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: “Trust me, you really will get to use this stuff some day.”

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, let’s 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 let’s look at his listing fee first.

Click 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 let’s 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 – 56.98) = $23.67

That works out to about a 28% gross margin. That doesn’t 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 didn’t 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 ÷ 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 seller’s 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 –and even less than it was selling for on amazon.com. But he didn’t 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 –and 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 don’t 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.