Adventures in Aeron Chair Arbitrage
blog.priceonomics.com
blog.priceonomics.com
When I was in my ramen phase of startup life (and newly married), I used to (among other things) buy clothes at local thrift stores and resell them on eBay for a decent margin. You quickly learn what brands/items sell and occasionally I'd hit gold and find a vintage Hawaiian shirt that fetches $200 (and cost $2).
In the end though, you realize it's just a way to make some extra money. It's not a "business" IMO–and definitely not a scalable business. But you learn what sucks (like dealing with shipping & getting photos from a camera to eBay pre-Smartphone) and realize other people also feel that pain. That's where your business is.
UPDATE: Downvotes, seriously? Read my reply down this thread. Some people on here are, frankly, ridiculous and have no clue how to engage in a meaningful discussion.
Yes. Some examples (depending on how loose you want to get with the term arbitrage. I'm using it as its used in this article) would include antiques/collectibles and used cars.
It's obviously much better to operate in areas where 1) value is unclear and/or 2) goods may take time to sell.
With those things, you can get an advantage by knowing the value and by being able to hold onto something until it sells for a proper value.
Business needs to be demystified. Look at Princess Kate. Her family's business (worth millions, or billions, I forget) basically started with assembling party supplies into convenient boxes. If that's a business, anything can be a business.
I wrote a program awhile back that would look for iPod Touches on my local Craigslist and would analyze the price for many different versions. If an individual iPod was available and was below mean price within a given time frame, I'd send the seller a note almost immediately. Then, if I purchased the item, I'd relist it at the mean price. Completely an arb play.
What I learned was that 1) iPods are easy to sell, 2) People who buy on craigslist are flaky and tend not to show up, 3) The time spent waiting around to meet people was obnoxious, and 4) Sometimes sellers see what you did with their item and send you angry emails.
I never made more than a few hundred bucks, but it was an interesting experiment nonetheless.
Second story: For years, my wife sold used books. She'd go to estate auctions and buy boxes and boxes of books. She'd go to library sales and buy hundreds of books. Then she'd sell them on the Amazon marketplace. She would walk into these places with a barcode scanner and would check their price and sales rankings on Amazon. If it was in a decent margin for her, she'd buy the item. This actually did scale, but she quit when it became less of a hobby side income and more like real work. She's a nurse by trade, and the book selling was never meant to be anything more than a hobby.
So, I guess what I'm trying to say is that arbitrage of used goods can be a business, but it depends heavily on the availability of the supply of used goods. Books worked for my wife because she could buy dozens of them at a time and ship dozens of them them all from the post office down the street as orders came in. For me, I was running around town picking up items and dropping them off.
It is usually used to describe a riskless transaction.
Correct. It's called, "market making".
In the academic sense, yes. In reality, no.
This is why you buy in the small and isolated market (craigslist) and then sell in the larger market (ebay) where you don't have to find people and waste time and money delivering the item to the person.
1) The Toy Story 3 plot: people want to find a home for their possessions with people of similar interests. They become angry that you are reducing the consumer surplus that would have gone to the ultimate buyer.
2) They realize that arbitrage on a first-come-first-served marketplace can reduce the value of the marketplace as a whole, since buyers are less likely to find bargains. They recognize your behavior as antisocial and become angry.
Friend of mine does the whole estate sale book thing, too. People have definitely gotten upset when they realize what the scanner is for.
It's not terribly scalable because you need to have transport and time to attend auctions, plus somewhere to store the stuff. But if you have a decent sized car/pickup, proximity to auctions and a nose for a bargain, you can pick up some good pocket money with this strategy.
Incidentally, I think the market for the pricenomics data is precisely the same as the KBB market - detailed lookup via mobile app for people who are buying/selling regularly. A good pawnbroker/2nd hand dealer/auctioneer will know the price point on a wide range of goods, but allowing people to purchase this information for a reasonable price will help both people starting out, and also professionals stepping outside their bread and butter.
I would suggest a freemium model, where the free version gives you a price range, and the pro version gives you a very direct price.
