Five Ecommerce Business Models: Reselling, Private Labelling, Used and More

People starting a brand new ecommerce business are often eager to find their first product to sell. Some are fueled by the promises of hyped-up educational programs promoting little-known approaches (so they say!) including private labeling, dropshipping and retail arbitrage.

The truth is that all those approaches are well-known, and all have been used effectively for many years both in ecommerce and in traditional retail. But for every business that has succeeded following a particular strategy, many others have failed.

Why is that? Well, like most things in life, it ain’t what you do but the way that you do it: the quality and creativity of your execution matters a lot more than the business model you are following.

So here’s my suggestion to all those new sellers urgently seeking their first product to sell: just stop. Go back to basics, and think more carefully about the different models an ecommerce business can follow.

But what are those models?

In this article I’ll outline five that I believe represent the majority of businesses selling through online marketplaces today. Each model is anchored by a different way of sourcing products. Not only is sourcing a natural place to start designing an ecommerce business, it also shapes the entire strategy including pricing, marketing and your choice of sales channels.

So look for a sourcing strategy that fits your personality, skills, available time and investment, and appetite for risk. Whichever you choose there will be intense competition, so work on finding your own niche, or developing a unique appeal that avoids competing head-on in the most saturated parts of the market.

Make sure you have a solid appreciation of pricing and costs, and then – finally – you can start looking for the right combination of supply and demand that makes for a successful product.

If you’re thinking that sounds incredibly dull compared to just finding the next bestseller, then you’re right. It’s not as exciting as that. But it’s the way real ecommerce businesses operate, and a lot more likely to lead to success than jumping on the latest bandwagon along with a thousand other sellers just like you.

One final point before getting to the strategies: although they are not mutually exclusive (you can do more than one) there is a lot to experience and learn with each. Even when you are highly proficient, it may be better to build even more contacts, skill and sophistication with the same approach than to learn a whole new one.

At the end of each section I’ve included the two-letter acronyms used for each strategy in some community groups such as Reddit’s FulfillmentByAmazon.

1. Reselling

Resellers buy products in bulk from other businesses such as wholesalers, distributors and manufacturers. Then they sell the individual units to consumers, at a profitable price.

You won’t find much hype around reselling. It’s the traditional way of retailing, which you’ll recognize from most high street stores and independent online shops.

The products they sell might be branded – bearing the name of a specific company – or generic, with little to indicate the company who designed or manufactured the item. Either way, these are items that already exist and can potentially be sold by many different retailers.

Resellers don’t add to the perceived value of a product by changing its design or packaging, but they can still carve out a unique place for themselves in the market by doing things like:

• Selling products that are not readily available.
• Providing expert knowledge that buyers need.
• Offering a wide or unique assortment of products within their niche.
• Bundling products with complementary accessories or services.

The keywords here are “specialization” and “niche”. For further reading, Manuel Becvar wrote a post with ten ideas for finding a niche.

Of course not every retailer is a niche retailer with expert knowledge and unusual products, but there’s not much opportunity for those who just want to sell easily available everyday items. The only thing those businesses can compete on is price, and they are up against the biggest retailers in the world.

Hello Baby is one example of a successful reseller. They offer a wide range from several lesser-known baby brands, sell on many online marketplaces, and ship worldwide.

Community abbreviation: WS (wholesale)

2. Private Labeling

Private labeling is currently the hottest product strategy for online sellers, with many training courses, gurus and pundits singing its praises.

It occupies an interesting place between reselling and full-blown product development. At one end of the spectrum, private labelers take generic products and sell them on Amazon without modification, simply adding a brand name to the listing title. At the other end of the spectrum, the private labeler customizes the product and packaging to such an extent it bears little resemblance to the original generic item.

As a retail strategy, private labeling is not new. Supermarkets often take generic products and literally add their own label to make it their own. They’ve been doing it for many years, typically to provide a range of mid-price but highly profitable products to sell alongside the household brand names they also stock.

But for independent online sellers, private labeling is about identifying a niche away from the main competitors, not unlike reselling. The main difference is that the private label business is built one product at a time, rather than by the breadth and quality of the overall range.

