From the May 2005 issue of Entrepreneur

Editor's note: Looking for our online exclusives? You can find our eBay Business Center here and our free downloadable PDF, "The Entrepreneur's Guide to Doing Business Online," here .

Ten years after being formed in 1995, eBay has become the world's leading online marketplace for all sorts of goods. At any given time, 29 million items are available worldwide on eBay, with more than 3.5 million new items added every day and $1,000 worth of merchandise sold every second. The online auction site has 135 million registered users in 32 international markets, and more than 430,000 people in the United States alone make a full- or part-time living on eBay.

If you think eBay is just about bobblehead dolls and Pez dispensers, think again. While $2.2 billion worth of goods in collectibles were sold on eBay in 2004, antiques and collectibles ranked only No. 6 among eBay's sales categories. The five highest were: automobiles and auto supplies ($11.1 billion); consumer electronics ($3.5 billion); computers ($3.0 billion); clothes and accessories ($2.9 billion); and books, movies and music ($2.4 billion).

Real people are making big bucks on eBay--and thousands have even reached PowerSeller status by maintaining at least $1,000 per month in sales for three consecutive months. Case in point: Angie Cash, 37, a stay-at-home mom who started selling on eBay nearly six years ago because it was "something I could do and watch the kids at the same time." Today, her Kennesaw, Georgia, company, Cashco1000 Inc. , sells thousands of home-decoration and other items each month on eBay and expects to break $500,000 in sales on eBay this year.

Even owners of existing businesses have found success on eBay by using it as an adjunct to their brick-and-mortar operations. Dan Morphy, 33, runs the Adamstown Antique Gallery , a 10,000-square-foot antiques mall in Denver, Pennsylvania. After a few successful eBay auctions, he started offering the antiques vendors who rent space in his gallery the opportunity to sell five items a month on eBay, at no charge other than out-of-pocket expenses. Within two years, Morphy not only had a full gallery of dealers, but was also listing 700 pieces a month and had exceeded $2.5 million in eBay sales.

If you dream of building your own eBay business, it's easier than you think. We've distilled what you need to know into five basic steps.

Step 1: Register Your Business

Getting set up as an eBay seller is a simple process that takes just a few minutes. You'll be required to provide your name, address, e-mail and phone number, as well as a credit card number and your checking account information. This information is used to confirm your identity--which protects the integrity of eBay's operation--and to collect auction fees.

Since every eBay business is a retail business, you should also register your business with federal, state and local tax authorities and consider forming a corporation or an LLC to protect you against legal liability. (For more legal issues you should know about before you start, go here. )

Most eBay sellers are also encouraged to open an account with PayPal, an online payment service owned by eBay that enables buyers to pay you by credit card or by debiting their checking accounts, without you having to obtain merchant card accounts.

Find Stuff to Sell

Step 2: Find Stuff to Sell

This can be the biggest challenge in setting up an eBay business. Keep these points in mind:

  • Pick the right product. Select something you'll enjoy selling and that stands a good chance of making a profit. Avoid merchandise you know absolutely nothing about, that's difficult to describe in a short paragraph, that won't photograph well or that's tricky to ship without damage.
  • Consider cost and sale price. "Buyers and sellers on eBay set the price--you don't," says Melissa Sands, 35, who started selling on eBay in 1999 to help her husband, a comic-book dealer, get rid of excess inventory. Today, Sands runs Sands-o-Time , an eBay store selling pottery, porcelain, glass, silver, costume jewelry and more with sales averaging $8,000 to $12,000 per month. Before you buy anything, find out what other similar items have sold for on eBay and ask yourself if there's a good chance you will make money.
  • Sell related merchandise. "If you make it easy for people to buy something, they will want to buy more from you--and you have to have related merchandise in stock," advises Cash. "So, for example, if you're selling collectibles, you should also carry the display racks, books and other accessories those particular collectors will want to have."
  • Make sure you have enough storage space for your merchandise. Don't start ordering pallets of large items if your basement or garage is small, or if your front door isn't big enough to squeeze the crates through.
  • Learn how to pack and ship goods. Calculating shipping costs properly is also important. To help you with this, eBay, FedEx, UPS and the U.S. Postal Service all offer shipping calculators on their websites. Buyers really hate it if they think you're gouging them on the shipping and handling fees.
  • Don't dawdle. Jim "Griff" Griffith, author of The eBay Bible and dean of eBay Education, says many new sellers feel overwhelmed at first. "A lot of new sellers spend too much time studying the site, and that's a mistake, as you can easily get hung up on 'paralysis by analysis,'" he says. Griff advises you to start small and slow, research the market on eBay, and then put one item up to get started. "If you do it methodically and slowly, you can list your first item in an hour or so and be up and running."

For more ideas on where to find product sources, visit our Sourcing Products area.

Step 3: Manage the Auction Process

There are several types of eBay auctions. In a basic auction, you post your item with a starting price and wait for bidders to drive the price up until a closing time, which can be three, five, seven or 10 days later, when the auction ends. You are then obligated to sell to the highest bidder.
 

You can also set a reserve price, which is a hidden minimum price that is the lowest amount you're willing to accept. Buyers are not shown the reserve price, and if it is not met, you are not obligated to sell the item.

If you have two or more identical items for sale, you can post them in the same auction by using a Dutch (or Multiple Item) Auction.

If you don't like auctions, eBay also has a "Buy It Now" feature that gives bidders the option to buy your item immediately for a set price. Or you can choose a fixed-price listing, which simply puts the item up for sale at a set price, with no bidding allowed.

To sell on eBay, you'll pay a listing fee to post your merchandise and a final value fee (a small percentage of the sale price) when the item sells. These fees change from time to time, so be sure to check the eBay site to make sure you can pay all the fees and still make a profit.