Isn't that basically the business model for antique dealers and pawn shops?
wasn't it bessemer that passed on ebay because a company with a marketplace for used goods wouldn't amount to anything?
But pawn shops don't get into YC and I doubt Cal Worthington ever raised a series C round on Sand Hill Road. Those types raise money via bank loans (if at all) and most people in the valley would call them "lifestyle businesses".
My point wasn't if such businesses exist but rather if Priceonomics really thought they could form a scalable business doing this. My guess is that they didn't (again, I don't know them and I'm often wrong). Rather, I think it was more of an experiment that would expose real business problems, validate ideas, create a case study, and/or make a little extra cash.
Actually they do.
And a business doesn't need to get into YC or get VC funded in order for it to be a real business.
Pawn shops can deal in second hand goods and often have the licenses for outright purchase (which may be where some of the confusion that I've seen from people originates), but that is not strictly speaking what pawning is.
They do not keep inventory or buy anything.
Buying and selling used goods is absolutely not that. You're talking about searching, inspecting, paying (cash), storing inventory, selling, shipping, etc.
And, no, eBay and Craigslist are not examples. They don't buy things. They are a marketplace and that's not what the original post set out to do.
So Amazon was never a scalable business? Or netflix? You don't have to be sitting around a kitchen table selling nothing but bits for it to be scalable business.
Amazon wasn't profitable for a long time and only scalable because of massive investments. They don't buy used goods and resell them. Same for netflix.
His main argument is that the acquisition of items for resale is not scalable, because you are dependent on people to supply used goods. You cannot make the market provide more used goods to meet demands. Amazon and netflix can perfectly well do that.
My point is that it's folly to try and argue this particular negative. I'm not so confident it's impossible to scale reselling of used goods when there's been so much growth in optimizing operations processes.
Secondly, "inspecting" may boil down to a similar process of QA, but I think it should be obvious that assuring quality in a production process of new goods is a very straightforward thing while for used goods, you probably need a new process with every supplier you find.
And I agree that there is an astonishing growth in optimizing any kind of operations process. However, that still doesn't increase supply. This cuts back to his main argument: "grow revenue without costs growing proportionally". If you have a finite supply of used Aeron chairs, acquisition of the remaining chairs becomes increasingly hard - up until the point where there aren't any, anymore.
So yes, I added the argument of finite (if only temporary) supply, but it was only to extend his argument of proportional growth of cost. And yes, there is room for optimization and that may be sufficient to keep a business afloat - certainly if they are flexible with their inventory - but there are still natural limits to such a business, and that makes all the difference in the world.
For most durable goods there's a never ending supply of used goods already; the supply of new goods a couple years later. Once you solve the business problem of building a good funnel for used goods to come into your operation, you can probably boost or create resale value for used goods, indirectly pressuring the original suppliers.
Selling burrito franchises, car dealerships, and grocery stores all work very very well at scale, and are very scalable.
About arbitrage: I agree with you, to some extent. By definition, as more people notice the price differences and take advantage of them, the arbitrage will become less and less profitable. If you intend to build a business that will scale and prosper in the long term, you need to provide value to people and not tie yourself to short-lived arbitrage opportunities. I work in finance and that fact is plainly obvious to a lot of us.
However, there is value added when you give people information. Information isn't free. Someone has to go out there and find all the prices, organize them, and show them to people. The arbitrage differential will grow smaller and smaller as competition grows, but at no point will this information be free. Given the possibility to find cheaper prices, people will pay if it's worth their while. If it's not money, at least page views.
In the used clothes example you are either limited by time (I can only hit ten thrift stores in a week) or supply (there are only ten thrift stores in my area.) After that, how do you scale up?
Those circumstances include lack of product knowledge, urgency to move item, and value for their own time/convenience.
For the first problem, people have tackled it with eBay/Craigslist listing misspeller searches or just manually emailing for more info. I once bought a new sealed copy of a collector's game, Panzer Dragoon Saga (eBay price ~$500+ back then) for $20 from a seller who was liquidating an old stash of games and listed the item as "Panzer Dragoon Saturn" and couldn't get any hits.
