How do I start an online auction business? eBay and Beyond

How do I start an online auction business? eBay and Beyond

Description of Job

  • Sell nearly anything to almost anyone over the Internet.
  • Choose your method of sale: auction to the highest bidder, fixed price, or Dutch auction of multiple items to multiple bidders.
  • Use automated processes to bill buyers, collect a payment, and prepare shipping labels and computer-generated postage.

The Needs for the online auction business

From the dawn of time, humans have bought and sold nearly every imaginable product and service. Commerce started as one-on-one sales from growers or artisans to individual buyers. It moved on to retail stores and later catalog companies that brought together inventories of goods to sell to many individuals. Built into the price of everything sold were the costs of showcasing goods in a store, printing and mailing catalogs, and paying the salaries of salespeople and telemarketers.

With the advent of the Internet, though, came an incredibly efficient, low-cost marketplace that blew down nearly all of the costly walls that stood between seller and buyer. The champion—and one of the few great successes of the Internet age—is eBay. Launched in 1995, the value of goods traded through its web site was expected to exceed $24 billion in 2004. More than 105 million users around the world buy and sell items in more than 50,000 categories.

As sellers, eBay and similar sites, including Amazon Marketplace and Yahoo! auctions, allow you to clear out your attic, empty your closets, and conduct a virtual yard sale, offering items to anyone with a connection to the Internet and a mailing address. Don’t limit yourself to the idea of a yard sale; tens of thousands of businesses exist entirely as storefronts on eBay or other services. They buy new items at wholesale, used goods at other people’s tag sales, whole collections from hobbyists, and antiques from estates, dealers, and individuals.

Challenges in the online auction business

As with any business, you have to find a way to buy low and sell high. The proceeds for items sold at auction should include your cost for the item, the cost of listing it with the service, computer costs, shipping costs, and a reasonable profit for your time and effort.

Before you go out and buy a truckload of bobble-head dolls to resell on eBay. Make sure there’s enough of a market for that item at a profitable price. Here’s an example of how these online services can help you run a very efficient business:

You can easily check the success of other sellers offering similar items. You can watch the progress of an auction, from its opening bid to its final selling price, and even determine the number of bidders.

Depending on the type of item and the auction site you use, you may have to deal with a certain percentage of returned merchandise and an occasional bad check. (Many sellers use the services of the auction site to collect payment by credit card. Or insist on money orders or bank checks as payment.)

Know the Territory

The biggest and most successful online auction company is eBay. You can learn about its services and fees and browse through tens of thousands of items by going to its web site at www.ebay.com.

As eBay has expanded beyond its original auction-only business, it now offers several choices of selling methods:

  • Auction. You set an opening price and promise to sell your item to the highest bidder above that floor.
  • Reserve price auction. You set an opening price, which is published on the site, and a reserve price, which is not disclosed to bidders. If the highest bid does not meet or exceed the reserve price, you are not obligated to sell the item.
  • Dutch auction. If you have multiple identical items, you can sell them in a single Dutch auction. Bidders offer a particular amount for one or more items, and all items sell for the lowest successful bid. For example, if you have three clocks for sale, all three will sell for no more than the third-highest bid.
  • Fixed price. You can offer items for sale at a fixed price, without an auction.
  • Buy it now. You can set a buy-it-now price that will halt the auction if a buyer agrees to that price.

You can select the time limit for each type of offering. The standard run for an item on eBay is usually seven days.

Yahoo! auctions are listed at http://auctions.shopping.yahoo.com.

Amazon offers a service allowing sellers to list new and used books and many other items for sale at a fixed price. Listings for these products appear on the same pages as prices charged by Amazon and major retailers. Currently (as of 2004), there is no charge to list an item in the Amazon Marketplace; fees are levied only on actual sales.

Amazon also offers Amazon Auctions, which functions similar to eBay’s offering. For information, consult www.amazon.com.

How to Get Started online auction business

Spend time trolling the sites of all of the online auction sites. There is no charge for electronic window-shopping.

