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In Our Words / Article

eBay 101: Using the World’s Largest Auction House for Fun and Profit

Part 3: How eBay Makes its Money

By Justin Laby, Co-founder, Mouko, LLC

One doesn’t need to buy or sell an item on eBay to understand why the service has been so popular and profitable. Over the years, eBay has shown tremendous resiliency, proving that even after catastrophic events it can emerge unscathed. The following chart and timeline illustrate how well eBay has weathered storms over the years, including the bursting of the Dot Com Bubble.

The first reason eBay has remained so successful is because a dearth of competition exists. Since its inception in 1995, eBay has become the de facto standard for selling “stuff” online. Many unnoticed competitors exist, such as uBid and MightyBids, but eBay continues to dominate the online market. Even many traditional auction houses like Sotheby’s have given up on the idea of direct competition and themselves utilize eBay’s “Live Auctions” service for Internet bidding. [1]

The company also has a voracious appetite for smaller entities, including California-based Craigslist, which was a modest competitor until 2004 when eBay acquired 25% of it [2]. Only the Internet giant, Google, which recently announced the development of a competing service called “Google Base” stands a chance of establishing any sort of rivalry in coming months and years. [3]

Another reason for eBay’s success is its fee-based business model, which allows the company to reap the benefits of others’ work (listing an item, taking pictures, assuming liability, and so on) at a relatively low overhead cost, and without the need to keep a static inventory or to do shipping themselves. Throughout the selling process, eBay generates income by applying small fees. There are fees to list an item, fees to add features to the listing, a “final value fee” when the item actually sells, and many more. Finally, if a buyer opts to pay with PayPal, another portion of sale amount is taken as well; and PayPal is a subsidiary of eBay.

The fee schedule for eBay and PayPal is relatively complex and constantly subject to change, so any attempt to keep a list up-to-date here would be futile. Instead, I will just provide links to eBay’s and PayPal’s published rates.

Individually, eBay fees do not tend to be expensive, usually only a matter of cents. As of the writing of this document, an item listed with a starting price of $40 incurs only a $1.20 insertion fee, but when combined with the final value fee, several optional fees, and a PayPal fee, your profits can begin to shrink very rapidly while only eBay sees any rewards. Thus, it is important to consider carefully which optional fees to apply to your item when you list it. The following list of fees gives a brief description of what each fee is and why it may be applied. The list is not all-inclusive, but defines many of the most common fees you will encounter.

Insertion Fee

The insertion fee is a mandatory fee to list an item on eBay. The fee varies depending on the starting price you set for an item. For example, if you set the starting bid on your item to be 99 cents, the insertion fee will be much lower than if you were to set it at $100. To entice more people to sell items on eBay, the insertion fee for the first item listed will be waived (as of January 2007).

Listing Upgrade Fees

A large number of optional fees exist that are designed draw more attention to your listing than to others. Ranging in cost from 10 cents to $40 or more, these optional upgrades will almost certainly attract more eyeballs to your item. The challenge is finding the balance between the cost of listing upgrades and the value they provide such that you will generate the highest possible profit. Some of the listing upgrades follow.

Gallery

A gallery photo is a small icon that appears next to your item when someone searches for it. Items with pictures next to them get far more attention than those without. If you choose to omit a gallery picture, your item will be represented in listings only as a textual description of your item with a green camera icon.

Gallery Plus

Like the gallery, this option shows a picture of your item, but when when someone moves their mouse over the icon, a larger picture will appear.

Subtitle

When you list an item on eBay, you are given only one line of just a few words to describe it. People who discover your item likely did so because they typed keywords into eBay’s search box, which matched those words to your item’s title. Thus, your item’s title in one of the most important things to consder when listing your item. If you add a subtitle, additional information will appears below your item in search listings. This can be a very useful feature in high-value items.

Bold, Highlight, Border

If you would like your item to appear in bold-face lettering, with a border, or with special colors, any of these features are available for a substantial fee. Each of these features will draw the eyes of many more people, but because of the cost, they are usually only worth using on high value items.

10-Day Duration

Auctions on eBay are generally 3 days, 5 days, or 7 days. If you would like your auction to go for 10 days, you may pay a fee. Choosing your auction’s duration is an important strategic decision that I will discuss in a later article.

Scheduled Listing

You can choose the starting time and date of your auction (up to 3 weeks later) if you pay for a scheduled listing. As is the case with the duration of your auction, the decision of when to begin (and thus end) your auction is of tremendous strategic importance.

Gift Services

Around holiday time, this feature becomes particularly valuable. By paying this fee, your item will acquire a “gift” icon, indicating that you are happy to provide services such as gift wrapping, expedited shipping, or shipping to a third party.

Home Page Featured

For a large fee, your item can have a chance to be featured on eBay’s main page. It is never guaranteed to appear on the home page of www.ebay.com, but there is a very good chance that many people will find it there. At $39 and up, this feature is one of the most expensive and should only be used for very high-value items.

List in Two Categories

Items in eBay are categorized hierarchically. For example, a Babe Ruth baseball card might be categorized in “Sports Memorabilia & Cards > Cards > Baseball > New York Yankees > Prints” or maybe it would seem better in “Sports Memorabilia > Vintage Sports Memorabilia > Photos.” By default, your item will be listed in one category of your choosing. If you would like your item to be listed in two categories, it could double or more the insertion and upgrade fees.

Reserve Fee

If you want to guarantee that your item sells for some minimum amount, but don’t wish the bidding to start at that price, you may set a reserve bid for a fee. If the reserve is not met, your item will not sell. If the item does sell, the reserve fee will be refunded.

Buy It Now Fee

If you would like to give buyers the option to buy your item for a fixed price, skipping the auction entirely, you may add a “But It Now” button to your item. If anyone places a bid on the item, however, the Buy It Now features disappears. This fee varies, depending on the price you set.

Final Value Fee

If your item sells, eBay will take a mandatory fee based on value of the final bid. The fee is a percentage of the final value and the percentage taken decreases as the final value goes up.

PayPal Fee

If a buyer chooses to pay with PayPal, a flat rate is taken from the money transfered.

eBay is also profitable is because they have made wise investments in companies that provide services to eBay members, such as PayPal, which allows buyers to pay for purchases via credit card or bank transfer, and Skype, which enables members to communicate about items via the Internet using voice or video.

Finally, possibly the largest reason for eBay’s success is the tremendous utility and profitability of the service to the public. An enormous amount of effort has been spent by eBay in making the user experience as simple and useful as possible. With over 200 million members, everyone who uses eBay is virtually guaranteed to find what they’re looking for, and usually with a reasonable chance of obtaining it at a fair price.

Next we will discuss how to list an item.