Ecommerce can be an exciting and rewarding venture but choosing between all the different business models can prove a challenge.

From private label and dropshipping to wholesale and arbitrage, each has pros and cons. The ecommerce business model you choose will depend on various factors. This blog will explain and compare them all so you can choose the best online business model for your business in 2024.

We work with hundreds of businesses across these models. If you need of an accountant who truly understands your ecommerce business, get in touch with us today.

1. Arbitrage

This is the classic “buy for 1, sell for 2” ecommerce business model.

How to start an arbitrage business in the UK

With arbitrage, you will purchase and sell the same product in different locations with the aim of profiting from the difference in the product’s listed price.

The arbitrage business model can be split into 2 primary methods based on how you acquire the stock you plan to sell:

• Online Arbitrage
• Retail Arbitrage

Online Arbitrage

With this method, the majority of the process is done online. You scour online stores for products which are “on sale” (discounted).

For example, you may scour the clearance section of T.K.MAXX’s website and find this Gucci perfume set (above) selling for £48.

Once you discover a discounted item, you search for that same item on the online ecommerce platform where you would plan to resell it, such as Amazon.co.uk (below).

You then assess the list price on Amazon and find it selling for £87.95. Naturally, the bigger the price difference you find, the bigger your profit could be.

Using online tools, such as Helium 10, you establish any additional fees of selling this item on your chosen platform (Amazon in this case). This is how you can determine whether you would make enough of a profit to justify the endeavour.

In this case, it could work out as follows:

    £87.95 (sell price)
  - £48 (cost)
  - £13.46 (Amazon referral fee)
  - £2.79 (domestic shipping fee)
 = £23.70 (profit)

If you're happy with the numbers, you purchase the discounted product, from T.K.MAXX’s website in this case.

You then list the product for sale on the other platform, Amazon in this case, and sell it for a higher price, to turn a profit.

If you want to know the full startup costs for any of these business models, see our Ultimate Budget Guide: How Much Does It Cost to Start an Ecommerce Business in the UK.

Retail Arbitrage

This is also an arbitrage ecommerce business model. The only difference with this method is that the sourcing component is done offline. Instead of searching online, you physically traverse retail stores in search of potential deals. 

For example, you might find the same deal as we covered for Online Arbitrage but by physically going into your local T.K.MAXX store.

Pros and Cons of Arbitrage

PROS:

• Can start with very little capital
• No need to hold large inventories
• Low risk of slow moving stock or long-term storage fees
• Flexible

CONS:

• Time consuming to find profitable deals
• Requires ongoing deal sourcing
• You need to check restrictions and/or brand gating to ensure you CAN resell the product on your chosen platform

2. Dropshipping

This is the lowest risk ecommerce business model but not without its flaws.

How to start a dropshipping business in the UK

In the simplest terms, dropshipping is an order fulfilment system that doesn’t require you to keep any stock. Instead, you sell the product and pass on the order to a supplier, who then ships the product to the customer.

As a dropshipper, you set up a storefront and advertise products for sale (as above). Since you are selling from your own website, one of the greatest challenges with this model is driving traffic to your products. You may do this through organic SEO optimization or through paid advertising, such as Google Ads.

A customer finds your store and purchases your products (above). Importantly, the customer fills in their shipping address while paying for the order (often using a credit card or PayPal). 

In this case, you receive $79 from the customer.

Once you receive the customer’s order details (and funds), only then do you use a portion of those funds to order the selected product from your supplier. In this case, the supplier is on AliExpress (above).

It costs you $32.91 to purchase and ship the product.

When you buy the product from the supplier, you specify the customer’s address (from the order details you gathered on your store) as the final shipping address (above). 

Lastly, your supplier sends the product directly to the customer who ordered from your store. 

You earn the difference between the price paid by the customer and the price charged to you by the supplier.

In this case:

      $79 (sell price)
   - $32.91 (cost + shipping)
  = $46.09 (profit)

Pros and Cons of Dropshipping

PROS:

• Requires no (or very little) capital to get started
• No need to purchase stock up front
• No inventory storage fees or slow moving stock
• No product development needed

CONS:

• Lengthy customer delivery times (if sourcing from the East and shipping to the West)
• Risk of poor quality control
• Driving traffic to the store requires large amounts of time (SEO, social) or capital (advertising)
• International shipping costs can deteriorate profit margins
• No ability to brand products or develop them uniquely
• Requires careful order management

3. Private label

If you start your own Private label, you will usually design and produce your products with a third-party manufacturer. You then market and sell the products under your own brand name.

