How do Chinese/Hong Kong sellers make money on eBay with 99c free shipping items?

Over the years I have purchased a large number of items from eBay, many from China and Hong Kong, I also act as a seller on eBay. I started wondering how sellers could make an income from items being sold for 99 cents with free shipping.

After reading forums and researching, I thought it would be useful sharing this information.

I thought I would investigate two products, two that I have bought previously

  • a generic Nintendo DS stylus, and
  • a generic iPhone USB data cable

The cost of the product

Everyone one knows that phrase “Made in China’, China’s products are inexpensive do to lower labour costs and mass production of products which get exported all around the globe. But how cheap are these items, to give you an idea head to Alibaba.com, self described as source of “Manufacturers, Suppliers, Exporters, Importers, Buyers, Wholesalers, Products and Trade Leads”.

A Nintendo DS stylus made from ABS plastic the bulk price can range from around 5 cents per piece to as low as 3 cents for quantities over a thousand purchased.

Similarly, an iPhone USB data cable can range from 10 cents to 30 cents, again depending on quantity purchased.

So the actual product’s cost can vary from 1 percent to 30 percent.

Small padded envelopes can also be purchased in bulk for a few cents.

2x Nintendo DS stylus roughly 2 cent each

Postage

Let’s assume items are posted from Hong Kong, Hong Kong Post offers a bulk postage rate of $2.30 (Hong Kong Dollars) for a 20 gram item or $95 (Hong Kong Dollars) for unlimited items to the same destination (Country and City) not exceeding 1 kilogram.

The current (26th October 2012) exchange rate of 1 United States Dollar is 7.75035 Hong Kong Dollars. So to put the above postage costs into perspective, you can post 1 kilogram of items for $12.24 United States. If you were sending 20 gram packets, it would cost 25 cents each. The envelope to post the item weighs around 8 cents and the actual item from 2 grams to 30 grams.

But why does an international letter from Hong Kong cost less than it costs us to send a domestic letter? There a number of contributing theories,

  • High degree of automation, have you ever seen a hand written envelope arriving from Hong Kong? Probably not. The seller has already entered all the details online, the postal service just needs to scan the barcode, there is minimal human involvement.
  • Reciprocating postage agreements, countries have agreements with other countries on the basis of ‘you deliver our mail and we will deliver yours’. Now when was the last time you sent a package to Hong Kong, and now when was the last time you received a package from Hong Kong. There a significantly more received parcels, who pays to deliver these parcels, your local post office, how do they afford to deliver these parcels to your letter box, by increasing the costs to send parcels. Now you know why our postage rates are so much more expensive?
  • Bulk postage, Hong Kong is an aviation hub, owning the record for world’s busiest airport by cargo traffic. That small envelope you received was probably sharing the same plane with thousands of others destined to your city.

A typical envelope from Hong Kong

eBay and PayPal Fees

Now we get to the costs for using eBay and PayPal, we know these cost are high for the average sellers, eBay itself have stated they want a return of around 10% on every item sold. How do these particular sellers minimise costs?

PayPal Micropayments

PayPal offers a Micropayments account with a different fee system.

Instead of the normal 2.9% plus 30 cents for each transaction on a Business account, a Micropayments account offers 5% plus 5 cents for each transaction. What this means is that for transactions less than $12, it is more economical to use the Micropayments account.

Assume a 99 cent item, with a normal PayPal business account the fee would be 33 cents, but with the PayPal Micropayments account the fee would only be 10 cents, a 23 cent difference.

Here is an interesting fact, anything sold for less than 30 cents and received with PayPal Business account or 5 cents and received with PayPal Micropayments account and the seller hasn’t already made no profit.

PayPal normal account vs Micropayments account

eBay fees

To list an item costs 50 cents, but on that single listing there can be any quantity, for each item sold 7% of the sale price is applicable. Sellers are allowed to make changes to this listing, so the same listing can be used for a number of different items.

