When eBay was first founded in 1995, it quickly earned a reputation as an online global yard sale. It was where Internet users could find everything from a vintage Fantastic Four comic book ($1,500) to matchbook covers featuring nine different U.S. Presidents ($14.99) to a half-eaten grilled cheese sandwich that someone claimed looked like the Virgin Mary (it actually sold for $28,000).

But, more recently, eBay has also become known as a small business Mecca. It’s where start-up companies, home-based businesses and physical stores can market their goods or services online to some of the 213 million registered eBay users worldwide -- 90 million in the United States alone. That’s a lot of potential customers. But before a business person gets started selling on eBay, they first have to understand how eBay works.

How eBay works

eBay is the pre-eminent online auction website. It’s where customers can search for a specific floral pattern of Laura Ashley queen-sized sheets or browse through categories such as Home & Garden, Toys & Hobbies, Jewelry & Watches, or Collectibles. Customers submit electronic bids for items they want, after reviewing the details such as payment options and shipping charges. Once a customer places a bid, they have entered into a contract to buy the item if they win the auction. Some auctions have “Buy It Now” options that allow customers to instantly agree to purchase the item for an agreed upon price. eBay also offers scores of fixed-price items from “stores” that people and companies have established on eBay that make shopping there similar to buying on other ecommerce sites.

One of the best ways to understand how eBay works is to register as a customer, which will enable you to buy, bid or sell within a matter of minutes. That’s the advice for would-be sellers from Jim “Griff” Griffith, author of The Official eBay Bible and dean of eBay University, an eBay-sponsored series of courses to help newcomers sell and buy. “You don’t want to sell on eBay until you’ve bought on eBay,” Griffith says. “It’s important to understand how it works from the buyer’s perspective first.”

How to get started as a seller

  • Set-up a seller’s account. This will include payment information so that eBay can collect its fees once you start selling. There are a variety of fee structures, which have recently changed. Read the fine print carefully on this one. If you’re operating on a thin profit margin, you could end up losing money if you’re not careful.
  • Think it through. It’s easy to lose money and time, lots of time, if you’re not organized. Think out all the costs and steps it takes to make a sale. Factor in your fees to eBay, PayPal, credit card companies and, most importantly, shipping costs. Michael Miller, author of some half a dozen books on eBay, advises using Priority Mail’s flat-rate shipping. “The eBay shipping calculator is very reliable too,” says Miller.
  • Don’t invest in large amounts of inventory. Not everything sells on eBay. In fact, the sell-through rate is only 50 percent. The worst thing you can do is buy inventory with credit cards and get stuck, not only with a garage full of basketballs, but high interest rates on your investment.
  • PayPal is your best friend. It’s also the payment method of choice for most eBay users, since eBay owns the company. Once a buyer or seller sets up an account with their banking information (you can use your credit card or debit/credit directly from a bank account), PayPal enables immediate, secure financial transactions. With PayPal, you always get paid before you ship out the order without any worries of bounced checks or declined credit cards later.

What you need to know about the average eBay customer

eBay experts have reached a lot of conclusions about who shops at online auctions. It’s useful to pay attention to some of the basics about the eBay customer before trying to make a business out of selling online.

  • eBay shoppers have notoriously short attention spans. “They just want facts and to see a picture,” says Debbie Levitt, president of AsWas, a certified eBay developer, which offers storefront design and marketing services for eBay businesses.
  •  80 percent of all sales on eBay come from search results. That’s another good reason to pay close attention to how you design your product listings. Don’t make the most popular rookie mistake: misspellings. They can’t find your Hummel collection in the search engine, if you spell it “Hummer.”
  • They’re not just shopping for a good product. They’re shopping for a good seller, too. If four sellers are offering the same iPod accessory, the buyer is going to pick the one with the best customer feedback score. You’ll find those scores on the right side of the screen under “Meet the Seller,” when you click on the product. Buyers read these religiously.

If you’re planning to set up a business on eBay, the advice to start small is universal. With over $40 billion dollars in gross sales annually and over 100 million products listed for sale or auction at any given time, eBay is a very large pool. You’ll want to enter it one toe at a time to prevent drowning.