Dropshipping VS Online Arbitrage.

Traditional dropshipping and online arbitrage are distinct business models, and combining them directly under Amazon’s policies can be tricky due to strict rules. Amazon explicitly prohibits conventional drop shipping where you list a product without possessing it and have a third party ship it directly to the customer under its terms of service (TOS). However, there are ways to ethically operate a third-party dropshipping-like model within the framework of online arbitrage while staying compliant with Amazon’s guidelines. Below, I’ll explain how you can approach this effectively.

Key Differences to Understand

Online Arbitrage: You buy products from online retailers at a low price, take possession of them (typically shipping them to yourself or an Amazon fulfillment center), and resell them on Amazon for a profit.
Dropshipping: You list products without holding inventory, and when an order is placed, a third-party supplier ships directly to the customer. Amazon bans this unless you’re the seller of record and meet specific conditions (more on this below).
Amazon’s Policy: Amazon requires sellers to be the “seller of record,” meaning you must invoice the customer, handle returns, and ensure the product isn’t shipped in a way that reveals a third-party retailer (e.g., in a Walmart box).

Given this, here’s how you can adapt a third-party dropshipping approach within an online arbitrage framework:

Step-by-Step Guide to 3rd Party Dropshipping in an Online Arbitrage Model

1. Set Up Your Amazon Seller Account

Register for an Amazon Seller Central account (Individual or Professional plan, depending on your scale).
Choose Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM). For a dropshipping-like model, FBM is more relevant since you won’t pre-stock inventory with Amazon.

2. Source Products Legally for Online Arbitrage

Use online arbitrage tools (e.g., Tactical Arbitrage, AMZScout, or Seller Assistant) to find profitable products on third-party websites like Walmart, Target, or Home Depot.
Look for items with a significant price difference between the source retailer and Amazon’s selling price, accounting for fees and shipping costs.
Ensure the products are from legitimate retailers and not restricted by Amazon (e.g., gated categories or brands requiring approval).

3. Purchase Inventory Strategically

Instead of buying large quantities upfront (as in traditional online arbitrage), purchase products only after receiving an order on Amazon. This mimics dropshipping but requires you to take possession of the item first to stay compliant.
Have the retailer ship the product to your address or a prep center (more on this below), not directly to the customer. This ensures you’re the seller of record and avoids Amazon’s dropshipping ban.

4. List Products on Amazon

Create listings on Amazon for the products you’ve sourced. Use high-quality images and descriptions (either from the retailer or optimized yourself).
Set your price to cover the cost of the product, Amazon fees (referral fees, FBA fees if applicable), shipping, and your profit margin.
If using FBM, manage shipping yourself; if using FBA, you’ll send inventory to Amazon after purchase.

5. Use a Prep Center for Efficiency (Optional)

To streamline the process and reduce hands-on work, partner with a third-party prep center. These services receive products from retailers, inspect them, and ship them to Amazon FBA or directly to your customers (for FBM).
This aligns with a dropshipping-like model because you’re outsourcing physical handling, but you still maintain control and ownership of the inventory.

6. Fulfill Orders Compliantly

FBM Approach: When a customer orders, buy the product from the third-party retailer, have it shipped to you or your prep center, then package and ship it to the customer yourself. Ensure no third-party branding (e.g., retailer receipts) is included in the shipment.
FBA Approach: After sourcing, send the product to an Amazon fulfillment center. Amazon handles storage and shipping once it’s in their system. This requires more upfront work but eliminates direct customer shipping hassles.

7. Stay Compliant with Amazon’s Rules

Seller of Record: You must issue the invoice and be identified as the seller on all packaging and documentation.
No Direct Retailer Shipping: Amazon prohibits having a third party (like Walmart) ship directly to the customer under your Amazon listing. You must handle or oversee the fulfillment process.
Quality Control: Inspect products (or have a prep center do it) to ensure they meet Amazon’s standards and avoid returns or negative feedback.

8. Scale and Automate

Use software like PriceYak or AutoDS to monitor price changes on source websites and automate ordering (though you’ll still need to route products through yourself or a prep center).
Reinvest profits to test more products and build a larger catalog.

Tools to Help You

Product Sourcing: Tactical Arbitrage, OABeans, or AMZScout to find deals.
Profit Tracking: RevSeller or Amazon’s FBA Calculator to calculate margins.
Price Monitoring: Keepa to track Amazon price history and demand.
Automation: Zapier or custom scripts to streamline order processing (without violating TOS).

Challenges to Watch For

Time Lag: Ordering after a sale (FBM) can delay shipping unless you have a fast supplier or prep center.
Profit Margins: Thin margins due to retailer prices, Amazon fees, and shipping costs can eat into profits.
Competition: Popular arbitrage products attract many sellers, driving prices down.
Account Risk: If Amazon suspects you’re dropshipping (e.g., third-party branding in shipments), your account could be suspended.

Legal and Ethical Alternative: True Dropshipping with Suppliers

If you want a pure dropshipping model, work with wholesalers or manufacturers (not retailers) who agree to blind ship under your brand. This complies with Amazon’s TOS as long as:

You’re the seller of record.
The supplier doesn’t include their branding or invoices.
You handle customer service and returns.

However, this isn’t online arbitrage—it’s a separate model requiring supplier relationships.

Final Tips

Start small: Test with a few products to refine your process.
Focus on FBM initially: It’s closer to a dropshipping workflow and requires less upfront inventory investment.
Research Amazon’s TOS: Stay updated on policies to avoid violations.

By blending online arbitrage principles (sourcing low, selling high) with a compliant fulfillment strategy, you can create a profitable system that leverages third-party retailers without breaking Amazon’s rules.