eBay: An Analysis From the Seller's Perspective

I recently did some spring cleaning by selling a number of old electronics on eBay. Over the past few years, I have used the online auction site less and less as it has simultaneously increased its fees more and more. Yet I decided to give it another shot, while statistically analyzing the process to find out where the major fault point lies. I was surprised to conclude that shipping costs, rather than service fees, are the scourge of the eBay seller.

Revenue and Income

After the dust settled, I had received $1037.82 in payments from the winners of my auctions. I also incurred $212.55, a whopping 20.5%, in expenses. Undoubtedly, losing over one fifth of my revenue is far too much to make online auctioning a sensible and practical endeavor. However, I was still interested in assessing the role of each separate cost in creating such significant overhead.

Paypal Fees

For convenience and security, I always use PayPal for online transactions. Sure, it means that I get charged for a simple transfer of money that could be completed otherwise. Yet, in the online auction world, PayPal is a godsend. Before it existed, paying for something on eBay meant going out to purchase a money order, mailing it to the seller, then waiting for the seller to receive the money order and ship the product. This process could take two to four weeks in total. Now, most transactions can go from end to end in only one week. Payment takes place immediately and, if the seller is responsible and prepared, shipping follows closely behind. In my latest experience, the PayPal fees totaled $31.90, or 3.1%, of my total earnings. This fee is both negligible and reasonable.

Ebay Fees

Ebay's notorious nickel and dime fee fest is a step up from PayPal's system. Not only are sellers charged an "insertion fee" based on the initial value of their products, but they are also taxed for each minor customization made to a listing. As if that was not enough, the largest charge comes at the end of each auction in the form of a "final value fee," calculated based on the price at which an item was sold. In spite of its irritating and devious fee structure, I found my eBay costs to be entirely reasonable. The service charged me $54.63, which amounted to 5.3% of my total proceeds. Considering that eBay exposes me to a vast number of potential buyers, in a relatively safe and secure environment, and all but guarantees a sale each time, I think that five percent is acceptable.

Service Fees Together

Together, PayPal and eBay fees accounted for only 41% of my total expenses and 8.4% of my total revenue. When I think of most middleman services, I imagine numbers like 10 or 15 percent, so 8.4 actually comes in lower than one might expect. Indeed, if these were the only fees associated with online auctioning, it would be difficult not to sell everything through this medium. I would even argue that this is the design behind eBay. Alas, online auctioning demonstrates yet another classic case of ideals and intentions going unrealized in the reality of practice. I will discuss this point later, but for now I will move on to analyzing the rest of my expenditures.

Packaging

Boxes, bubble wrap, and tape are the least that one can do to mitigate the damage incurred to one's lonely package as it travels through the rigors of the United States Postal Service system. There is nothing more cheesy than receiving an item in its original box with a postage label slapped on it. There is nothing more unbearable than receiving an empty original box, because the shipper was too cheap and lazy to conceal the item within a generic folded slab of cardboard. Packaging is vital to retaining one's pride and credibility to people whom he will never encounter in person. Yet it costs money, and thus, is a necessary evil at the same time. Packaging supplies cost me $25.61 or 2.5% of my received payments. I found this to be a pretty sizable fee, considering that I only bought the few basic necessities required to put my items in transit. Unfortunately, things have to be shipped in something, so I did not exactly have a better option.

Shipping

Mailing costs themselves are nothing special. The postal system has been around for quite a while and shipping is shipping. However, it turned out to be, by far, the most costly item on my list of expenditures at $100.41. Yes, shipping costs singlehandedly ate away 9.7% of my total revenue. It must be noted however, that eBay allows sellers to specify shipping fees associated with their auctions. In total, I charged buyers $109 for shipping, which means I estimated the costs rather well and ended up making an extra $8. Now you may be wondering why I have pinpointed shipping costs as the failure point in the online auction process. There happens to be more than meets the eye, for buyer behavior regarding shipping costs pins sellers in a losing situation.

