How to lose money

by Cory Doctorow

Sage advice from 37 Signals' Jason Fried on how to get good at making money through low-risk iteration and practice:

Full article

So here's a great way to practice making money: Buy and sell the same thing over and over on Craigslist or eBay. Seriously.

Go buy something on Craigslist or eBay. Find something that's a bit of a commodity, so you know there's always plenty of supply and demand. An iPod is a good test. Buy it, and then immediately resell it. Then buy it again. Each time, try selling it for more than you paid for it. See how far you can push it. See how much profit you can make off 10 transactions.

Start tweaking the headline. Then start fiddling with the product description. Vary the photographs. Take some pictures of the thing for sale; use other photos with other items, or people, in them. Shoot really high-quality shots, and also post crappy ones from your cell-phone camera. Try every variation you can think of.

I love doing this, because there's no real risk involved. If you already have a business, you don't need to dream up a new product line or rock the boat with crazy experiments. If you don't have a business, it's a perfect way to work on your chops.

Now...the article should have been entitled "How to lose money" because it's just that stupid.

1) There is this mysterious thing called "transaction costs" that should immediately ring alarm bells in anyone who reads this article.

Let's look at ebay and craigslist separately

a) ebay

You buy something for $90 and have it shipped to you for $10. You have paid $100.
You immediately turn around and re-list it on ebay, it sells for $100 plus $10 shipping.
Congrats you lost money.

Let's say you are a gambler...you opt to save money and avoid a starting price above $0.99...you avoid "buy it now"...(i.e. you risk the item going for far less than it's "worth" but pay less in fees)

You'll pay 9% to ebay and 2.9% plus $0.30 to paypal. Or $12.20 in fees.

So...including shipping you bought an item for $100...sold it for $110 ...and netted a grant sum loss of $12.20. REMEMBER the shipping cost to you counts as part of the purchase price...going the other way, the only money you care about when selling is the pre-shipping amount.

But, wait, you cry...what if I sold it for $120!...well...$110 plus $10 shipping means that ebay and paypal get $13.39 in fees...so you take the $110 you sold it for and take away the fees and you've netted a loss of $3.39.

You, being delusional at this point, cry...what if I sold it for $130!...$120 plus $10 shipping again means fees for ebay and paypal...totaling $14.58..meaning that you've made $5.42.

I want you to think about that...you bought an item on ebay and need to turn it around at a 30% increase in order to make any money.

b) craigslist

Aha! Craigslist is free! It also has zero consumer protection and features the most pain in the ass buyers in the history of the planet.

For fun, create an ad for a brand new, in the box ipod and see what kind of response you get for it. I'll bet anything you will get swamped with people who want to lowball you and people who will simply waste your time with inane questions.

Oh, and you also have to meet a stranger and expect that the agreed upon amount will almost certainly no longer be what they are offering when you meet. i.e. Offer something for $100...agree to sell it for $70...meet them and find they "only" have $60 on them...happens ALL the time.

So, what you gain in transaction costs and lack of shipping you lose in travel and pain in the ass costs.

2) You are BY DEFINITION buying at the high end

You bought the ipod...doesn't that mean that you were the person willing to pay the highest amount for that ipod? Clearly, ebay is not an efficient marketplace in the sense that different people are always logging on...so a guy willing to pay $130 for that ipod may not have been online during that auction...but it stands to reason that in the liquid marketplace suggested by the author (will explain in a minute) that prices are not going to swing wildly by 30%

3) Liquid markets don't have huge price swings

Why is a can of coke basically the same cost at every convenience store? Because there are a zillion convenience stores, right?

A liquid market is basically where there are lots of buyers and sellers always engaging in the sale of a given item (say Apple stock). If you decide you need to sell your Rolex there are lots of people out there willing to buy at any given moment, just are there are lots of people willing to sell. If you want to sell buy or sell a Van Gogh, there are far fewer out there for sale (very limited number) and very few people with the resources to buy one.

In other words, it's easier to sell a can of coke than it is to sell a Rolex than it is to sell a Van Gogh.

What that means is that the price of a can of coke may be $0.95 somewhere and it might be $1.05 somewhere but generally speaking it goes for $1. Which means that you can't buy a can of Coke for $1 and expect to sell it for $1.30.

4) Ipods are the WORST possible choice

Ipods are, by definition, on a downward price curve. When the new ipad was announced, the amount re-sellers were offering for 1st gen ipads went from $375 to $300 overnight. The price is still dropping.

In other words, you are buying an item whose value is always going down and trying to sell it for 30% more than you bought it. Does that make any sense?

5) Nobody else does this

Seriously, I want somebody to come forward and declare they make a living buying and selling the same item on ebay. It won't happen because it makes zero sense. For every time you actually manage to sell something for 30% more than you paid, you will sell something at 85% of what you paid.

Not to mention the huge time cost in doing all of this.



In other words, PLEASE don't listen to this kind of shit.