Arbitrage: the practice of taking advantage of a price difference between two or more markets
Value is largely relative.
On October 30th, a frazzled parent might gladly pay $50 for a cheap Halloween costume with guaranteed overnight delivery. That parent isn’t paying $50 for the quality of the design and the actual materials in the costume; she’s paying $50 to salvage her family’s Halloween at the last minute.
Similarly, a new winter coat is worth more in November than it is in April.
In addition to seasons and holidays changing the perceived value of an item, geography can do so as well. Here in my home state of Michigan, you can buy a brand of ginger ale soda called Vernors. Vernors has a reasonably small-but-dedicated collection of fans here in Michigan, and some of those Vernors-loving Michiganders have moved to regions where you can’t find Vernors in the grocery store.
As a result, Vernors 12-packs, which sell for $4 or less here in Michigan, are currently selling for a ridiculous $18 on Amazon.
If you’re looking to use The Data-Driven Life to build a side income for yourself, arbitrage opportunities such as these could be a great way to get started. Let’s look at how:
The first and most straightforward way to profit from value arbitrage is to find items in high demand and sell them for a premium. This can occur when a company sets a fixed retail price on something and the item frequently goes out of stock (think the Christmas rush on Tickle Me Elmo dolls, for example).
At the time of this writing, you can buy a Nintendo Classic Edition for $59.99 from Best Buy (of course, you should be getting at least 2% cash back on that purchase as well as using other rewards like EBates, so your effective price should be even less). Also as of the time of this writing, the cheapest new version of that item is currently selling (as of the time of this post) on Amazon for $90.73.
Boom — there’s one arbitrage opportunity you could exploit right this minute.
But how can you consistently be one of the lucky people to get to purchase a high-demand item at the fixed retail price? That’s where NowInStock.net comes in. From that site, you can sign up to be contacted immediately when an item of your choosing is in stock at any one of a number of different online retailers. When you get the notification, you can purchase the item (or multiple items) as quickly as possible, then list it on Amazon for a tidy profit.
The next time you see massive demand building for a new product set to become this year’s Furby, Cabbage Patch Doll, or Beanie Babies, don’t just roll your eyes. Set up a notification alert from NowInStock, purchase a few items when they become available, and enjoy your easy profits.
Exploiting Regional Arbitrage
Selling Vernors soda on Amazon is one form of regional arbitrage, but my all-time favorite example of regional arbitrage has to be one couple in Utah who began selling tumbleweeds (which were free, abundant, and worthless in their area) and had so much success that, as the article states, “The Rigbys eventually quit their previous jobs to work full time in the tumbleweed industry.”
Who knew tumbleweeds were an industry?
To take advantage of regional arbitrage opportunities, consider them in both directions: What items, common to your area, could be scarce or unavailable (and thus more valuable) somewhere else? Conversely, what items are freely or cheaply available in another area that you could bring to your location and sell for a higher price?
If you’re struggling to come up with ideas, check out Alibaba.com. Alibaba is designed to link manufacturers (typically from low-cost areas) with sellers in other parts of the world. I’m not advising you to purchase huge amounts of items off of Alibaba to try to resell them — many others do that, and the market is fairly saturated and competitive — but it’s a great website to examine while trying to brainstorm your own niche product to sell.
The Mindset of Arbitrage
A major purpose of this blog is to help you to benefit from approaching life mathematically. Arbitrage opportunities can sometimes be short-lived, but if you train yourself to look for opportunities where the value of an item could be different in two different markets, you’ll find these opportunities fairly frequently.
Best of all, you’ll develop an entrepreneurial mindset of being able to identify value imbalances and profit opportunities, something that could eventually lead to a full-fledged business of your own.