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The Economics of Online Sales

Selling Books on Amazon

Amazon's fee for books is roughly $2 + 15% of sale price. The 15% fee is a little high, but there's no PayPal fee like with eBay payments, and it's worth it IMO. Amazon charges a bit less than the 15% for all items other than books. Fortunately, unlike eBay, they don't charge a listing price, so if your book doesn't sell -- as happens quite often, especially with textbooks that have suddenly become obsolete -- then you're not out any money. You can see a detailed explanation of Amazon's fees.

In order to be worthwile to bother buying and reselling something, you have to be able to profit from the affair. Since

Profit = Revenue - Cost

and we need Profit to be positive, we need Revenue to be greater than cost, or

Revenue > Cost

As stated earlier, Revenue is the amount you get for selling the item online minus the overhead that Amazon/eBay charges, minus whatever other overhead such as shipping you incur.

Let's look at the example of selling a textbook on Amazon. From the description of Amazon's fees the overhead for selling a book with Domestic Standard shipping is roughly $1 + $1.23 + 15% of sale price. In addition, although Amazon reimburses you $3.50 for standard shipping costs, I usually pay about $1.50 more, depending upon packaging materials and weight. In other words,

Revenue = 0.85 * sale price - $3.73

with the $3.73 being the constant overhead of $1.00 + $1.23 + $1.50. So, for Revenue to be positive, eighty-five percent of the item's sale price must be greater than $3.73. So if you already have a book (i.e. you don't have to buy it used), and you're wondering whether it's worthwile to sell it on Amazon, you must sell it for at least $4.39 or you're losing money.

Now, what if you're at a used book store and you're wondering whether you should buy a certain book. From before, we have

Profit = Revenue - Cost

with Revenue the same as before (from selling the book online, minus overhead) except this time we have a cost — the cost of buying the book. If the book is on sale at the bookstore for $2, then

Profit = Revenue - $2

Profit = 0.85 * (sale price) - $3.73 overhead - $2 cost

In order for Profit to be greater than zero, you must be sure you'll be able to sell it for at least $6.75 online. If you're not sure you'll be able to sell it, you could come up with a guesstimate of the probability that the book will sell, and take that into account for expected revenue.

If you've ever went into a bookstore looking for anything of value, and been astounded by all the books there that would sell for less than $7, now you know why. Book sellers with a brain don't bother with these small potatoes.

eBay is decent for most other stuff, like electronics. Just be careful if you're selling (or buying) anything pricey, as there are a fair amount of disputes and outright fraud that goes on.

Selling on eBay

Now, let's consider the slightly more complicated case of buying a pricey electronics item online for a nice discount with rebates, and reselling it on eBay for a profit. For this example, we'll use a deal posted to SlickDeals.net on June 17. The offer is for a Sandisk Sansa e260 4 GB mp3 player that's going for $120 after rebates and coupons. The original price was $200. After applying a $30 instant coupon code, a $35 manufacturer's rebate, and a $15 rebate, it costs only $120.

Well, not so fast. That's assuming we get all the rebates in. I trust Office Depot rebates, more or less. Let's be liberal and say we have a 90% chance of getting the $35 rebate back alive. I'm a little more skeptical of the $15 rebate from SanDisk, especially since there's only one UPC to mail in for two rebates, leaving us to photocopy and pray. Let's give SanDisk a 75% chance of giving our $15 rebate to us. We'll assume the coupon code has a 100% chance of working (i.e. we wouldn't go through with the offer if the coupon code didn't work at checkout). That leaves us with an expected price of:

Price = $200 - $30 coupon - 0.9 * $35 rebate - 0.75 * $15

Price = $127.25

Let's assume that you have excellent feedback, and that someone would be willing to pay slightly less than market value on eBay for a new SanDisk e260. Doing an eBay search for " Sandisk e260", it looks like people are willing to pay roughly $180, with shipping, for it on eBay assuming modest luck, decent feedback score, etc.

Here are the eBay Insertion and Final Value Fees, and PayPal fees. Someone's put together a handy Ebay/Paypal Fee Calculator that will do the work for you. Using the calculator above, a starting bid price of $1, and a final sales price of $165 + $15 shipping, it looks like eBay/Paypal skim a total of $11.38 off the whole shebang. In other words, our Revenue from eBay comes out to:

Revenue = $165 - $11.38

Revenue = $153.62

While the total price we paid for the item, with only $1 overhead, was $128.25. We can now calculate our expected profit,

Profit = Revenue - Costs

Profit = $153.62 - $128.25

Profit = $25.37

So we expect to make about $25 off this deal. Note that if you had neglected to take eBay overhead, Paypal fees, rebate shipping costs, and rebate uncertainties into the equation, you might have falsely concluded that you wold make $45 off of this deal.

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