Private labelers add value to generic products by:

• Adding their own brand name and logo, to increase the perceived value.
• Creating their own instructions and packaging to provide better product information.
• Creating their own marketing material including photos, videos and text that sell the product more effectively.
• Making design modifications to address buyers’ needs better, or differentiate themselves from competitors.
• Bundling products with accessories bearing the same branding.

So a private labeler’s creativity is concentrated on making the most out of each individual product, unlike a reseller who carves out a place for themselves by focusing on entire ranges.

At Web Retailer we’ve published a number of popular articles on private labeling including an interview with Will Tjernlund, a comprehensive checklist by Chris Rawlings, James Amazio’s story of success and suspension, Pilar Newman’s guide to trending products and a list of private labeling myths.

Community abbreviation: PL

3. Liquidation

Liquidation is a catch-all term for stock that can’t be sold for full price through a retailer’s normal channels. It is sold off in bulk and at a discount, to make way for more profitable merchandise.

There are several reasons stock might be liquidated, including:

• Overstocking: products that the retailer has too many of and can’t sell. They may have been replaced by a new version, or be from a past season.
• Returns: products that have been sent back by buyers. The boxes may have been opened, and packaging could be missing or damaged.
• Damage or faults: products that are not in perfect condition. Sometimes they are tested and “refurbished”.
• Bankruptcy: products that are sold off to pay the creditors of failed businesses.

Discounts for clearance stock can be high, such as 90% off the full retail price for a pallet of mixed goods. That may appear to be a highly profitable bargain, but the quality of liquidation stock can be variable, and include items that are completely unsellable. Also, the declared retail price may be the manufacturer’s original recommended price, and far from the actual price that the products recently sold for.

Liquidation inventory is often sold by specialist wholesale clearance companies like Liquidation.com or Wholesale Clearance UK. A more recent innovator is BoxFox, who have created a direct business-to-business marketplace for clearance stock.

There is a lot of potential for profit from liquidation stock, but a level of hype has come with that, leading to high competition and increasing prices. Retailers with stock to clear have never had it so good! So building close relationships with other businesses is often the most effective way to access liquidation deals at a good price, and ahead of the competition.

As a sourcing strategy, clearance is all about buying as cheaply as possible, and competing with other sellers on price. Some sellers may repair or refurbish products themselves, but they are unlikely to add value to their items in any other way. It’s all about price.

Andrew Minalto has written a great guide to buying clearance stock, and an interview I did with Elizabeth Hitchins about a clearance-based business making a move into reselling highlights some of the common issues. One is the constant need to find new sources – a clearance-based business cannot simply reorder their bestselling products.

4. Retail Arbitrage

Retail arbitrage is the novel practice of sourcing inventory from ordinary retail stores, either online or offline. Sellers who specialize in arbitrage will often look out for newly discounted products available in large quantities (which may indicate a clearance of overstocked items). A sufficiently high discount can allow the stock to be resold at a profit through online marketplaces.

Arbitrage is similar to liquidation as a source, with some key differences:

• Discounts (and therefore profits) are not usually as high.
• Products are more likely to be in perfect condition.
• The source of products is easily accessible to small businesses and individuals.

Perhaps not surprisingly, retail arbitrage is a really hot product sourcing strategy, second only to private labeling. For ordinary people with little time to learn about the retail business, it’s a very compelling way to make some extra cash.

But the problem with competition for wholesale clearance stock is even more pronounced with retail arbitrage. With few barriers to sell through online marketplaces, and even fewer to buy from an ordinary retail store, this sourcing strategy is open to absolutely anyone with some time and capital to invest.

Perhaps the only significant dampener on competition is the need for sufficient chutzpah to walk into a store over and over, ask for their new clearance offers and – when the price is right – buy out all their stock.

An interesting variation is online retail arbitrage. A number of services exist for finding online arbitrage opportunities including Primeresale, ScanDroid Pro and ProfitSourcery. These tools automatically search several online retailers for items with a sufficiently low price, as compared to the local Amazon site, for products to be bought and resold at a profit. There are also tools specifically for Amazon to eBay arbitrage.

I interviewed leading arbitrage seller Robyn Johnson, and expert Chris Green has written a highly regarded book on the topic called Arbitrage (also on Amazon UK).

