Business Model: Drop Shipping
Startup feasibility: HighSourcing difficulty: Low
Overhead: Low
Competitive advantage: Low
Risk: Low
How it works: The most heavily advertised eBay business model, drop shipping is the idea behind those ads you’ll hear on the radio promising that you can get rich on eBay selling stuff “you never even have to buy.” The idea is simple. You’re the eBay-based salesperson for another company, who actually fulfills the orders. You post item listings, collect money, and handle customer service, but don’t keep any stock or inventory or worry about packaging and shipping. When a buyer wins your listing and pays you, you immediately place an order to your supplier at a slightly lower cost, who delivers the item directly to your buyer. You pocket the difference.
Problems: The problems and difficulties with the model are too numerous to mention but the biggest is that most sellers simply can’t make a pure drop shipping business work. You’re purchasing in the same quantity (one at a time) as your buyers, so you get little if any discount for your markup. At the same time, you pay all of the eBay fees, as well as the shipping costs, meaning that margins are razor-thin. Worse, buyers can often turn around next time and buy directly from the company filling orders for you, bypassing your listings entirely. Meanwhile, it’s your feedback on eBay that's at stake and you’re the one legally responsible for the transaction, even though you have little control over how your fulfillment partner handles it. Finally, because it’s so easy to start this kind of business, millions have. Any kind of item that does happen to sell with a reasonable margin is instantly seized upon (within hours, not weeks or months) by dozens and dozens of other drop shipping sellers, too, creating a supply problem in which you have have heavy price competition with already razor thin profit margins while listings for the item(s) multiply out of control, seriously threatening scarcity and demand.
Potential for success: Low. Most who start this kind of business don’t continue because the sales aren't good enough (if you want to make any money) or the money isn't good enough (if you want to make any sales). Furthermore, the hassles are high and the competition is intense. On the upside, there’s very little up-front risk involved in drop-shipping when compared to other selling models; your business is closed without liabilities the moment you stop posting new listings.
Business Model: Wholesale-Retail
Startup feasibility: MediumSourcing difficulty: Medium
Overhead: Medium
Competitive advantage: Low
Risk: High
How it works: This is the classic retail business model, only taken online with eBay. You decide what sorts of goods you want to sell. Then, you form relationship(s) with supplier(s), stock your inventory with goods purchased in wholesale quantities (with corresponding wholesale discounts) and sell them on eBay.
Problems: There are two basic problems here. The first is that this isn’t a “start the business in your bedroom, tonight!” sort of operation. After you find space for your inventory and get zoning permission to operate a business in that location, you’ll find yourself searching for and having to build relationships with suppliers and needing a measurable amount of up-front capital to invest in your inventory and manage your operations costs, which include all of the usual small business tasks, right down to bookkeeping, licensing, and labor (whether yours or someone else’s via payroll). All of your investment is at risk—if your inventory doesn’t sell (or if it is eaten by mice or swept away in a flood without insurance), the loss is yours.
Potential for success: Medium. If retail is in your blood, eBay can be a great place to enter the world of online business. It’s better than opening your own website because eBay comes with a massive built-in audience. On the other hand, the competition is stiffer that you’re used to as well. This option is best for those who already have experience in retail, or who seriously want to get it, not for those who are looking for an “easy” online business.
Business Model: Liquidation/Surplus/Thrift Lots
Startup feasibility: MediumSourcing difficulty: Low
Overhead: High
Competitive advantage: Medium
Risk: High
How it works: As with the traditional wholesale-retail model, you stock your inventory with goods bought at wholesale quantities and prices, then try to sell them to individual eBay shoppers at higher prices, pocketing the difference. The twist in this model is that you’re buying goods that are rare in some way—inventories of discontinued items that nobody else will have, large grab-bag lots of surplus goods or equipment that can be had AS-IS, WHERE-IS for very little if any money, and so on, meaning that either your competitive advantage or your sourcing costs improve.
Problems: With this model you’ll have all of the difficulties involved in the traditional wholesale-retail business model plus the problem of sourcing. You’ll have significantly more legwork here. Either you’re identifying sourcing opportunities and building relationships with other companies as their liquidator or you’re combing through piles and piles of goods you’ve acquired at very low cost to separate the “sellable” from the “unsellable” and to identify, photograph, and describe the many (often unidentifiable to you) things that now form your inventory. More to the point, sourcing of this kind can be notoriously unstable and difficult to maintain, though some people seem to have a natural instinct for it.
Potential for success: High. This is really one of the business models that made eBay what it is today. The trick is to mix your own business skills and body of knowledge with unique source access that you have to find or create—access to discontinued, liquidation, or lot-packaged goods or to things like large government surplus auctions. You’ll have to get your hands dirtier than with the previous two models, but because your goods are far likelier to be unique and your sourcing costs much lower, you’ll have a better chance of making an ongoing profit—if you can maintain your sourcing pipeline.
