July 27, 2016 15+ min read

This story appears in the August 2016 issue of Entrepreneur. Subscribe »

Fred Ruckel was an advertising guy. At 25, he started his own agency, and over 12 years he developed commercials for the Super Bowl, Lays and Pepsi. But he never considered himself a Mad man. “I’ve always been an inventor,” he says. A tinkerer. An explorer. He was a guy with ideas but no time to pursue them. So in 2011, his wife, Natasha, gave him the gift of a lifetime: Quit your job, she said. She’d cover the bills while he built a new career. Ruckel immediately went to his business partner and said, “I’m out. I’m going to go change my life.”

He opened a production studio. He sunk $30,000 into an app. He experimented. And on Valentine’s Day 2015, as his wife was playing the piano at home, he watched their cat, Yoda, discover a new toy: a rug under the couple's drum set. It had become rippled, and Yoda swatted at the resulting funny shapes. Ruckel knew: This was it.

He called it the Ripple Rug. It’s stupidly simple, as all great cat toys are: There’s a small rug, you see, and on top of that is another rug. The top rug, attached by Velcro, is full of holes. It’s designed to be a crumpled mess, with bulges and tunnels for cats to explore. Soon hundreds of yards of carpet and Ripple Rug designs cluttered Ruckel’s home. So in June 2015, the couple made another concession to inventions: They left Manhattan, where they’d lived for 22 years, and moved upstate to a house they built as a future retirement home. There, Ruckel would truly have space to invent.

Ruckel hired a factory in Georgia and developed a way to make every Ripple Rug out of exactly 24 recycled bottles. The product debuted in September and went live on Amazon in December. Sales quickly spiked to $2,000 a day, and he became obsessed with the numbers. “Amazon is, without a doubt, Kickstarter on steroids,” he says. “It’s adrenaline. It’s like crack -- ahhhhhh, all day long.” There’s another word for this drug: validation. He was finally a successful inventor.

Then his brother-in-law called.

“Did you see that people are selling your Ripple Rug on eBay?” he said.

Ruckel looked. It was true. Lots of people were selling it -- and not used, either. They were selling new Ripple Rugs. “I’m like, ‘Oh, man, what is that? They copied my stuff!’” Ruckel says. “I’m thinking, Where are they getting it? Is one of the guys in my factory selling it on the side? So I called up the factory, and of course I looked like a jackass.”

The factory was innocent. But as Ruckel kept digging, he discovered the true cause. It’s an industry of people who transform themselves into uninvited middlemen -- either as a form of reseller or, depending on your perspective, a parasite. They steal brands’ marketing materials and make money off their products, creating all sorts of consequences for small retailers like Ruckel. And yet, these people also represent a difficult new reality for entrepreneurs: In the increasingly complex world of e-commerce, everything about a brand -- from its reputation to its pricing -- can be up for grabs.

To understand what’s happening, it’s helpful to visit a different site -- the place largely credited with launching this middleman army: It’s DSDomination.com. The site, which says it has had more than 140,000 users, launched in 2013 and spawned a universe of copycats. Over a cheery ukulele, a man in a video explains its offering: “DS Domination is the first and only platform of its kind that allows the average person to harness the power of multibillion-dollar companies like Amazon, eBay and Walmart at the push of a button,” he says, like an infomercial pitchman. “Using our unique platform, any user can create an income within minutes, simply by copy-and-pasting product information from one company to another.”

The internet is, of course, full of promises like this. Work from home! Get rich with no effort! If you have a few years of your life to waste, you can go down the mother of all rabbit holes trying to understand them. Suffice it to say: Most rely on something called MLM, or “multilevel marketing” -- pyramid schemes, basically. DS Domination does offer an MLM element, but its main service is something more unique: It’s called “Amazon-to-eBay arbitrage.” It sells software and strategies to make this possible.