Arbitrage vs Wholesale vs Private Label

The major difference between private label and reselling (arbitrage or wholesale) is that with private label you develop and sell your own unique products under your own brand name rather than reselling the standardised products of existing brands.

How to start a private label business in the UK

The first step is to decide where to sell. Let’s say you choose to start selling your private label products on Amazon.co.uk.

Next, you will begin your Amazon product research. There are various tools mentioned here which will enhance and speed up this process.

A common choice is to use a product research database such as the Black Box from Helium 10 (above). This allows you to apply filters to narrow down Amazon product opportunities.

You should comb through the results (above), focusing on those that appear most “private-labellable.” For example, private label sellers will often avoid products that are:

• Highly seasonal
• Do not provide product improvement/development opportunities
• Produced by major brands
• Potentially hazardous (hazmat)

In your research, you come across this whiskey decanter (above) selling for £59.95.

Reading the customer reviews, you find there are ways you could improve this product or downfalls you could fix with your own unique version of it.

You search for the same on a sourcing website such as Alibaba.com (above).

After assessing multiple suppliers, you find that you could source a quantity of 500 standard units for £4.69 per unit.

You contact the supplier via Alibaba, discuss your idea, and find you could improve the standard unit with customizations for an additional £3 per unit, bringing total manufacturing cost to £7.69 per unit.

Using a freight forwarding quote website such as Freightos.com (above), you enter the details of your shipment from the supplier in China to the Amazon Fulfilment Centre in the UK.

Based on the quotes (above), you estimate that it would cost about £700 to ship the 500 units. 

The international shipping cost per unit is (£700/500) £1.40.

Adding total manufacturing (£7.69) and international shipping (£1.4) together, you find your landed cost will be about £9.09 per unit. That is landed in the Amazon fulfilment centre, ready for sale.

Using Amazon product research tools like Helium 10, you run a profitability analysis (above) which breaks things down as follows:

      £59.95 (sell price)
   - £7.69 (base manufacturing cost of £4.69 + differentiation cost of £3.00)
   - £1.40 (international shipping cost)
   - £5.84 (FBA fulfillment fee)
   - £9.17 (Amazon referral fee)
  = £25.28 (profit)

This is a potential profit margin of 50.61%. Due to the frequent need to pay for advertising (using services such as Amazon PPC), many sellers choose to aim for a profit margin of 40% or greater at this point.

Once you’re happy with a product, you create an order with your supplier. You will both need to agree to the Trade Assurance order/contract. This will also specify payment terms, which are often 30/70, where you pay 30% up front and 70% upon completion of manufacturing.

Before paying, it’s important to set up any needed selling accounts and list the product on your chosen platform (even if not active). This ensures you can sell the product without any restrictions and often provides you the product labels needed for sending products to fulfilment centres.

You then ship your products to the fulfilment centre and begin selling!

Some of the top private label categories include:

• Personal Care and Beauty Products
• Household and Cleaning Products
• Health and Wellness Products
• Home and Kitchen Products
• Pet Supplies
• Baby and Childcare Products
• Apparel and Fashion
• Electronics and Technology Accessories
• Automotive and Car Accessories
• Sporting Goods and Outdoor Equipment
• Home Improvement and DIY Tools
• Office Supplies
• Jewelry and Accessories
• Toys and Games

Pros and Cons of Private Label

PROS:

• Lower (or no) competing offers on your listings (which is common with the reselling business models).
• Higher profit margins compared to reselling (once established).
• Freedom over marketing, including packaging and listing assets.
• Brand-specific advantages such as Brand Registry if you sell on Amazon.
• The most passive business model (once established).
• Private Label brands are often more sellable than reselling businesses.

CONS:

• Requires significant upfront capital.
• Doesn't leverage an existing brand, known by customers.
• Doesn't leverage an existing listing with existing reviews and ranking (depending on where you sell).
• You often need to run ads early on, to make your products visible to customers, which reduces profit margins.
• Requires significant time on product research, supplier research, and product development.
• Usually takes longer than reselling to start gaining your return on investment.

