Supply and Demand on eBay

How to know what to buy and when to sell

Sometimes it's not enough to merely have something to sell.

If your only goal is to hold a garage sale on eBay and turn your old junk into quick cash, eBay's a no-brainer. List stuff you're not using anyway, get paid, and smile all the way to the bank. If on the other hand you plan to turn eBay into a small business, a supplemental income, or even an occupation, you're going to have to be much more careful about what you buy and later sell.

eBay is a Fluid Market

It is true that nearly everything will sell on eBay. It is also true, however, that many things on eBay typically sell at well below retail value because of eBay's nature as a near-ideal market: every seller can approach every buyer at the same time with no barriers, real or imagined, to trade. For manufactured goods that are neither rare nor out of production, this potential for near-infinite supply has the effect of driving prices down.

At the same time, the rapidity with which stock can enter and leave the supply chain on eBay leads to a marketplace in which demand can fluctuate as rapidly as consumer tastes. If you're a seller that has invested real money in your inventory with the expectation of generating a return, you don't want to be caught suddenly with worthless stock!

In order to stay above the fray and make money, you need to understand how demand for different types of items behaves on eBay, and be able to make smart business decisions accordingly before you buy.

The Types of Goods

There are four major categories of goods that are the most viable foundations for eBay businesses: limited-life goods, general goods, seasonal items, and investment or collectible items. Each of these has its own demand characteristics and is suited to a particular size, type, and temprament of seller.

Read on to learn about each of them.

Examples of Limited Lifetime Goods

  • Laptops
  • Television sets
  • iPods and MP3 players
  • Some clothing and accessories
  • Current movie or television merchandising goods

How Demand Works—In Brief

  • Absolute demand is limited early in the product life cycle, but due to extremely low supply before and at the time of product launch, even limited demand among early adopters can drive prices very high.
  • Demand increases steadily, but supply tends to increase even faster as the market sees opportunities to move product and production ramps. This drives prices gradually downward.
  • When the product reaches end-of-life, liquidation stock enters the market in large quantities just as demand drops off in anticipation of the next product or fad, causing prices to fall precipitously in the flash of an eye—not years or months but weeks or even days.

Understanding the Market and Pitfalls to Avoid

Limited lifetime goods are goods that live in the world of product cycles in one way or another, meaning that the current incarnation of the product (whether it is a video game console, a movie action figure, or a designer purse) is only valuable until it is replaced (whether by an upgraded console, the next movie's action figures, or the next big designer's hot accessory).

The key to selling in this area of the market is timing—which makes it a precarious way to sell. Though these issues also arise in brick-and-mortar inventory management, you must remember that on eBay to be early you have to be earliest in the world, and when you liquidate, you're not selling off to a constrained market, but to a single global market in which the entire worldwide liquidatable stock for this product is simultaneously on offer.

Can you compete? If you're not sure, watch out!

Selling Early

When sourcing, you'll pay much more early on in the product cycle, but if your sources can get you sellable product with a window of opportunity before it is available to the general marketplace, some of the highest margins to be made on eBay are to be made here. As an example, witness the prerelease sales of game consoles like the XBox on eBay. The sellers who get them before or at release can enjoy one-to-two week window during which they can sell the items for two or three times the value they'll hold just a few short weeks later as supply increases.

Selling On Time

If you don't have the ability to source product before the rest of the market, you'll have to compete in-cycle along with everyone else. Here you're operating much more like a traditional business—your margin comes from efficiency, good source relationships/deals, and volume discounts. Just be sure you don't buy yourself off a cliff by failing to anticipate the final part of the cycle.

Selling End-of-cycle

If you're a gambler, this may be the place for you. End-of-cycle selling is tricky, risky, and timing-intensive. Your goal here is to buy product in volume just as it hits liquidation channels but before demand has dried up as the result of market saturation or the public's anticipation of the replacement product. There is usually a window, but you must be critical and smart. Are you really ahead of the market, and can you really buy liquidation stock early and cheap? If so, you can make a killing buy buying at liquidation prices and selling at near-reatil prices.