A quick language lesson. Arbitrage means to take advantage of price differences between markets: Buy low in one place and sell high in another. DS stands for “drop shipping,” which means to sell a product and then have it shipped directly from the wholesaler or manufacturer. In this world that DS Domination sparked, the terms are used somewhat interchangeably. But both play a role in the cleverly complex transaction that enables someone to sell Ruckel’s Ripple Rug on eBay -- and, occasionally, make more money on it than Ruckel himself does.

To see how this works in real time, I go to eBay and buy a Ripple Rug. There are five listings for the product on this day, and I select one from a seller called AFarAwayGalaxy. The price is $49.51; on Amazon, Ruckel sells it for $39.99. So, how’d this listing get here? Almost certainly, the seller is using some kind of software -- made by DS Domination or a competitor -- that scans Amazon for its best-selling products. (They can also do this on large sites like Walmart’s, though most seem to focus on Amazon). The software found the Ripple Rug, which, on the day in June I buy it, is ranked number 25 in cat toys. Then it copied everything in the Amazon listing and pasted it into an eBay listing --amusingly, right down to the part of the product description that says,“Thank you for viewing our Amazon version of the Ripple Rug.”

The price is usually set between 5 and 15 percent over the Amazon price. When I make the purchase, the person behind AFarAwayGalaxy simply goes to Amazon and buys a Ripple Rug -- but instead of buying it for themselves, they designate it as a gift and have it shipped to me. Because I paid $9.52 above the Amazon price, that’s profit, which AFarAwayGalaxy can keep (minus Paypal and eBay fees). This seller has more than 11,000 items listed on eBay. That can quickly add up to real money.

After I place my order, I get an email from AFarAwayGalaxy: “This is to let you know we got it, processed it and have sent it on to the warehouse for shipping,” the note says. Of course, that leaves out a few details. The “warehouse” is actually Amazon’s fulfillment center, which is where Ruckel stocks his Ripple Rugs.

“That’s genius!” says David Bell, a professor at the University of Pennsylvania’s Wharton School, who studies e-commerce. He’d never heard of this scheme but laughed loudly when I explained it.

As it turns out, retail experts didn’t see this coming. In 1997, in the dawn of e-commerce, a New York University professor named Yannis Bakos wrote a well-regarded paper that predicted the internet would change pricing forever. Imagine the old days: You went to a store and had no idea what other stores charged for the same products -- which meant the store you were in could jack up the price. But once everyone could comparison shop online, Bakos reasoned, every site would likely have to offer the same price. And yet, it turns out, many shoppers don’t do the research. If they like eBay, they buy on eBay. Simple as that. Bell’s conclusion: “I think if you’re a small guy, you just have to accept the fact that the platform is the place where the product is going to be sold.” But which platform, and at which price? That’s hard to control.

Ruckel wasn’t feeling so laissez-faire. The more he understood what was happening, the angrier he got. At first, he was protective of his product. “Brand consistency is primo for me,” he says, and the eBay listings were often janky. But then he began seeing an uptick in returns and pieced together what was happening: Someone orders the Ripple Rug on eBay, but the product shows up in an Amazon box. The customer is confused, goes to Amazon, sees how much cheaper the product is there and feels ripped off. “Who are they immediately mad at?” Ruckel says. “The people at Ripple Rug, not some person from nowhere!”

The customer then returns the product, setting off a crazy series of events. Let’s say I want to return the Ripple Rug I just bought. I’d push the “return” button on eBay. AFarAwayGalaxy would then go to Amazon, acquire a return label (which is free for Amazon Prime customers) and send it to me. But because eBay sellers can set their own return policies, AFarAwayGalaxy reserves the right to charge customers a 20 percent “restocking fee” -- which in this case would come out to about $9.90 -- as well as a shipping fee. Meanwhile, Amazon would charge Ruckel a return fee and ship him the product so he could inspect it. Almost always, Ruckel says, returned products have been opened and are covered in cat hair -- making them impossible to sell again.

So, in total: I could have lost more than $10. Ruckel would lose $19.51 (that’s the $2.05 per unit it costs him to stock at Amazon’s warehouse, $12.06 in nonrefundable fees for Amazon to process a sale and $5.40 in return fees). And AFarAwayGalaxy, the only person in this transaction to never spend a dime, just made enough money for lunch.