A number of books offer advice on reducing the amount of time and effort necessary to create eBay auction pages, such as Marsha Collier's eBay Timesaving Techniques For Dummies , Janelle Elms' eBay Your Business and Joseph T. Sinclair's eBay Business the Smart Way . Entrepreneur magazine's Startup Guide #1824, How to Start a Business on eBay , is available at www.smallbizbooks.com .

Software can also help you streamline the auction management process. Listing programs, such as Turbo-Lister (available for free from eBay) and Zdrop , enable you to create multiple auction pages on your PC and upload them as a "batch" to eBay. Full-service auction-management programs like Auction-Helper and Zoovy handle almost everything, from inventory management to label printing.

Customer Service and Branding

Step 4: Provide Great Customer Service

Buyers will ask you questions about your merchandise, and if you don't respond promptly, they won't bid. Top-notch service also means shipping your goods to the winning buyer within two to three days after the auction closes, or as soon as you receive payment.

When an eBay auction is completed, the goods shipped and payment made, you and your buyer can comment on each other in eBay's Feedback Forum. Buyers rely on the Feedback Forum to determine how reliable a seller is. But watch out: If buyers aren't happy with your customer service or your merchandise, they will post negative or neutral feedback. Many buyers will not deal with a seller who has less than a specified number of positive feedback postings in the forum, or a seller who has too many negative feedback postings.

Unfortunately, some customers will threaten to leave negative feedback if you don't do what they want, even if they are being unreasonable. Most of the time, you're best advised to meet their demands because "the customer is always right," and because you want to avoid negative feedback on eBay at all costs.

In cases where a buyer posts negative feedback that is inaccurate or unfair, eBay affords you a limited opportunity to respond to the negative posting and tell buyers your side of the story. In extreme cases, eBay's SquareTrade service helps mediate disputes between eBay buyers and sellers.

Step 5: Build a Brand on eBay

On eBay, sellers are offered a number of tools to help establish their brand identities, including:

  • About Me: A free page that enables you to describe your business and any relevant information that would make buyers feel more comfortable buying from you.
  • eBay Stores : A virtual storefront that puts all of your current auctions together in one place, so buyers can see everything you're selling at a glance. You'll pay a monthly fee based on the level of store services you want, plus additional fees for items listed and sold.
  • Customizing Tools: A number of features (accessible from your "My eBay" page) that enable you to make your pages stand out from others offering similar merchandise.

Like any marketplace, eBay is constantly changing. "A lot of people get set in a comfort zone, especially if they have an initial rush of success," says Griff. "If you get to the point that you really feel comfortable you know what you're doing on eBay, I guarantee you there's a brick flying at the side of your head at 80 miles an hour that you're not seeing because you're not looking in that direction."

You can expect pricing and demand on eBay to change over time. As more and more people start operating on eBay, competition will increase and prices may decline slightly. Still, keep in mind that eBay has reached only a small fraction of its potential worldwide market. And it will continue to grow even faster as internet access becomes more readily available world-wide. "EBay is the leader in internet auctions," says Morphy. "It has such a strong hold on the market and such a huge following, you can't beat it."

Legal and Tax Tips for eBay Sellers

Legal and Tax Tips for eBay Sellers

When you sell on eBay, you're subject to most all federal and state laws, taxes and rules that apply to retail businesses generally. Here are some tips to help you stay out of trouble on eBay:

1. Set yourself up as a legal business. Get federal and state tax ID numbers for your business, as well as any licenses and permits your state requires for you to sell your merchandise. If you're using a trade name, register it with your city, town or county clerk's office as your state law requires.

2. Register for your state's sales taxes. If the winning bidder is a resident of your state, you'll have to pay sales tax on the bid amount. Put the following statement on all eBay auction pages: "Residents of State X [your state] must add ___% sales tax to their winning bid."

3. Sell only legitimate merchandise. If a random street vendor offers you a shipment of "genuine Rolex watches," watch out. Competing eBay sellers offering Rolex watches and Rolex itself can report you to eBay for selling illegal knockoffs, and eBay will cancel your auctions. Find out if the stuff you're planning to buy is legitimate by visiting eBay's Verified Rights Owner program .

4. Resist the temptation to "shill." If you (or a friend or relative) are ever tempted to bid against legitimate bidders in an attempt to drive up the price of your products (an illegal practice called "shilling"), think twice. Not only will eBay's fraud department shut you down permanently if they catch you, but many state attorneys general are bringing criminal charges against flagrant offenders, with eBay's cooperation.

Finding Items to Sell

As eBay becomes more popular, it's getting harder to find quality products to sell without bumping into other eBay entrepreneurs. Here are some product sourcing strategies your competitors might not have thought about (yet):

  • Estate attorneys are deluged with requests from grieving relatives to help them "clean out Mom's place" because they either can't bear to do it or don't have the time. Send a letter to the estate attorneys in your area (get a list from your local bar association), and tell them you specialize in online estate sales of any size.
  • Other eBay vendors often buy tons of stuff in bulk lots, and there's a lot of merchandise they just don't want to sell. Let other sellers know you're looking to buy certain categories of merchandise and will take excess inventory off their hands.
  • Take out an ad in your local newspaper and offer to take consignments of stuff to sell on eBay for a small upfront fee plus a percentage of each winning bid. Have your lawyer prepare a one-page consignment agreement for each new seller to sign. Keep in mind there's growing competition in this field (including nationwide franchises such as iSold It and UPS-affiliated QwikDrop), and your state may require you to get an auctioneer's license before you legally can take consignments.
     

Cliff Ennico , best known as co-host of PBS TV series Money Hunt, is author of Small Business Survival Guide and a faculty member of eBay University , where he teaches the legal and tax aspects of starting an eBay business.