Beware though that during this part of the cycle, demand is not increasing—at best, it hasn't yet started to exponentially drop—but by pushing this additional liquidation supply into the market, you and your competitors will cause it to drop, along with prices.

If you buy too late, too high, or too much, you'll lose your shirt, as this type of stock typically loses 90 percent or more of its value once the next product cycle begins in earnest.

Examples of general goods

  • Kitchen appliances
  • Bulk batteries and other consumables
  • Supply-unlimited hobby goods
  • Hardware and tools

How Demand Works—In Brief

  • There are still product cycles here—make no mistake—but they tend to be much longer, and the drop in demand at their end is not so rapid, usually tapering off over months or years, rather than overnight.
  • Demand is constrained almost entirely by supply—the more there are on eBay of any one type of item, the less each listing of that type will generate in revenue.
  • Used, recycled, and refurbished goods are important components of this marketplace. With a longer product cycles and stable pricing, many consumers will seek to buy on price alone.

Understanding the Market and Pitfalls to Avoid

Of all the types of goods you can buy and sell on eBay, general goods and consumables behave the most like traditional business goods. It's here where room can be found to become a success the old fashioned way: through hard work, frugality, good customer service, and generally sound business practices.

Note, however, that this also removes many of the motivations that people most often list for wanting to sell on eBay, including the ability to achieve massive profits by timing the market or leveraging exclusive relationships, the possibility of rags-to-riches business models in which a single buy-and-turnaround nets millions, etc. These instant wealth stories are true, but there are many failures for every success.

If you're just an honest, common-sense businessperson looking for a way to migrate your operation to the 21st century through eBay, then general and consumable goods is the ticket for you. Source frugally and with an eye toward quality, stay away from limited-life items, work hard and provide good customer service, and be patient.

You'll grow and prosper—slowly.

Don't Try to Do It Fast!

The word "slowly" bears repeating here because eBay has a tendency to create problems for sellers who want to grow too quickly. Remember that every market—even eBay—is of limited size.

Too often a seller who has found a niche is lured by the physically unconstrained and global nature of eBay's selling space to overlist or oversell in a market. The truth is that eBay does not scale linearly forever. Buy too much stock and post too many listings at once and you'll find that you've driven your price down all alone thanks to oversupply.

A seller doing fine at 50 listings a month might find that with 200 listings a month supply has exceeded demand and his auctions are now competing against themselves. Not only do items end up selling for less than they were selling for before, but a percentage of the items are now also going unsold entirely, creating a revenue sink out of listing fees and overhead.

Diversify

Sellers in this market also need to be aware of the unending possibility for new competition to arise. Remember that on eBay all sellers share the same floorspace—there is no way to corner a local market on anything. When you do well selling something, someone else will inevitably see your success and will try to duplicate it. By diversifying your sales, you hedge against the possibility that you'll lose half your revenue in a flash the moment another seller decides to move onto your turf.

There is always money to be made in general merchandise and consumables on eBay, but you must remain flexible and light-footed in order to make it work. To rely on any one relationship or type of product indefinitely is to fail sooner or later.

Examples of seasonal items

  • Holiday decorations
  • Recreational equipment
  • Weather-specific apparel

How Demand Works—In Brief

  • Both supply and demand reach peak before the season in question—for natural seasons, generally in the preceeding quarter; for holiday seasons, generally in the leading two months.
  • Demand begins to decline in advance of supply once the season is reached, gradually driving prices downward and leading into eventual liqudiation.
  • Liquidation occurs during the period immediately following the season and demand is low, limited primarily to those looking for good deals in anticipation of the season's return next year. If the goods aren't time-limited, liquidation stops once the overhead of maintaining the goods until next seson becomes less than the losses incurred by liquidating them now in the face of waning demand.

Understanding the Market and Pitfalls to Avoid

It's no shock that Christmas items don't sell well in March, or that bikinis have a limited sales appeal in January in the United States. In short, the best way to source seasonal goods is to buy those that will retain their value across annual cycles so that overstock doesn't become worthless if you can't move it all in time. It's also clear that the best time to buy is on the opposite ebb of the annual cycle, essentially two quarters ahead, when prices are at liquidation levels.

