The Cruel Math of eBay's Seller Penalty System

I’m baaaack…

We’ve all heard lots of venting across the chat board world about eBay’s shortcomings but as far as I can tell, no one has tackled the peculiarly punishing financial math behind eBay’s seller rankings. Let’s give it a shot and take a deep dive into the math behind eBay’s seller penalty system. I call it a penalty system because eBay’s seller policies are punitive at their core. If we were dating, eBay, with its ever-increasing costs and seller-unfriendly policies, would be in an abusive relationship with me and my friends would be telling me to leave her. But I can’t leave because eBay remains the best place to sell cards as an independent entrepreneur. No auctioneers controlling the sale timing or making bad lotting decisions, no delayed payments, no social media time-suckage to build followers a la whatnot.

eBay’s methodology is all about money, of course, specifically, devising a mechanism to wring more money out of eBay sellers. eBay’s basic fee for cards is 13.25% plus $0.30 for each lot sold. But that number is deceptive because eBay also charges you the 13.25% on shipping and sales tax collected. I understand charging on shipping. It patched a common cheat from when shipping wasn’t charged a final value fee. People were selling hundred-dollar cards for a dollar and charging $99 for shipping to evade paying fees. Collecting on sales tax, though, that’s just piggish, and has been the subject of quite a bit of well-deserved online contumely. Still, eBay makes financial sense. Here is a real-world example of the numbers on a $1,800 sale with free shipping:

Item subtotal $1,800.00

Shipping $0.00

Sales tax $112.50

Order total. $1,912.50

Sales tax -$112.50

Transaction fees -$253.34 (13.25% of 1912.50)

Shipping label -$7.69

eBay $0.30 processing fee -$0.30

Net to Seller $1,538.67

Playing with the math, the actual seller’s fee is 14.1% of the hammer price, and I pay for the packaging materials, so call it 14.5% all-in. Now, if I had consigned an item to an auction house with a 0% commission and a 20% buyer’s premium and it had sold for $1800 including hammer price and premium, I would have netted $1440 (80% of $1800). eBay is a better deal.

If you qualify as a “top rated” seller, you pay 10% (plus $0.30 per lot) instead. That discount requires one-day turnaround and 30 days’ free returns. Currently, sports trading cards are not subject to the return requirement, a vestige of the modern card market boom and bust cycle that inundated eBay sellers with returns. If you can flip your sales out there in 24 hours and want to commit to it in all your listings, you can get this discount.

So, what does “top rated” mean? Well, eBay has defined it as an unbelievably high standard of performance with no more than 0.5% defective transactions. AKA a 99.5% grade. That means you are allowed one mistake every 200 sales. eBay’s definition of a defect is expansive:

--Being out of stock on an item.

--Shipping later than your listing says.

--Not entering shipping tracking quickly enough.

--Late delivery unless excused by weather.

Make 1 mistake in 199 sales and you lose your top rating, falling to “above standard”, where you pay the regular rate of 13.25% (plus the extra cost of $0.30 per lot). You are “above standard” if you have less than 2% defective transactions; no more than two of every 100 deals have a defect. In school, that’s a grade of 98. Still an A+.

Here’s the crazy part: there is no “standard” rating on eBay. Really. 95% positive is treated the same as 35% positive. You are either an A+ or screwed. Being “below standard” brings on a world of financial hurt that greatly profits eBay far more than if you were a “top rated” seller fully performing. Here, in eBay’s own words, is the seller penalty:

“If your account doesn't meet our minimum seller performance standards for the US in the evaluation on the 20th of the month, you'll be charged an additional 6% on the final value fees applicable to sales in the following calendar month. … This fee does not apply to Above Standard and eBay Top-rated Sellers.”

The final value fees go up by 6% and that even applies to sales tax and shipping. In other words, below standard sellers pay 19.25% of the gross amount eBay collects (plus the $0.30 fee per transaction). Turning back to our example:

Item subtotal $1,800.00

Shipping $0.00

Sales tax $112.50

Order total. $1,912.50

Sales tax -$112.50

Transaction fees -$368.16

Shipping label -$7.69

$0.30 ding: -$0.30

Net to Seller $1,423.85

Worse than an auction house consignment. Plus, I must pay for packing materials, fulfill the order, and so on. D’oh!