The fees add up. Ripple Rugs have been returned to Amazon 219 times -- that’s nearly $8,000 in losses since December -- and while Ruckel can’t prove they were all arbitrage-related, he says that sales through his own website have yielded only one return. That’s why this whole thing makes him furious. He has appealed to eBay and Amazon, but arbitraging doesn’t appear to violate either platform’s rules. Amazon declined to comment for this story. An eBay spokesman told me, “We don’t specify where sellers obtain the products they sell.” Hitesh Juneja, DS Domination’s cofounder, says he has “a very good relationship with eBay.”

And so, Ruckel has tried taking his campaign to the arbitragers himself. He’s gotten into email arguments with them. He finds other anti-arbitrage sellers and swaps strategies. One of those people, Eric Wildermuth, who sells a line of children’s hats called Snuggleheads, came up with a particularly sneaky punishment: He bought his own hat from an eBay arbitrager for $27 -- and then, before the arbitrager could go to Amazon and make the purchase, Wildermuth changed his Amazon listing price to $199. Result: The arbitrager could either lose $172 on the sale or cancel the purchase, which would damage the arbitrager’s eBay ranking. Wildermuth repeated this about 10 times. “I got these frantic calls [from the arbitrager]. He said, ‘Please don’t do this,’” says Wildermuth. “He knew what I was doing. And I let out a string of expletives.”

This summer, Ruckel tried a new approach: He put his own product on eBay and titled it “All other eBay sellers are fake.” A few weeks later, he stumbled upon an eBay listing with a familiar title. “All other eBay sellers are fake,” it said. It wasn’t his, of course.

Someone had copied that, too.

There is an argument Ruckel doesn’t like very much, and it goes like this: Hey, what’s the big deal? Sure, the arbitrager eBay listings are ugly. And sure, someone else made a buck on your hard work. But returns are the cost of doing business. And ultimately, if 1,000 arbitragers sold your product, that’s 1,000 more products you sold at the price you set. “If someone was doing that with my book, and I was selling a few more books, I’d be all for it,” says Bell, the Wharton professor. (Note to arbitragers: It’s called Location Is (Still) Everything. You’re welcome).

This, you will not be surprised to learn, is also the attitude of the arbitragers. “The mentality is, they’re making money for these people’s products,” says Anthony Hull, founder of Profit Scraper, a company that offers arbitrage software. “It’s that person who’s getting paid for that product in the end. For him to say he just wants control is damaging, really, to him, in terms of reducing his potential sales volume.”

Hull says he grew up working in controversial businesses, although not initially by choice. His dad was disabled and employed as a switchboard operator, which paid poorly and was unfulfilling, so he was desperate to find a better source of income. That made him an easy mark for work-from-home schemes. The older man signed up to sell supplements, import paintings from Hong Kong and all manner of other odd tasks. Hull, who was a child at the time, became his dad’s assistant. “That experience always stuck with me,” the younger Hull says, “of seeing my father often conned out of the little money he had.”

Hull grew up and eventually got a degree in business information systems. He spent years as a web developer and took a short detour into carpet cleaning. When DS Domination came out, he was intrigued: Could this really work? He tried out the process and was impressed but felt he could build better software. In April 2014, he launched Profit Scraper.

I ask why he’d even entertain internet schemes, after seeing the scams his dad fell for. “Maybe it’s me wanting to do something where, OK, I am promising something, but I’m fulfilling the promise as well,” says Hull, who lives north of Manchester, England. Sure, some of his customers are just looking for easy money -- but they don’t last long, he says. The people who succeed in arbitrage want to work hard but have limited options. He’s had users with lost limbs or sick relatives. His customer service adviser works from home, caring for her disabled daughter. He has hundreds of people who pay for his software, and some sell hundreds of items every day. “If I’m able to have a career and help people --people like my dad, who are struggling -- it’s very fulfilling, and that’s why I continue to do it.”

