The most popularly sold items include jewelry, decorative pieces, artwork, etc.
  • Handmade products are generally less expensive to make, but this also depends on your own production process.
  • It is difficult to make substantial returns from selling handmade products online. It usually falls between the $500 – $5000 range. It is rare for a homemade product seller to make anything close to $5000 in monthly sales, most of the time.
  • While overall cash flow may be a lot less, the profit margins are usually a lot higher. Since most handmade products cost less to make, sellers are able to gain better profit margins that could go up to 20% of the actual cost.

Bottomline

So far, we’ve discussed six of the most popular business models that most ecommerce sellers adopt when they do business on Amazon. Each model we mentioned has its own set of pros and cons. What works for one person might not work for the other. It all depends on your own business goals, ambitions, needs, resources, and location. 

You have to evaluate the advantages and disadvantages of each model before you proceed with any one. Once you decide on a business model, plot a realistic strategy to make sure you’re prepared for the best case and worst-case scenario. You should be willing to commit to a business model for the long term but also ready to switch to something feasible if things don’t pan out the way you expected them to. 

Remember, all of business is about trial and error. In the next lesson, we’ll give you some in-depth insights on the private label model of business, where we cover how you can create and maintain your brand on Amazon in the long term.

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