Today let's talk about profit margins. One of the questions that I get over and over again as I'm trying to teach people how to drop ship on Amazon, is whether or not smaller profit margins that you typically find with drop shipping and wholesale are better than the margins that you get for retail arbitrage and other ways of selling on Amazon. In order to really answer this question I really think there needs to be a huge mindset shift when it comes to understanding profit margins and what it means in a long term sustainable business.
Thrifting and Retail Arbitrage Skew Margin Expacations
If you're like me, you probably started selling on Amazon by going to different types of thrift stores, garage sales and retail stores. Typically, when you are selling products from places like that, you are used to seeing margins anywhere from 30% all the way to 300% from the items that you sell. Now, that can be absolutely awesome but it also excuse how you look at selling products on Amazon altogether.
How much margin do typical retails stores make on their products? This is a very important question to understand if you're going to really be aware of whether or not your profit margin is going to help sustain your business over the long haul. The typical retail store has a profit margin anywhere between 8% to 20% and more often than not, it's closer to the 8%. That being said, one thing that you find at the retail store, as opposed to people who sell thrift items and garage sale items, is consistency. The retail store has suppliers that they can consistently reach out to and buy product from. They never have to go out and spend hours sourcing that product. They simply have to put in purchase orders for products that they're selling within their retail store.
Consistency and Sustainability Always Trump One-Time Big Margins
All that being said, when you factor in the time it takes to source products even if you are selling a product that has a 300% margin because that one product, typically, is only going to sell once, meaning that you're not going to be able to sell it ever again because you're only able to find that product one time. The fact that it has a 300% margin diminishes in value overtime. Personally, I would prefer to have a product that sells at 10% but sells multiple times over a year period. Because it's able to sell multiple times, over the year I'm going to sell more from that product if our price is same as the other product. I'm going to sell that product much more than I would. I'm going to be able to make a profit far more than I would with the other product that I was only able to sell once at the 300% margin.
When you're thinking of profit margin, you have to think of it as how long am I going to be able to sell this product overtime? For me, this is one of the reasons why I chose drop shipping over any type of retail arbitrage, private label or online arbitrage because I want to be able to have something that can sell multiple times throughout the year.
A Quick Example…
Let me give you one more example of this concept. Say you had a product that you found for $10 that you are able to sell for $100, that is a ten times markup on that item. On the flip side, say you also found a supplier that was able to sell you a $10 item and you're only able to make $1 out of that item but you sold 10 of those a day. With the first item you made your cash right away. You were able to profit $90 in one shot, good for you. However, it would only take you ten days with product to reach the same amount of profit from the item that you sold at a ten times markup. On top of that, after those 10 days if you're still able to have your supply replenished overtime you are going to make far more profit than you would with that one item that you're going to sell at a huge markup one time.
All of these being said, I prefer having the lower profit margin but high sustainability and consistency as opposed to finding items at high margin but only able to sell once. In my opinion, it's far more preferable to sell wholesale private label or drop shipping on Amazon than it is to use the retail arbitrage and online arbitrage model.
Sure, the profit margins are very high with retail and online arbitrage or with finding items at garage sales and thrift stores, but overtime I can far surpass the amount of profit for product with wholesale or drop shipping and continue to grow my revenues and profits by stacking replenishable products on top of replenishable products overtime