Look at the sorts of products that are offered for sale. Most sites, including eBay, allow you to see the opening price and the progress of bids over the course of an auction.

If you see lots of people selling the same sort of product you hope to sell, that’s not necessarily bad news; it probably means there is a healthy market for that item. Only you can decide whether you can make a satisfactory profit at the going prices.

If you cannot find similar products for sale, proceed cautiously. It may mean that there is no market for the item you want to sell, or it may mean that you have something that is extremely rare.

Up-front Expenses

You will need access to the Internet. There are no advertising and promotion costs associated with most auction sites.

Depending on the type of product you are selling, you may want to post a digital picture with your ad; you can purchase or borrow a digital camera or a scanner to create a file.

How much to charge for the online auction business

There are five elements to consider here: (1) the price you receive for the sale of the item. (2) The listing fee from the auction site. (3) The final fee based on the actual selling price for the item. (4) The cost of shipping the item to the customer. (5) Charges for accepting payment from your customer by credit card or debit card.

The beauty of an auction—if you are reaching the right audience for your product—is that you are participating in a relatively pure form of capitalism. The price you receive is the highest any of the bidders are willing to pay.

Of course, in most cases, you don’t want to sell items at prices that are lower than your costs or significantly below what you think the item is worth. There’s bad news and good news here. In a standard auction, you are bound to sell the product to the highest bidder, which could be at too low a price.

The good news is that most online auction services allow you to set a reserve price, a floor below which you are not willing to go. For example, you could offer a used camera for sale and allow opening bids of $10 to get the process going. As part of your listing, though, you may set a reserve price of $100. Bidders are not informed of the reserve price, but the site will notify them if their bid is below the reserve.

Online auction sites generally charge a listing fee and then an additional charge based on the actual selling price of the item. You can also choose extra cost services, including featured positions, boldface or color listings, and multiple photos.

We’ll use as an example some of the elements of eBay’s plan; others are similar. Currently (as of 2004), the insertion fee for items with an opening bid price of less than $25 is about 60 cents; the fee for items with a starting price of $50 to $199 is about $2.40; and items with a price starting at $500 or more have an insertion fee of about $4.80.

If you register a reserve price with eBay, the company adds a fee of as much as 1 percent of the reserve price. If the item sells (which means it is purchased at a level above the reserve price), the additional fee is refunded.

Then there is a final value fee. As of late 2004, eBay charged 5.25 percent of the closing value for items that sell for $25 or less. For items selling for as much as $1,000, the final value fee is 5.25 percent of the initial $25 plus 2.75 percent of the remainder. Items selling for more than $1,000 are assessed a slightly lower overall percentage of the selling price.

For most online auction sales, you should add a set fee to your product to cover shipping. Spend the time to research actual costs, and list a realistic price for shipping. If you set the fee too high, you will scare off knowledgeable buyers; if you set the fee too low, you will reduce your actual profit. Most of the auction companies, including eBay, offer guidance on shipping costs and may even have links directly to the U.S. Postal Service, United Parcel Service, and FedEx to help you calculate costs and arrange for shipment.

Finally, you may have an expense associated with accepting credit cards or direct debit from checking accounts. In 2004, eBay’s affiliated company Paypal charged about 3 percent of the total amount (including selling price and shipping costs) for its services.

You do not have to use a company like Paypal. Although there is great value in receiving immediate payment for orders. If you deal directly with buyers, you may want to ask for bank checks, postal money orders,

Or other forms of guaranteed payment, or delay shipment until personal checks have cleared.

Legal and Insurance Issues for the online auction business

Special notes: The online auction business site will require you to agree to its seller’s agreement; there is little if anything you can do to modify it. You will likely have to give the company an active credit card account number or a debit account for direct payment. The company may reserve the right to assess charges or penalties for actions that violate the agreement. If you plan to make this an ongoing enterprise, consult an accountant to determine the proper form of business for your operations. An insurance agent may recommend a business owner’s policy.

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