Ruckel is deeply skeptical of stories like this. He sees arbitrage companies repeatedly bend the truth, and now assumes that everything he hears from sellers must be untrue. For example, what happens if a customer asks, Why did my order arrive in this Amazon box? “Tell them you are environmentally conscious and like to recycle packaging,” says the online sales site MarketingBoard.biz. One arbitrager admitted to me that he tells customers, “I use Amazon as a fulfillment center.”

But what’s undeniable is that get-rich-quick schemes -- whether they’re online sales or Trump University -- mostly attract people who are down on their luck. And many will stay that way. On the front page of the website for Profit Spy, another arbitrage software company, an animated man dances under a cascade of dollars. “Guaranteed to make it make rain,” the site says clumsily, and promises that Profit Spy is “ideal” for people who need a “source of income that will be around forever.” But on a separate page, Profit Spy says that “any reliance” on its claims are “strictly at your own risk.” The DS Domination and Profit Scraper websites also carry disclaimers; those say there’s no guarantee of profits. I spoke with one woman who has used DS Domination for years, but her best month brought in $800. She’s disabled, divorced and says she has an attention deficit disorder, and she lives with her son and daughter-in-law in Kentucky. “I tend to wind up fiddling around all day and then realizing, eight hours later, I didn’t get anything done,” she says. She has 50 items listed on eBay. She sold two in the past month.

Not all arbitragers have a hard-luck story, though. Some, like Julie Becker, just consider themselves online entrepreneurs.

Becker lives in Georgia and once held a traditional corporate job, but office culture turned her off. “I just thought, This is my life, and I can choose to live it the way I want to, and I don’t have to do this,” she says. She discovered those MLM companies -- the multilevel marketing, where, pyramid-style, one person recruits another and gets a cut of their sales -- and tried out a few with varying success. In 2013, she signed up for DS Domination, paying $19.95 a month for its arbitrage training sessions. “I really was blown away,” she says. “This is very step-by-step, very basic stuff that people can do at the most rudimentary level.”

Like many online marketing businesses, DS Domination has multiple buy-in levels. Committed users can pay for more complex training, where they learn revenue-building tricks like generating cash back, using gift cards and optimizing sales tax collection. But DS Domination has also evolved past arbitraging. It now teaches its most advanced users how to produce their own products and sell them on Amazon. Becker tried it, loved it and gave up arbitraging altogether. She developed a brand called Juligo, a niche in camping equipment, and found a particular hit with a headlamp. It’s just an ordinary, generic light made by a Chinese manufacturer, which she had stamped with her brand. “I’ve sold tens of thousands of those buggers, a ridiculous amount,” she says. “On those alone, I’ve done more than six figures of gross sales over the course of a year.” Now she regularly invests $10,000 in new inventory, has it shipped to her home so she can inspect it for quality and then sends it off to Amazon’s warehouses -- where it’s sold just like the Ripple Rug.

The Juligo headlamp has become a top-selling item on Amazon. And we all know what happens to top-selling items: They get arbitraged. Other people -- Becker’s peers -- are now selling her headlamp on eBay and making a few extra bucks off her work. Does it bother her? “I think it’s awesome,” she says. “I can earn some income, and they can earn some income. It’s really fun to watch that.”

At its heart, none of this is new. In the Mycenaean period, no doubt, some clever ancient Greeks were arbitraging wine. Ticket scalpers are arbitragers. People have accused McDonald’s of arbitraging meat, selling the McRib only when pork prices drop. The difference today, however, is the breadth of commerce happening on just a handful of platforms. In exchange for the massive, unprecedented reach companies like Amazon and eBay provide, a product like Ripple Rug must relinquish some measure of control and identity. It is not a box on a shelf, carefully positioned and branded. It is a clickable subject line, a few photos and some text. And in this environment, it wouldn’t even occur to most customers to wonder: Who’s actually selling this?

