Learn The Math if You Want To Make Money on eBay
By Skip McGrath
I was always mathematically challenged when I was in High School, but
somehow the Nuns and Brothers managed to beat the basics into me. As I went
through life, I learned what every parent and teacher tells every child when
they are studying math was true: ďTrust me, you really will get to use this
stuff some day.Ē
Nowhere is that more true than on eBay. Not understanding the math can
really cost you money. If you want to make money on eBay you really need to
understand the numbers and learn how to calculate your true selling costs.
When researching a new product I always check out the competition before I
place a wholesale order for something to sell on eBay. Recently I was
researching a new product and found one major competitor. At first when I
looked at his auctions I thought this might not be the product for me. But
when I looked closer and did the math, I realized this seller was not making
much money, but I probably could.
Before I show you the example, letís take a moment to consider the cost of
selling. This particular product (a kitchen product), has a unit cost of $49
each when I buy them by the case. The MSRP on this product is $125 and the
MAP (Minimum Advertised Price) is $99.
This seller was selling them on eBay with a listing (starting) price of $79
and a Buy-it-now (BIN) price of $89. So letís look at his listing fee first.
here to see the eBay Fee Schedule
Since he is starting his auction at $79, his listing fee is $2.40. When I
looked he only had one BIN sale. Most of his sales were at or very near the
starting price. The average was probably around $82. That means his final
value fee is $3.16. If his buyers paid with PayPal, the PayPal fee will be
2.9% + $0.30 = $2.67
So letís look at his cost so far:
Unit cost: $49.00
In-bound Shipping 2.90
Listing Fee 3.75 (including gallery and bold)
PayPal Fee 2.68
Total selling cost $58.33
Gross Profit ($82 Ė 56.98) = $23.67
That works out to about a 28% gross margin. That doesnít sound too bad.
But the problem is this seller has a lousy Sell Through Rate (STR). The STR
is the percentage of auctions that close successfully. When I looked he only
had 3 sales for every 10 auctions, an STR of 30%. That means that he paid
listing fees on the other seven auctions that didnít close with a sale.
So if he sold three units with a profit of $23.67 per unit, he also paid
$26.25 in unsuccessful listing fees. If you divide that by the three units
that sold, you have to subtract ($26.25 ų 3) = $8.75 from his profit. His
profit per unit is now only $14.92, or 18% per unit. If he sells three units
a week, that is a total profit of $44.76. That is a lot of work for only
$44.76. Now if you were selling a product like this in huge volume, that
would be different, but the total market for this product on eBay is
probably no more than 20 to 30 units a week.
Looking at this you might think why I would also want to enter this market?
There are several reasons. First of all I have related products that I can
upsell to this product from. For example if you sold a French Coffee Press
you could upsell a coffee bean grinder or vice versa. Upselling, or cross
selling as some people call it, is one way to cancel out the negative result
of poor STRs. The other option is to increase the STR.
When I looked at this sellerís auctions, he was only using a stock photo
from the manufacturer. By taking a couple of photos of the product in use I
could probably increase the STR by one of two units a week. The other issue
was his description. He described all of the features but hardly mentioned
the benefits or why this product was better than competitive products. He
was also selling the product for less than it sells for in retail stores and
mail-order catalogs Ėand even less than it was selling for on amazon.com.
But he didnít point that out, so no one thought they were getting a bargain
unless they already knew about the product.
Lastly was the issue of his starting price. Other sellers of similar
products are getting higher STRs Ėand slightly higher final values, by
starting the auctions at a lower price.
So by my reasoning this looks like a good product to sell. If I can achieve
an STR of 50% it will be fairly profitable. If I can get 75% it will be very
profitable. And, if I can upsell just one out of four customers, it will be
extremely profitable. (I upsell from my payment email and web site, so there
are no additional eBay fees.)
As you can see it really pays to understand eBay math. If you donít know
your true costs it is very easy to do a lot of work, sell a lot of product
and not have any money left at the end of the month.