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Is buying wholesale to resell on eBay a viable business model? Product-sourcing is an important issue for eBay and online sellers, and in today's issue, we invited two sellers who also write about eBay to debate the wholesale option.
First, Michael A. Banks discusses the challenges of wholesale selling on eBay and describes the negative cycle that can occur when saturation is reached. Then Skip McGrath talks about the advantages of wholesale sourcing for online sellers.
Point: Buying Wholesale Leads to Saturation
by Michael A. Banks
 I wonder whether buying wholesale for resale on eBay is really as attractive as some folks think it is, what with thousands of sellers offering the same kinds of new merchandise on eBay - merchandise they're buying from similar wholesalers at similar prices.
The wholesalers from whom the sellers obtain their goods are constantly bringing new customers on board - which means they're creating competition for their customers. Fanning the flames are eBay experts of all stripes who preach buying wholesale as the route to financial independence.
There has to be a saturation point, a point at which the market is so crowded with sellers that the average number of customers per seller drops below a profitable level. When this happens, sellers will be faced with some hard choices. Some may opt to cut their margins. This may result in price wars. Other sellers may add sales incentives, like free shipping or bonus merchandise. Either way, they'll be making less money per sale.
Unless there is a sharp increase in buyers for what the sellers are offering, two things can happen. Enough sellers will drop out to allow for an increase in market share for each remaining seller (or a return to regular prices). Or, enough sellers content to make fifty cents an item will remain, and permanently dilute the market.
There's a wildcard, too: those sellers who find themselves stuck with a lot of merchandise and feel obligated to keep on keeping on and cut their prices still more just to break even, or not lose too much money. Many more will hang on because it's so simple and cheap to sell on eBay that hanging on and hoping for a sales leap is easy. Which will of course delay any increase in sales for the majority of sellers.
Note that seller overcrowding applies mainly to low-end and more common merchandise. Pricey electronics and other high-end items are unlikely to draw an overly large number of sellers simply because the cost of getting into the business with that kind of merchandise will discourage most.
No matter how much or how little retail sellers are making, wholesalers will continue to sell. Even if there are 3,000 online retailers serving a market that generates only enough profit for 300 retailers, the wholesalers and gurus will continue to create more competition.
Counterpoint: Wholesale Sourcing Can Pay Off
by Skip McGrath
 Unless you are going to sell used goods that you buy from garage sales and thrift shops, you are going to have to buy wholesale from someone.
When I started in the early days of eBay, the site was predominantly a market for used goods, handmade products and collectibles. New goods tended to be liquidation items. However, by 2000, popular consumer goods started showing up in large quantities and large companies began selling directly on eBay. Pretty soon massive competition for hot consumer products heated up and prices started falling. The result was that weaker sellers were pushed out of the most competitive products. This left two types of successful sellers - those who have the capital to buy in large quantities and therefore lower prices, allowing them to make sustainable margins - or those sellers who were somehow able to command higher prices by distinguishing themselves with service or unique positioning.
Today a third type of seller has emerged. Sellers have discovered that they can use sales on eBay as a loss-leader to capture customers for their web site. This is a growing trend and is further reducing prices, making it harder to make decent margins by selling just on eBay.
But does any of this mean you can't make money buying wholesale and selling at discounted retail prices on eBay? The answer lies in your business model and strategy. If you can afford to purchase popular consumer goods in large quantities (therefore lower prices), the low operating costs of selling on eBay as opposed to selling offline should allow room for profits as long as you achieve high sell-through rates and keep your costs under control.
The other option is to focus entirely on a niche product or market that doesn't attract massive competition, and provide a level of service and benefits that allow you to command higher prices. This is the model we follow, and it works for us. I often have competitors show up selling the same goods I am selling and trying to cut prices. The normal response many sellers have is to react by cutting or matching their price. Instead we ignore them. I know and understand the product and selling costs and know that the competitive seller cannot survive selling at a lower price point for long. The result is they usually disappear within a few weeks.
The other strategy successful sellers employ is to deal with wholesale companies that enforce MAP pricing (Minimum Advertised Price). If a wholesale vendor enforces MAP pricing, whenever you see a competitor selling at less than MAP, you simply report that seller to the vendor and the next time they try and place an order they will be denied.
So you can either sell used goods or new - but if you sell new goods, you are going to have to work with wholesalers. The trick to being successful is to find the products with minimum competition, employ strategies that insure a high sell-through rate, and command higher prices by delivering superior service and maintaining a stellar feedback reputation.
About the Authors
Michael A. Banks is the author of The eBay Survival Guide: How to Make Money and Avoid Losing Your Shirt (No Starch Press, 2005. ISBN: 1-59327-063-1). He has written 39 books and more than 3,000 magazine articles and short stories. A full-time freelance writer and editor since 1983, Banks has written for most major computer magazines, and has served as a Contributing Editor for such publications as Windows Magazine, Computer Shopper, Connect Magazine, and others. He began writing about computing for Popular Computing in 1981. In addition to writing for the computer press, Banks has contributed to a diverse range of magazines, including Writer's Digest, Science Digest, Analog Science Fiction, Cavalier, Grit, Visual Merchandising, Starlog, Modern People, Good Housekeeping, and many other special- and general-interest publications. His work has been reprinted in Japan and South America, and he has written features and columns for magazines in Japan and England. His latest book is How to Become a Full-Time Freelance Writer, published by The Writer Books.
http://michaelabanks.com
Skip McGrath is an author and eBay Gold PowerSeller. He is the author of Three Weeks to eBay Profits, Ten Little Known, Highly Profitable eBay Niche Markets and publishes the eBay Seller's News, a free monthly newsletter for professional eBay sellers. Besides writing about eBay and the internet, Skip and his wife Karen, run a full-time eBay business under the username mcgrrrrr. They sell in a series of niche markets including Eskimo Art and Collectibles, Firepits and Barbecue grills, chef's knives, books and the EZ Cube light tents.
http://www.SkipMcGrath.com
http://blog.skipmcgrath.com
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