To put the eBay cost in perspective, on a 99 cent item it is roughly 7 cents on eBay fees alone.

Final Profit

So now we know all the costs associated with selling the item, what is the profit?

Adding all the selling costs, not including the cost of the actual product, we get 7 cents from eBay, 10 cents from PayPal, 3 cents for the envelope and 25 cents for postage at a total cost of 45 cents. Assuming the product can cost anywhere from 2 to 30 cents, the profit on a 99 cent item can range from 25 to 50 cents, or 25% to 50% net profit. No bad for a single item.

Let’s assume the seller is selling 10,000 items a year. That’s an income of $2,500 to $5,000 per year.  Increase the number of items offered, and that is quite a significant income.

  • Haris

    I am planning to ship a single piece of an item that is currently being manufactured in China. The item is about the size of a condom. Assuming the item costs 50 cents to make, and I need to sip 20,000 single piece items to 20,000 addresses in US, can I price the item for $1 and still make some margin? How much would shipping cost per item to send from China to US for my product (similar to a single condom).

  • John

    Be honest… they’re condoms aren’t they?

  • Haris

    No sir

  • Mike

    Is the condom in the wrapper or is it fully extended?

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  • Me

    THANK YOU for this article. You have finally solved the mystery in my mind about these cheap China eBay sales. You really broke it down!

  • gtrdude

    Nice article. It seems crazy that you can post an item for a few cents from overseas but it costs $7.20 just to post locally here in Australia. It puts sellers here at a real disadvantage.

  • Milly Orozco

    Great post! Loved the stats, and I always wondered about this. Now I know. Such knowledge :—–)

  • Jacques Leclercq

    Post talks about ‘How dot hey make money on this?’.
    But I don’t see the labor costs covered.
    Sure, China has cheap labor costs, but they don’t work for free nor is their cost negligible.
    I feel that the article is incomplete and doesn’t cover all costs to make an accurate calculation.
    There is manufacturing, transport costs from factory to seller, picking and repacking costs, storage/warehousing, possible certifications as well, all before an item can be shipped out.

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  • dmund

    Labor costs are included in the prices mentioned, although warehousing etc may not be included in this estimate…

  • ‘openthepodbaydoorshal’

    I wanted to purchase an item from the usa, to Australia, not available from anywhere else. Item cost, $23.99 us. Postage $28 us. I did not complete the purchase. Can anyone guess why ?. Are you listening US Postal Service ?.

  • free trade.

  • 1000leagues

    China is NOT the USA. Factories often shut down if they don’t have orders, then reopen when they do. Laborers can be paid with goods such as food rather than monetary. Yes, they do work for free, (though not voluntarily or knowingly). The population is out of control w/ a vast amount of disposable laborers. Bribery is an acceptable, traditional, and more often than not, expected way of doing business. There’s often someone along the supply chain who will take a bribery. The Chinese government owns a stake in many of the companies. Any foreign company investing in China has to partner with the government giving it 51% of the company.
    China’s government will do what it must to keep its people working…I don’t blame them…too many people.
    Capitalism has blurred the distinct line between Democracy and Communism.
    Profit of $2500-$5000 is not bad at all.

  • Saven

    I can’t tell you how many times I’ve wondered that. Thank you for the great and thorough explanation!

  • westwoodwizard

    Nice political statement. You barely addressed the business case. Companies are in business to make money so it is interesting to know how somebody makes money on a one dollar item especially when from an American perspective it would be impossible for an American seller to make money by selling an item for one dollar including shipping to somebody in Hong Kong.

    Yes China is not the USA. In the USA, companies just layoff people whenever they feel like it. Also, who says USA companies do not have similar tactics…they do. Ask those poor people working in minimum wage retail jobs how their employers no longer give them a set number of hours per week. It is all just in time staffing. They are in the employee database and they just get a text message if they are needed even for one hour and they have to show up or they get a last minute text message saying they are not needed for a particular shift so stay home.