Understanding Supply and Demand on eBay
By Skip McGrath
I remember studying supply-and-demand theory in Economics 101 at UCLA. When the teaching assistant took to the stage in the auditorium and put the supply and demand curve up on the board and explained it, I thought to myself: "It's a good thing I am going to school on the GI Bill. I would hate to be spending my own money for this."
To me the law of supply and demand was obvious. The fewer the supply of something and the more demand for it, the higher the price someone would pay for it. I understood the law intuitively. I couldn't understand why it was being taught in college.
I had learned the law of supply and demand by experience the previous summer. I was lying on the beach and realized I had forgotten my sunblock. Not wanting to get burned I walked over a mile from my spot on the beach to a stall on the boardwalk where I bought a tube of overpriced sunblock. It only took a moment to realize that other people lying on the beach might pay even more if they didn't have to walk a mile.
As a young college kid, I didn't have any wholesale connections. So the next day I went to Wal-Mart and bought 25 tubes of the cheapest 15 and 30 SPF sunblock I could find. I walked up and down the beach hawking my sunblock for three times the price I had paid. I sold all 25 tubes within two hours and made over $60.
I made over $3,000 that summer working a couple of hours a day hawking sunblock on the Santa Monica Beach.
This simple, easy-to-understand concept is easily evidenced on eBay today. You can see it in action 24 hours a day. Goods sell at a price that reflects the available supply and the corresponding demand at a specific moment in time. Why is the "time" issue important? On eBay, this has to do with the supply of a specific item at that very moment.
Almost everyone believes that Sunday evening between 6PM and Midnight is the best time to end an auction. This may be true in terms of getting the highest number of eyeballs that will see you auction. If you are selling an item that is in either high demand or low supply, then this may indeed be the best time to end an auction.
However, remember that eBay bargain hunters scan the auctions ending soonest looking for the one with the lowest bid price. If you are selling the same or similar item that is being sold by lots of other sellers, then you would not want your auction to end on Sunday evening when dozens of other sellers are also ending their auctions.
Here is an example. When I was in New Orleans for eBay Live last year, I purchased a dozen of the New Orleans Starbucks mugs because they are very popular on eBay. I listed one ending Sunday evening at 6PM Pacific Time. There were four other New Orleans mugs ending within 6 hours of mine. My mug still went for $21, over twice what I paid. Not bad.
But, I next listed a second mug that ended Saturday at 2PM. When I looked at the auctions on Saturday, mine was the only New Orleans mug and in fact there were very few mugs ending that afternoon. My mug went for $31. Had those bidders scrolled down to the auctions ending Sunday, they would have seen at least two other identical mugs, one of which was also mine. It went Sunday night for $22.50.
When it comes to managing supply, many sellers compete with themselves. The average eBay bidder is a bargain hunter by nature. What does this mean to you the seller when you are sourcing product to sell on eBay? It means you must pay attention to the law of supply and demand. When you are considering the purchase of inventory, the sharp eBay sellers will use research to determine if the product is selling on eBay and the prices it is selling for. They often, however, neglect to research the supply.
It's important to look not only at other seller's prices, but to look at the price trend of a product over the past 30 days. Has the price been holding steady? If so, the supply is probably in equilibrium with the demand. But if prices are falling, look at how many listings there are. Have the number of individual sellers and the number of listings increased over the past 30 days? Are there more Dutch Auctions for the product? (Dutch auctions are a favorite way for eBay sellers to dump inventory quickly.)
Let's say your research shows that 300 units of Tommy Hilfiger polo shirts were listed on eBay in the past month. You calculate the average selling price (ASP) of the shirts to be $35. What is going to happen if you buy a pallet load of 500 shirts and start listing them on eBay? You will have more than doubled the supply. A supply increase of this magnitude could drive the price down to below $25. If you paid over $15 each for the shirts, this is a pretty small margin. Worse yet, as the other competitors see the prices drop, they may start dumping their shirts to get out of unprofitable inventory, thereby accelerating the price decline.
You should always be aware of what your competitors are doing. But, sometimes you have to be careful not to compete with yourself. If you are the cause of too much supply, you can drive prices down all by yourself, lowering yours, and everyone else's margins in the process.
About the author:
Skip McGrath is the author of numerous books and training courses related to selling on eBay and Amazon at SkipMcGrath.com and he also publishes a twice-monthly free eZine, The eBay and Amazon Sellers News.
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