That’s a frustration for brands, who want long-lasting relationships with their buyers. “Amazon’s great in a lot of ways,” says Ben Hantoot, cofounder of the wildly popular game Cards Against Humanity. “Everyone trusts it, the shipping is incredible, but it’s bad in that you don’t really have fine-tuned control over the customer experience.”

Hantoot’s game is regularly arbitraged on eBay. He doesn’t care. eBay is also full of counterfeit versions of Cards Against Humanity, so he’s happy that the arbitragers, who are at least selling his product, will rise to the top. But the big platforms remind him about how much brands crave that fine-tuned customer experience -- and how many e-commerce problems, including arbitrage, could be lessened if brands directly reach their fans. So to accomplish that, he has cofounded a fully customizable system called Blackbox. It isn’t a platform like Amazon; rather, it powers sales on a brand’s own website. Blackbox processes transactions, as well as warehouses and ships product. Brands control everything from the packing slips to the language in the confirmation email, and could easily block arbitragers if they wanted to.

Blackbox is rolling out slowly, and is currently in use by five companies. But Hantoot doesn’t expect an instant revolution. “We tell our clients and prospective clients that you also have to be on Amazon,” Hantoot says, “just because that’s where so many people go to shop and literally won’t shop anywhere else. If you don’t sell on Amazon yourself, someone else will, and they’ll sell it for a marked-up price, or it could be counterfeit.”

Three days after I order my Ripple Rug, in fact, I get my own surprise from Amazon. The cat toy arrives at my door inside a plain cardboard box. There’s no Amazon logo anywhere. Inside, there’s no receipt. The only clue to this box’s origin, in fact, is an easy-to-miss note at the bottom of the address label: “Follow Amazon on Instagram!” it says.

This is highly unusual in arbitrage. The game, it seems, has changed.

I send a message to AFarAwayGalaxy. How did you do this? I ask. I get an email back from Drake Leacock, which he says isn’t his real name. He won’t reveal how he shipped in a generic box; he calls it a trade secret. But he does say he has worked in “various online businesses” for 20 years, started arbitraging about a year ago and has good news for opponents like Ruckel: Arbitraging has become too popular for its own good.

When Leacock started, he says, he was able to make a decent living. But now more and more people are flooding eBay with identical listings. “You have no idea how hard it is to make money at it these days,” Leacock writes. “Only the big guys are making money, and not nearly as much as people would think. The attrition rate is sky-high for new people in this business. Very few will make it.”

Ruckel isn’t waiting around to see how it all ends. In June, he raised his price on Amazon by $4 and included this note in his description: “We have increased our price on Amazon to cover fees, lost inventory, abusive returns and fake eBay sellers.” Then he launched the Ripple Rug 2, a redesigned version of the original, which won’t be available on Amazon. It’s being sold only through brick-and-mortar stores and on his own site, and is now $4 cheaper than the original. “We’re hoping we’ll use Amazon for people to see it and go, ‘I want it. And wait, there’s a better version? But it’s not on Amazon? Fine, I’ll go buy the better version,’” he says.

He’s also stopped using Amazon’s warehouses. He worked out a system to do shipping himself -- saving on fees, which in turn will allow him to lower his price. It will also avoid odd hiccups where, for example, all his Amazon inventory was suddenly unavailable for a few weeks in June. Ruckel, of course, suspected the arbitragers had found some way to reserve it all, though he couldn’t prove it.

If his plan works -- and given how many customers don’t comparison shop, that’s a big if -- his direct Ripple Rug 2 sales will overtake the Amazon sales of Ripple Rug 1. And as his Amazon sales drop, the original will become less attractive to arbitragers. And then he’ll be free.

If it doesn’t work? Well, he says, then something else will have to give. He sometimes spends three hours a day fighting the arbitragers. That’s three hours a day he could be inventing, which is the reason he got into all this in the first place. “As my wife says, we’ll have to not sweat it the way we do now,” he says, “because it’s too much anxiety to live with. It’s super stressful.”

His fallback plan: He’ll just sell as much as he can on Amazon, and hope for the best.