The problem of illiquidity has some fun implications assuming you're willing to take some product risk. Back when I was in grad school in the Bay Area, I was flipping Fujiiryoki massage chairs (MSRP 5k, buying around 1-1.5k, flipping around 2.5-3k) and there are plenty more items out there. This requires either good product knowledge (tons of old Chinese people who I knew wanted these) or a data-driven way of identifying high-price-point items without much/any historical pricing data. This is a rather solvable problem that hasn't been tackled (that I know of) and can be a value point for your site I'd think.
As for buying liquid items low, subscribing to CL RSS feeds with the right search terms can do the trick, though I neither confirm nor deny that I may have once written a CL page refresher to buy Burning Man tickets at cost (instead of from scalpers who were charging hundreds more). Back when I didn't really value my time, offering to pick up at a time of their location/convenience and pay cash.
Misc selling tips as an enthusiast: and legit work/school email or Googlestalk-able email establishes you as a "real" person. A phone number is almost a must-provide these days too. Pay low(er) and always in cash (or cert. check at bank) but assure the buyer that you'll be there and make the transaction convenient and easy.
It's an addictive hobby, I know... :/
Did you consider letting the buyers and sellers do the leg work?
Setup a distribution center. Sellers who want to offload stuff scan the items and their details to you and you give them instant, fair quotes. If they like your offer, they bring the items to your center, and you check to make sure everything is as it was stated.
You put the items, their details and their new prices (with your margin markup) online for buyers to peruse. If interested, they'll come by and pick up whatever they want.
Like an online pawn store w/ local centers, except there's no pawning, just selling & buying.
With a consignment store the model works because you are willing to take the reduced profit to not have to put in the actual leg work it would require. People are also willing to pay the slightly higher prices because consignment tends to be in things like clothes that are difficult to buy online.
There is a world of difference between a straight 2nd hand goods dealer and a pawn shop. Most of that difference is in the profit margin.
Craigslist:
* Listings have "ASKING" prices and can easily negotiated down 5-20%. So even if you provide a historical information of "Asking Prices", its still not a 1-1 relationship to how much you expect to sell your item for or its "BUYING" price
* I do question the value of historical information on CL: Its never been available, therefore neither buyer nor seller expect it and their view of the marketplace is limited to the time they hit search. And it is this view that they will use to determine a good price for an item. When I need to buy something that I need NOW, I try to choose the nearest, cheapest item, satisfying my requirements that is CURRENTLY available. Historical information doesnt come into play.
Ebay:
* Since I already have access to historical information(completed items) and I can use it to figure out how much to sell my stuff for, I dont see what Priceonomics bring to the table here.
Again Im trying to figure out where you guys are going with this. From technology standpoint, all this content scraping, indexing and searching is interesting, but what problem are you solving and how do you plan to make money with it(short of arbitrage of aerons)
specially for the lower-than-market value ads. and NOT excluding expensive ads such as cars.
that alone would be a complex problem alone.
The work you're doing there takes time and has value, and Pricenomics is trying to capture that. I'm not intimately familiar with the company nor do I know if they'll figure out a viable business model, but I do see the intrinsic value in what they're proposing.
All things being equal, the effort is the same in my opinion
Combine with geolocation data for the buyer and the seller and they probably have a greater trove of data then you could get even with a biz dev deal with Craigslist -- main issue is that you have no idea whether an item in a given post was actually sold, and if so for how much.
I fear Priceconomics.com, as interesting as it is, will just work hard to prove a business model for this data that if successful will just be exploited by some engineers working at eBay who spin up a product to compete.
If you're happy with a "doordesk" and a metal or wooden folding chair, more power to you. I bought my own personal Aeron years ago, I've used it at multiple different companies and at home when I was freelancing. In the approximately 10 years I've been sitting very comfortably on that ~$800 chair I've gone through dozens of thousands of dollars of now obsolete computer equipment (desktops and laptops). From that perspective combined with the fact that the chair is still in very much like-new condition, even paying $800 for it was well worth it, IMO.