4. Wholesale

If you choose wholesaling, you will buy goods in bulk from manufacturers or distributors and then sell them to customers or other businesses for a profit.

Wholesale vs Arbitrage

The key difference between wholesale and arbitrage is how you source the products. 

With arbitrage, you search for products on discount at a store/website and purchase a lower quantity of them to resell elsewhere at a higher price. 

With wholesale, you purchase products in bulk from a supplier, which provides you a lower cost per unit. You then resell them at a much higher price for a profit.

How to start a wholesale business in the UK

First, choose where you wish to sell and the type of products you want to wholesale. You want to research the market to confirm there is enough demand for your chosen products. You can do this with a myriad of product research tools.

If you choose to sell wholesale on Amazon, you could use tools such as Jungle Scout or Helium 10 to research products. 

One of the key filters you will want to use is that of Number of Sellers (above). Setting this to 3 will ensure you discover products that are more suited to wholesale. This is because if a listing has only 1 seller, that is often a private label product and likely not available for wholesale sourcing.

Once you gain results, it’s important to keep in mind your goal will be to open a wholesale account with the brand whose product you would sell. Landing wholesale accounts with major brands like Nike is unlikely, so focus on lesser known brands that are selling well.

In addition, if the Brand name and the Seller name differ (above), this can indicate that the brand owner is open to others selling the product via their listing - and potentially open to wholesale accounts.

As an example, through this process, you find this Thermos mug (above). At the bottom right, you can see multiple sellers have listed offers on this one product listing. That is, multiple sellers are competing to win the Amazon buy box (the one click checkout at the top right) and sell this product to Amazon customers.

Should you land a wholesale account with Thermos, you would also list your offer on this listing and begin competing with these sellers for a portion of the sales.

Once you have identified a fitting opportunity, you will need to request a wholesale account from the brand, in this case, Thermos. A simple Google search should reveal their website. 

Search for a wholesale portal or simply use their Contact Us page (above) to request more information on how to open a wholesale account with them.

Should you find a profitable wholesale relationship, you will place a bulk order for the product, and have it shipped to your specified location. Depending on where you sell, you may choose to warehouse products yourself or to use a 3PL (third-party logistics provider).

If you’re wholesaling on Amazon, choose whether you want to fulfil orders yourself (FBM - Fulfilment by Merchant) or leverage Amazon's Fulfilment Centers (FBA - Fulfilment by Amazon). FBA is often preferred for convenience and Prime eligibility. By default, FBA items feature the Prime badge and Prime shipping, which customers often prefer. In addition, Prime offers often win the buy box over non-Prime offers, so this is an important consideration.

Once you’ve listed your offer and your products are ready to ship, you can begin selling!

Pros and Cons of Wholesale

PROS:

• Leverages an existing brand, known by customers.
• Doesn't require time on product development.
• Leverages existing listings (with reviews and ranking).
• Less need to run ads on listings with already-established ranking.
• Requires less time on product research, supplier research, and product development than private Label.
• Usually takes less time than private label to start gaining your return on investment.

CONS:

• May need to compete with other offers on listings, putting downward pressure on price and margins.
• Generally has lower profit margins compared to private label (once established).
• No freedom over marketing, including packaging and listing assets.
• Requires time for researching and restocking.
• Not as “sellable” as a Private Label business.

Last Word

Private Label vs Dropshipping vs Arbitrage vs Wholesale

The best ecommece business model depends on your objectives, available resources, and risk tolerance. 

The lowest risk/lowest startup capital is clearly dropshipping, followed by arbitrage, then wholesale and finally, private label.

In the long run, the most time intensive is arbitrage, followed by dropshipping, then wholesale and finally, private label.

The most sellable business/highest long-term ROI is a private label brand, followed by a dropshipping store or a wholesale business and finally, an arbitrage business.

Some entrepreneurs combine methods. You could, for example, start dropshipping products to test the market and then switch to private labelling once you’ve confirmed a profitable opportunity.

We hope this article has moved you closer to selecting the best online business model for your business. Ultimately, success with your business venture will come down to market research, execution and marketing, regardless of your chosen model. If you want us to handle the numbers so you can focus on those aspects, get in touch with us today.