The Psychology Behind eBay Shipping

Consumers on eBay are not stupid. They are exceedingly thrifty and well-informed. Hence, they know what an item's retail value is, both online and off. From a buyer's perspective, shipping costs are part of the total price paid for an item, as if it were purchased in a brick and mortar store. Of course, this is untrue, as shipping a product is the entire difference between online and in-person shopping. Rather than paying a premium for the delivery of items purchased online, buyers instead expect shipping to be discounted from the price of their items and manage to exhibit this behavior across the board. For example, a $20 DVD in the store costs the purchaser $20. That same DVD on eBay, with a $3 shipping fee, will never be bid above $17. Thus, buyers force sellers into a losing situation by coupling shipping costs with auction bid prices to form an imaginary total price in their minds. Naturally, this total price must be lower than the price of an item in a physical store, else why would a buyer expend the effort to go through the online auction process and wait for an item to arrive in the mail? The DVD still costs the seller $3 to ship, regardless of the final value of the auction. Since a buyer would never bid $20 for the DVD (because it would yield a total buyer cost of $23, which is greater than the cost of the DVD in a normal store), the seller always loses out on 100% of the shipping cost. Consequently, in spite of the fact that shipping coverage is designed into the eBay system, sellers are never able to realize compensation for their mailing costs in practice.

In addition, the problem is only compounded by the perceived, and increasingly unwarranted, "eBay discount" that is expected by buyers. It derives from ancient fears that dictate that online shopping is unsafe, unruly, and risky to the point that a 10% or more discount on every item sold is standard. In reality, the aforementioned $20 DVD with $3 shipping would never receive a bid higher than $13 and may be more likely to sell between $3 and $7. It is this assumed risk, however over exaggerated that it may be, along with the relative hassle of the auction process, that consistently renders eBay the cheapest place to buy a given product.

On a side note, perhaps it goes without saying that this situation is an enormous win for buyers. Essentially, they get a double discount on everything that they purchase; one for shipping, one for the eBay factor.

How To Be More Profitable On eBay

Amidst the eBay shipping phenomena, there may still be a way to run a profitable business through the service. I believe that the key to mitigating shipping expenses is to auction items that have low to no mailing costs associated with them. For example, small objects like keychains and iPod accessories can be sent with minimal packaging and shipping expenses. Better yet, online services and electronic products (i.e. website memberships, ebooks) can be delivered at no cost to the seller. These may not sound like very appealing items, but this technique can be witnessed by some of the largest sellers on eBay. It is common for full-time dealers to sell uniform, low-cost items in very large volumes. Furthermore, while it is impossible to fully counteract the "eBay discount," I think that the low-value, high-volume technique is the seller's best opportunity to do so. This is because a buyer will be less committed and fearful of his purchase if it is inexpensive to begin with. For example, if a $1 keychain happens not to show up, the customer is probably not going to lose sleep. On the other hand, if one bought a car on eBay that never arrived, it would be a serious matter to deal with. Hence, a buyer is more likely to pay $1 for a $1 keychain than he is to pay $6000 for a $6000 automobile.

Conclusion

All things considered, I am surprised that there is still such a thing as an eBay store. I cannot imagine that having upwards of 20% in selling expenses can yield anything more than a minimal profit percentage. While this margin can work if sellers distribute massive quantities of low-value items, the sheer volume required to do this comes along with significant logistical burdens. Nonetheless, I find the eBay situation to be most intriguing. The site's approach and policies are not a problem. Rather, the online auction market is determined by its consumers. Their fears, desires, and behaviors have consistently determined that eBay sellers are responsible for shipping costs and an additional product discount beyond retail prices. Thus, although the auction process extends the end to end transaction time, eBay is almost certain to be the least expensive place for a consumer to make a purchase.

In terms of selling, I prefer to exhaust other avenues prior to resorting to eBay. I find that local sources, such as social networks and classified ads (both offline and online) are the best places to start. They do not charge fees and the transactions happen in person, which avoids shipping costs. eBay is better used as a last resort or an opportunity to get rid of something very quickly, albeit at a significant discount relative to other avenues.