I'm also quite fond of the Ikea Galant height adjustable desk I also bought ~6 years ago, and that one doesn't have the premium price of the Aeron. I do like a good value... IME, the Aeron actually is a good value despite the high price.
My point was more that you could replace Aeron Chair with X (where X is anything that doesn't have a steep depreciation curve -- ie - something that's not a car or PC)
If you buy a used "X", it's very likely you can sell it for the same price a couple of years later. Essentially you can lease "X" for free.
That low altitude you're flying at can only keep you off radar for so long and you're building your entire business on shaky ground.
1. List price is not the same as selling price 2. The averaging is being moved by "accessory items" i.e. http://priceonomics.com/computers/apple/macbook-air/ shows a lot of things that aren't MacBook Airs in the low price bracket. Maybe tossing out anything that is a few SD away from the average would fix that.
some arbitrage of used goods can be a business; but it ultimately depends on the effort required and sustainable the income generated.
They provide a 1800 phone number + internet site. People who are looking for an out-of-print book give them the details. They search for the book. When they find it, they add 20% the price, charge the buyer, purchase the book at the list price and have it shipped to the buyer, and keep the 20% without ever touching the book.
Essentially it's an agency business - I've often wondered why people don't find the books themselves, but it's a time/doing business internationally/inexperience type of thing. They would rather pay the extra 20% and have someone else deal with it.
The true value of the business in in the dealers database which allows them to find a book very quickly by drilling down into who is most likely to have a copy, plus they have an exclusive deal with point-of-sale booksellers, whereby anyone who wanders into a bookstore looking for an out-of-print book can be given somewhere to go.
He made decent money, but said that putting stuff in boxes and going to the post office was a hassle. He eventually stopped -- he was finishing med school at the time.
As a general rule of thumb, always ask for cash. Or ask for a cashier's check if the buyer is not comfortable with carrying large of cash around. Don't accept anything else (e.g. personal check or even paypal).
In addition, there are enough scammers lurking around on craigslist that I didn't want to expose myself to those kinds of risks.
I was also buying/reselling items with fairly low-margins. Credit card processing companies e.g. square, paypal, etc. will only eat away at whatever little profit I was making at the end of the day.
Once you factor in the girlfriend subsidy, they would have made better money with far less risk by getting shifts at local fast food restaurants.
Even if you take out $75 for the GF subsidy (being generous and assuming she gets an equal share), each guy made $25/hour, cash (i.e. ~$30-$35/hour pre-tax), which is >3x what they'd get at a fast-food joint.
Now of course, one does need to take into account the fact that they're restricted in spending their loot on beer, which they are obligated to share. From a short-term economic standpoint this is probably a significant hit on their profits (i.e. unlikely that the three gentlemen will consume the majority of the beer). However, from a longer-term/more holistic view, purchasing beer for the group will surely lead to fun, team building, general goodwill, and so on, which is arguably more valuable than the $300 cash at this point in the startup's lifecycle.
tl;dr startups should use aeron-chair arbitrage to fund investment in beer, it's science.
I also believe that these models will increasingly become more mainstream, because they save people 'time', time which is increasingly becoming the most precious resource that we have. You save 2 hours of time for someone, and pay him $40-50 dollars less than craiglist or ebay, and I am sure you can find a large percentage of people for whom the opportunity cost of 1 hours is more than $20-25, and voila, you have customers.
The most basic, lowest-common-denominator example of this is arbitrage. Buy one product for X and sell it for X + 10%. If you can't do that with one product successfully that you know there is already a market demand for (e.g. chairs) then how on earth are you going to do it for your startup?
umm, by building something new, not reselling existing stuff?
You would be astounded at what you can find there... things worth well over 100 dollars show up regularly.
Open your eyes and guess what a pawn shop, antique store, used office furniture dealer, or IT equipment reseller do. It's not far off from this, but they aren't bitching about it and plugging a silly website.