Where it gets really, really ugly is the duration of the penalty. A defect trails you for a year. If you can accumulate a total of 400+ sales in three consecutive months and your defect percentage falls back under 2%, the trailing period is three months. Again, in eBay’s own words:

“To make sure we're getting a fair picture, we'll adjust how far we look back (the "evaluation period") depending on how much you've sold recently:

• If you had more than 400 transactions in the past 3 months, we'll count all those transactions

• If you had fewer than 400 transactions in the past 3 months, we'll count all your transactions from the last 12 months”

In case you can’t catch it, the only way out of the penalty box in less than a year is selling enough to bury the defect, but you do so at a huge relative cost. How much you must sell to insulate defects depends on the number of defects. Remember, the magic number is 2% of total transactions, so, assuming ten out of stock orders, it works out to 501 sales over three months just to get below the 2% penalty threshold.

The bad part is that it is to eBay’s extreme financial benefit to keep a seller in the penalty box for as long as possible. Let’s say you accidentally double-listed 15 common cards at $2 including shipping on a set break, sold them, and had to cancel the sales. The total sales were $30; eBay’s lost commission on the cancellations is around $7.50. Seller’s bad for sure, but a 6% rate increase for up to a year on everything sold is a penalty that is grossly disproportionate to eBay’s loss. If a seller’s usual sales per month average about $1,000, the penalty he will pay is $60 a month for 3-12 months, aka $180-$720. The seller this faces a no-win scenario where whatever he sells on eBay will cost him more to sell than it would using a full service auctioneer, and eBay will make much more money than it would have had the seller not screwed up.

So, what is the best strategy to get out of this doghouse? There is none, really. The only way to not pay eBay its penalty is to stop selling via eBay for a year, until time flushes the dings out of the rating. Or you can say “screw it”, grit your teeth and raise your prices 10%, and let eBay have its pound of flesh courtesy of the customer.

If you opt to try and sell your way out by selling enough to cut the evaluation period, the cheapest way to do that is to blow out low priced cards until hitting the magic number that will dispose of the penalty in three months. Even doing that, eBay will make out like a bandit. Assume you sell a card at $2 with free shipping and tax is 6%. At the eBay penalty rate, you net almost nothing:

1.06 x $2.00 = $2.12 x .1925 = $0.41 + $0.30 = ebay seller fee $0.70

+ $0.60 eBay flat rate envelope for a single card

$1.30 in costs on a $2 sale before deducting the cost of the card itself, the toploader and the envelope. You make nothing unless you got the cards for free, but eBay sure gets paid. Instead of the $7.50 or so it would have gotten from the canceled sales It will receive $6 extra for every $100 sold. If it takes 500 sales at $2 to clear your dings in three months, that is a thousand bucks, and if the sales tax averages 6% on that (remember, one of the ways eBay screws sellers is by charging a final value fee on sales tax collected), the hapless seller will pay eBay an extra $63.40 in three months. Here is the math:

$1000 x 1.06 = $1060 x .06 = $63.60

$63.60 / $7.50 = 8.48 x 100 = 848%

Tell me I give you $7.50 in April and I get an 848% profit over the next three months, yeah, I would make that trade every day. So would any loan shark, actually, because the vig a loan shark charges is 1% a week. Now scale it up to eBay seller numbers and this racket adds a ton to eBay’s bottom line. At least loan sharks risk jail time for their 52%; the banksters at eBay who came up with this penalty system go home every night. Where, presumably, they abuse puppies and kittens then dine on the meat of endangered species.

Another interesting point is that eBay does not make these rules easy to find. The information on how a seller will be hammered and for how long is scattered across multiple help pages. I had to dig in and research to find it. That tells me that eBay management does not want sellers to have an easy time understanding that the eBay seller metrics are so unforgiving and the penalties so large that if you fall into the eBay punishment zone, you are either going to be forced to pay eBay a big premium to get out, way more than eBay makes if you sell without any demerits, or stop selling for a year.

If eBay makes a lot more money off a ‘below average’ seller due to a seller’s breach of contract than it would with a ‘top rated’ seller fulfilling his contract, that is a perverse incentive, meaning that it is to eBay’s advantage to penalize sellers not to get fair compensation for its losses from seller transactional defects but to extract a greater profit than it would have had the transactions been successfully completed. I suspect that if there was any competition at all, eBay would be forced to change its procedure to one that is fair to sellers, like just having to pay the final value fees on the canceled sales. That would make eBay whole for the lost sales without kicking the snot out of the sellers for 3-12 months. Of course, kicking the snot out of the sellers is a profit center for eBay, and without competition, we get things like the eBay seller penalty program.

It's enough to make me want to do a livestream on whatnot…