The Economics of Online Selling : Episode 5 of the Hustle Lab

You know there will be fees. You understand that companies like Amazon and eBay make their money from the commission they charge for selling your stuff through their portals.

Despite that knowledge, the reality of the economics of selling through eBay and Amazon can take you by surprise if you haven’t calculated it all in advance.

Sometimes it feels like everyone else gets more out of your effort than you do.

Let’s take a closer look at the selling value chain for the auction flipping side hustle.

The eBay Value Chain

Let’s assume I see something for sale on an auction site for £69.44. I think I can sell this for £150 on eBay. That sounds like a good deal, right? £80.56 in profit less the various fees should leave me with a decent margin.

Let’s looks at this transaction closer.

First, the auction house will charge a bidder’s premium of 20%, so that’s £13.89 of cost. UK VAT (value added tax) is charged on the item, at 20%, so another £13.89 is due to the tax man. UK VAT is also due on the bidder’s premium of £13.89, so £2.78 there also.

In fact, if you add all that up, the item’s cost me exactly £100 to buy. So far I’ve made nothing but the tax man has made £16.67, the auction house has made £13.89 and I’ve paid someone £69.44 for something to sell.

Now I need to ship the item from the auction house to me. Since it will be part of a larger group of items (I don’t buy my stock one item at a time), this number will depend on the weight of the overall package and how much of that cost is applicable to this one item. Let’s call it £1.

Now I list it on eBay. It costs me £0.35 to list, then when it sells (assuming it sells for £150), eBay will charge a 10% final value fee which comes to £15.00. So eBay have now made £15.35 and the buyer needs to transfer £150 to me.

But wait, eBay more or less forces you to go through their partner Paypal, and Paypal charge fees for receiving money on your behalf. £0.20 plus 3% to be precise, which adds up to £5.45.

I am now required to send the item to the buyer. Let’s assume the item is a small parcel that needs to be boxed, I can buy a box for £1.99 and then send it second class with signature on delivery for £3.86, for a total of £5.85.

My final calculation for this transaction is :

eBay trade transaction detail including fees, costs, transport and commission

Looked at visually, here are all the leakages from the value chain before I get my cut:

eBay Costs, Fees and Value Chain
Costs associated with selling items on eBay

What originally looked like a 216% profit, or £80.56 in my pocket, has turned into an 17.5% profit, or £22.35 in my pocket.

While everyone else did some work to earn their share, I as the buyer and seller took all of the risk in the transaction, but ended up with less than a third of the overall profit generated.

What risks?

  • I had to put my money at risk to carry out the trade by buying the item and only getting paid back when it sold. eBay, Royal Mail, the taxman and others did not
  • The item could have been defective or too worn to sell at full value
  • The item could have failed to sell at the price
  • The item could have been lost in transit
  • I had the cost of stocking the item and keeping it in good condition until it could be sold
  • If the item had failed to sell, that would be my problem
  • The exercise was time-consuming, requiring multiple transactions with various suppliers, trips to the post office, mailing supplies and the writing of an eBay sales listing
  • Particularly annoying is eBay’s policy to charge you a final value fee on the shipping cost as well as the item cost. Paypal’s fee also applies to the total amount received, so in the end you are forced to subsidize at least a part of the shipment to the customer

This is not to complain. 17.5% is not outrageously low and £22.35 is not a negligible amount of money, but it is not, in my opinion, a worthwhile return on the investment and risk in this case. You can also optimize slightly on this – if you have a lot to sell, you could buy your boxes 100 at a time for a significant discount, for example.

To make this hustle worthwhile, you need to find better trades than this. Alternatively sell something that scales to large quantities with less risk, and that requires less effort than sending stuff out individually to people.

The Amazon Self-Fulfilled Value Chain

Amazon is similar to eBay, but perhaps slightly slicker and more professional in the feeling you get when you use it. eBay feels informal, Amazon feels like a huge, grinding machine.

The self-fulfilled process is most like eBay. You list your item, someone buys it, you go to the post office and mail the item to them. After we look at this, we’ll consider the fulfilled by Amazon alternative, where Amazon does much of the heavy lifting for you, at a price.