If you buy later to get "this year's" goods, keep your eyes open about whether or not you're buying limited-life goods that will have to be sold this year.

Beware, too, that you'll face direct competition from competitors still selling last year's goods, picked up at liquidation prices in anticipation of this year's season.

Timing the Seasonal Goods Market

The demand curve for seasonal goods is similar to the one for limited-life goods, but there is by and large no early adopter premium. Except in very specific cases, there is little benefit to buying goods high early in hopes of being able to sell them to irrationally hungry early adopters.

If the value of your sourcing deals is primarily in product quality, brand, or other non-price metrics, the best time to hit the market is just before the listing glut that will drive prices down. If you can be the one to convince buyers to shop for an upcoming season before the other sellers begin to list, you'll stay ahead of the demand curve and your stock will enjoy some of the best pricing of the season.

If the value of your sourcing deals is primarily in low price, the best time to hit the market is during the seasonal buying boom, when your low buy-ins mean that you can undersell your competitors just when consumers are doing seasonal shopping in the greatest numbers.

Examples of collectible and investment items

  • Antique furniture
  • Keepsake clocks and timepieces
  • Fine jewelry
  • Baseball cards, beanie babies, and comic books and figures

How Demand Works—In Brief

  • Demand in these markets depends on two things: limited supply and expert sentiment, for which many euphemisms exist—public opinion, market regard, preferences of a collecting or investing "community," conventional wisdom, etc.
  • Watch out for unexpected supply gluts, for example of the kind that can occur when a major player's assets are liquidated or sold off, as this can cause the bottom to drop out of a market with little or no notice.
  • Two spheres of demand exist. The much more consistent one is built on long-term scarcity and reputations for workmanship, desirability, or value that have accrued over years or decades. The other demand sphere fluctuates rapidly and comes from collecting or investing "fads," usually at the hands of the media or experts (often with vested interests). Avoid these unpredictable areas of the marketplace (or at least don't try to leverage the fluctuations for profit) unless you are an absolute professional in your chosen market, beyond mere buying and selling.

Understanding the Market and Pitfalls to Avoid

Naturally, sourcing in these markets is largely a matter of luck, insider information, expertise, and long-standing relationships. Generally speaking, these are difficult and risky markets to enter if you don't already have a passion for and knowledge of the market in question, beyond the desire to buy and sell.

These are also much slower markets, with limited room for sellers that will make a good living exclusively trading in them and nowhere else.

A heavy premium is placed on relationships and reputation, both of which are slow to build, and shifting product is often a much slower process—supply is very limited, yes, but so is demand, often to just one or two people in the world. Even if they're saving up specifically to buy the item that you want to sell them, there's no revenue in it for you until someone who wants the item actually has the money to buy it.

Investments and Collectibles: For Experts Only?

To summarize, consistent income in this eBay market depends on a myriad of factors, many of them requiring a solid foundation of product experience:

  • Both breadth and depth in inventory
  • Multiple sales channels (eBay alone is unlikely to suffice)
  • Absolute dedication to quality and customer service
  • Personality or personalities amenable to a business that trades in relationships and individual amiability/reputation
  • Enough knowledge of the product to separate the wheat from the chaff at an expert level
  • Enough knowledge of the marketplace to separate fads from real value and to spot coming shifts (for example, from unexpected dumping of previously rare goods)

In short, this is probably the toughest market to break into and one of the hardest to leverage when building a business around eBay sales.

The risk varies wildly, almost entirely with your own level of expertise: if you're a major player or expert already, there is relatively little risk to you if you have sound business sense and good customer service. If you are a newcomer to the market, the risk is very high, since you don't yet know what you don't know, to coin a phrase.

Of all the markets or types of goods you can choose to build your business around, however, the investment or collectible goods market is the most satisfying to its sellers, and the one for which eBay remains the most famous.

The Choice Is Up To You

However you choose to build your business, whether it's with limited-life pop culture gear, general manufactured goods, seasonal fun, or valuable antiques, there are basics that will carry you far: treat your customers well, protect your feedback, and never be afraid to change what isn't working for you.