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Ebay Basics: How To Keep Your Profits From Evaporating

Aug 17, 2007
If you're fairly new to eBay, or business in general, you may be scratching your head and wondering why your profit isn't what it should be. This article looks at some ways to plug the profit hole and keep you afloat!

There are two main aspects to ensuring profits in business - and this applies to any business, eBay or otherwise. Let's look at them in turn. The first is the gross profit margin.

This is the term applied to the portion of any sales amount that is the profit element. For example, if an item costs you $50 and you sell it for $100, it's tempting to think you've made 100% profit. This is incorrect - what you have in fact done is applied a 100% mark-up to your cost, which equals a 50% gross profit margin. This, for newcomers to business, is a common mistake and can give the trader a much rosier view of their profit margin than is real.

Also, the difference between gross profit margin and nett profit - the magic 'bottom line', so called because the nett profit always appears on the bottom line of a profit and loss sheet - is something not always fully understood by newcomers to business and trading. Put simply, nett profit is what you have left after everything else is paid out. These payments include such things as rent for premises, rates, staff wages, transport and insurances. These cost elements are usually known as overheads.

Although a full explanation of overheads is beyond the scope of this article, basically they are, as described above, anything that is not classed as 'direct costs' - defined as what you pay for your stock. Too often these overheads are either ignored or simply forgotten - and this can have a disastrous effect on the difference in the amount of money you should be making and the amount you actually are making.

This difference can, in some businesses - especially those in high-volume, low-margin markets - mean either success or failure. So - what can be done to ensure that this does not happen to your business? For that we turn to the second aspect of ensuring profits in business: price setting.

Price setting literally means just that - setting the price for any item that you are selling. Again, a full discussion on price setting is too large in scope for this article but, basically, you must set a price for your item that will do two things - firstly, the price must be competitive (you have to sell your goods!) and secondly the gross profit margin must be sufficient for you to make the nett profit you require.

This may seem very straightforward but there is one 'hidden' charge that is regularly overlooked by those traders who use eBay and PayPal on either a regular basis or as a core business vehicle. This is, of course, the percentage charges levied by eBay for listing your items and also the final value fees. As for PayPal, the charges for accepting money via their service are significant. In fact, to set a price for an item that will take into account eBay and PayPal charges the formula is cost price + required profit + 15%. This is a rough figure but certainly not far off the mark and a good 'rule of thumb' to work to.

What this means in real terms is this: buy an item for $50. Say you want a 50% gross profit margin - plus $50. Now say you sell your item. Your overheads (so you think!) equal $30, leaving you with a nice $20 bottom line nett profit. Whoops! You forgot the eBay and PayPal fees! These equal roughly 15% of you sale price which is $15. Suddenly your $20 nett profit is reduced to a measly $5!

This equation is even more important when selling items on eBay by the auction format. It's very tempting to just put the item on at $5, or $9.99, or whatever - 'because everyone does that'. I beg to differ. Many people may do that but the ones making money are those who stick to a formula such as the one I've listed. If your item does not sell, or regularly falls below the price you think is viable - choose another market or maybe another supplier.

The moral of this article is simple. Always, always examine all your costs before setting your selling price. Failure to do this may not result in total disaster - but you will be making far less than you should be!
About the Author
Steve Dempster writes informative articles for the web and is also an eBay shop owner. To learn more about levering your eBay sales, take a look at A New Life 4U
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