Costs, fees and commission on selling items through Amazon
Costs associated with selling items on Amazon

The numbers, as you can see above, are almost the same. The difference is mainly in the referral fee, which Amazon varies depending on the category. Some items are charged as low as 7%, others as much as 15%, with a couple of narrow categories being charged 40%. Amazon are skimming your profits with discriminatory pricing.

Which is better? Amazon or eBay?

The answer to a question like this is always it depends.

Amazon is going to be more expensive for some items, less expensive for others. More importantly, some items will sell faster on Amazon, and prices will vary (in both directions) depending on the item and the platform.

In my experience, I’ve found it easier to sell used items through eBay because I have more control over the description box and I can make more detailed comments about the state of the item, justifying the price.

New items sell better through Amazon. There appears to be an assumed trust for transactions on Amazon that doesn’t exist on eBay.

It’s on a case-by-case basis, but my experience tells me that it’s easier to handle just one platform rather than two, so I’d pick one and specialize in products that are appropriate to the platform.

The Fulfillment By Amazon (FBA) Alternative

Finally, we have the hands-off approach, where Amazon take your stock, you create your listings and when someone orders or returns a product, Amazon deals with the logistics.

Amazon can do this at a very competitive price, largely because they deal with so much shipping and logistics that it’s simple for them to just add your stock to their pipeline.

From their point of view, they’ve crowdsourced their stock and they’re taking profit from every transaction.

The neat little trick in the pricing structure here is that Amazon charge you for every item sent. If a customer buys six or seven items, each seller will get charged an FBA fee per item.

Are Amazon going to send six or seven boxes? Of course not.

They’re going to send one box with all the items in it, thus saving lots of money compared to the fees they charged the sellers. Another sneaky source of profit for the giant in the room.

In the pricing below you’ll notice the absence of the listing fee. That’s because to use FBA you have to be an Amazon professional seller. That means you pay £25 per month to Amazon, and they waive the listing fees. I kept it in before to remain comparable with eBay. Bear in mind therefore that there’s a £25 per month fee to add to all of the numbers below.

Costs associated with selling items through Amazon FBA

The advantage of FBA Is you get to do all your stock handling in one go, labelling your products and setting up a shipment to FBA. Then you send it and Amazon deal with all the logistics from that point forward. This is a massive time saving, and it’s impossible to imagine scaling this hustle very far without relying on some kind of fulfilment company to deal with the logistics on your behalf. Amazon is the biggest sales outlet in the world, so it’s a good place to start and a good partner to have.

There are several downsides, however :

  • If Amazon don’t like your product, they’ll arbitrarily mark it as inactive and label the stock as ineligible for sale. It can take weeks to figure out why they did this and can be super-frustrating
  • Amazon aren’t very quick about receiving stock. It can take 14 days before everything is where it needs to be. In my experience it’s rarely much quicker than that
  • You completely lose control of your stock. To get it back you need to make a withdrawal order and pay for shipment back to you
  • There’s a stockholding fee (which is not outrageous), which means the longer you hold stock with Amazon, the more you’ll pay for them for the space

It’s also worth repeating what I said in a previous article: Amazon don’t let you sell everything, and branded products are often gated, such that you cannot sell them without permission from the brand owner or proof that you purchased the stock from an approved wholesaler.

Conclusion and Lessons Learned

There are a lot of deductions that come into play before you get to book your profit. Until you reach the end of this chain, everyone else is feeding at the trough at your expense, because you’re the one who financed the transaction and carries all the risk.

It’s therefore worthwhile to find stock that sells for a very significant profit, since it has to be shared with so many people.

Shipping costs are not big individually, but these items move around so much that it adds up. Also don’t forget to add the cost of the packaging itself, items don’t get mailed to people naked.

A lot of the cost in the above models comes from the initial purchase at auction. The title of this series is auction flipping, so that’s part of the formula here, but it’s worth thinking about what the profits would be if you didn’t have so expensive and unreliable a source of product. An online sales model doesn’t have to involve products you’ve bought from second-hand goods auctions!