Community abbreviation: RA (retail arbitrage) and OA (online arbitrage)

5. Used Items

Selling used items is probably the least glamorous of all these sourcing strategies. You are, after all, handling other people’s cast-offs. A lot of would-be sellers, while telling themselves that it’s all about the money, are equally motivated by the idea of handling thousands of perfectly shrink-wrapped new items. They wouldn’t dream of dealing in second-hand goods.

Let’s assume you’re not put off by the idea of selling used items. Is there much money to be made? Actually, there is. Some used items, books for example, need a large market like Amazon or eBay to find their true value. A textbook that sells for little more than pennies in a library sale, can fetch a hundred dollars plus online. Students and academics who urgently need that exact title have only a minuscule chance of finding it locally, and are prepared to pay a high price to get it online.

This sourcing strategy is also a type of arbitrage, as the items are simply “flipped” from one channel to another for a profit. A key technology is usually a phone app and barcode scanner, to quickly look up the market price and help identify profitable inventory rather than buying blind. Popular choices include Profit Bandit and ScanPower.

Used book seller Nathan Holmquist runs a fascinating blog called Book to the Future, where he posts detailed breakdowns of his sourcing trips and the resulting sales. Andrew Minalto, again, has written a great in-depth article on buying and selling used items.

If you are still skeptical that selling used items can be a real business of scale, read my interview with Christian Wegner of Momox. This company is the largest seller on Amazon, worldwide, and the third-largest on eBay. What do they sell? Second-hand books, CDs, DVDs, video games and designer clothing. They turn over 100 million Euros a year, employ 1,000 staff, and one of their warehouses is as large as an Amazon fulfillment center. They’re huge.

What About Making Your Own Products?

There are two main ways you can produce your own products:

• Yourself, by hand. This is what crafters do.
• Using staff, in a factory. This is what manufacturers do.

There are many people successfully selling handmade products online. Etsy has built a two billion dollar marketplace focusing on just that. Just a few days ago retail giant Amazon opened their own version, Handmade at Amazon.

But I find that the people looking for products to sell online are not normally crafters. If they already make items by hand, they’ll generally just look for somewhere to sell what they can already create. And it’s unusual that someone looking for products to sell will take up a craft just so they can sell their own wares. Crafting normally starts with a hobby and a passion for the technique, not a financial need.

Designing and manufacturing your own products can grow from a sourcing strategy like private labeling, but more often it’s the domain of professional marketers and inventors. You’ll find many examples of independent online stores that create and market their own products, like Dollar Shave Club. That kind of product innovation is impressive, but it’s out of reach for most people, and not a great fit for selling through online marketplaces.

The demands and disciplines of running your own web store are a world apart from selling through Amazon and eBay, and not something I would recommend to the average person who wants to dip a toe in the world of ecommerce.

What About Dropshipping and FBA?

Dropshipping and FBA are popular buzz words promoted by a number of ecommerce courses. Both have their value, but they aren’t strategies for sourcing products in their own right.

Dropshipping is a service provided by some suppliers (wholesalers and manufacturers) where they will ship their products directly to the buyer after a sale is made. They do not require payment until the product is sold, so unlike most retail there is positive cash-flow – you pay the supplier after the buyer pays you.

FBA, or Fulfillment by Amazon, is a service provided by Amazon.com where they provide their own product storage, handling and shipping services to process orders for other companies. Amazon’s logistics are renowned for their quality and efficiency, and FBA provides enhanced visibility when selling through Amazon itself.

Course providers like dropshipping and FBA because they take away some (or all) of the need to handle physical products. For sellers with limited time, particularly those with day jobs, they solve a key problem. But they don’t in themselves provide any base to build a business on. Consumers won’t buy from you just because you use dropshipping or FBA.

In Closing

There are many ways to have a successful business selling through online marketplaces.

Some of those ways, like reselling, take a traditional business model and transplant it directly onto the internet. Others like private labeling and retail arbitrage are more innovative models.

What’s important is to understand that there is no right or wrong business model in this industry. You can succeed or fail whether you are a reseller, private labeler or clearance seller, or indeed if you buy from retail stores or sell used items. It ain’t what you do it’s the way that you do it.