What I'm about to explain is no secret. Most of it is simple economics and logic. Some of the numbers I'll use to illustrate things are purely fiction. I don't want you to get lost in the numbers. I'll use nice round numbers to keep it simple. Before we get to actual examples, here is very a simplified view of how a dealer operates.

In any business, there are two costs. Fixed costs are things that do not change regardless of business activity. Variable costs are things that change depending on the level of business.

An example of a fixed cost is my ASDA membership. Whether I sell zero stamps or millions of stamps, I pay the same dollar amount for my annual ASDA membership fee.

An example of a variable cost is postage. The more business I do, the more postage I need to mail the orders to customers. If I have no orders, my postage cost is zero. If I have 100 orders, my postage cost is at least $41 (assuming first class postage). As sales rise, postage costs rise.

All dealers have costs such as: insurance, advertising, professional memberships, postage, office supplies, computer software, utilities like gas and electric, rent or a mortgage for office space, travel and food expenses, etc. Some expenses are fixed and others are variable.

Suppose a dealer wants to make $30,000 income in a year. They want to make 10% profit after expenses. That means a dealer needs to sell $300,000 in stamps per year to make $30,000 in profit. Suppose expenses for advertising, printing, etc. are $120,000 per year. That leaves $150,000 per year to buy stamps with. In other words, a dealer will spend on average 50% of the retail value of a stamp when purchasing it.

That's a really brief and simple overview. But that's how a dealer operates. Now let's get to a specific example.

Suppose you buy a stamp today for $100. In a few months, you need cash and you need to sell your stamp back to a dealer. How much are you going to get for it?

If you bought this stamp from a dealer at retail value and it's still in the same condition that you bought it in, then a dealer is only going to get $100 for that stamp when they sell it. A dealer is not going to give you $100 for a stamp that they will only be able to sell for $100. Otherwise, the dealers profit would be zero. The dealer would be out of business very quickly.

How much will you get for your stamp? That depends on several things. Does the dealer have an immediate customer for your stamp? Does the dealer have one or more copies of that stamp in the same condition already in his stock? Is it a popular issue or an ordinary stamp?

The dealer operates on average at 50% profit before expenses. So for your $100 stamp, the dealer may pay $50 for your stamp that he's going to resell someday for $100. That rule doesn't hold for all stamps though. Here are some examples why.

Example #1. Suppose you have a box full of 100,000 common used US commemorative stamps that are off paper. All of them are from the years 1940 to 2000. The catalog value is $20,000. No dealer will pay $10,000 for this box of stamps. They are too common. Too many collectors have them already. Most dealers buy this type of material for so many dollars per pound. This material will be broken down into packets of stamps for beginners or sold as mixtures at so many dollars per pound or ounce. Catalog value does not equal retail value.

Example #2. Suppose you are selling a very nice MNH, VF centering $5 Columbian (Scott #245). Demand for this stamp is high and the dealer has an immediate customer for your stamp. If the retail price is $10,000 for this copy, the dealer will give you much more than $5,000 for this stamp. Why? Because it's a stamp from a popular series that is in demand and the dealer has an immediate buyer. A dealer may make a small profit of a few hundred dollars on this item because it's a high price item with a quick sale.

Example #3. Suppose a dealer is able to keep their expenses very low. For $300,000 in sales, suppose the expenses are only $70,000 now. With a $30,000 profit, that means the dealer has total expenses of $100,000. This dealer can offer 66% of retail for an item due to his lower operating costs. So for the $100 stamp, the dealer can now offer $66. As a dealer's costs go down, their offer price may go up.

If the dealer needs to buy stock at 50% of retail, then slow moving or common material may sell at or below that 50% figure. Quick moving or scarce items may sell above that figure. No two dealers have exactly the same operating expenses. There may be differences in an offer from two different dealers due to different costs and demand for your stamp. Not that the dealer with the lower offer is trying to steal your stamp.

If dealer A doesn't have an immediate customer for your stamp, they have high operating costs, and they already have two stamps in stock that are the same as your $100 stamp, their offer may be low. If dealer B has an immediate customer for your stamp and their operating costs are low, dealer B may offer more for your stamp.

You need to consider the time value of money too. Suppose the dealer has $100 in his pocket. If he can go to the bank and get 10% interest on his money, at the end of 1 year, the dealer will have $110 in his pocket. His profit is $10. If the dealer buys a stamp and sells it within 1 year and makes $10 profit after expenses, there is no difference between putting his money in the bank and putting his money into your stamp.

With the bank, the risk for the dealer is low. That is, the bank will almost certainly be there in 1 year and the dealer will get his $110. But with your stamp, there is more risk. It may sell tomorrow. It may sit in inventory for more than 1 year. There is some uncertainty in obtaining a profit on the sale of a stamp. The dealer wants to be rewarded for this risk. Otherwise, why not put the money in the bank and wait for a sure thing?

The reward from this risk is the dealer's profit. When a dealer buys your $100 stamp, if he expects a quick sale, he may give more than the $50 average offer. If he thinks your stamp will sit in inventory for an average amount of time, he may give a $50 offer. If he thinks the stamp will sit in his inventory for longer than normal, his offer may be less than $50. The dealer hopes to make more than the $10 profit he gets from the bank.

To summarize, all dealers have costs and no two dealers are exactly the same. Different dealers may have different demand for the same stamp. Buying stamps is a risky business. Dealers want to be rewarded for that risk. The dealer hopes to make more profit at selling stamps than they could get at a less risky investment like putting the money in the bank.

A dealer does much more than just buy and sell stamps. Dealers attend to things such as: preparing and reviewing advertising; buying to replenish stock; filling orders; answering correspondence; paying bills, managing the customer list; preparing price lists or auction catalogs; traveling to stamp shows, etc.

Back to your $100 stamp. If you bought the stamp at full retail and you need to sell it a short time later, you're probably going to take a loss on this stamp. Will you always sell your stamps at a loss? No. What can you do to try and make a profit when it comes time to sell? Here are some generalized suggestions:

Hold on to the stamp for several years. Stamps appreciate over time. Nineteenth century US issues appreciate more rapidly than other issues. Early 20th century stamps do OK. Post-1940 material has almost no appreciation.

Look for bargains. Some stamp issues are under-valued in the Scott catalog. Sometimes you may spot a misidentified stamp in an auction, sale book, or mixture that you're sorting through. Knowledge may lead to financial rewards.

If you're investing in stamps for a profit, invest wisely. Buy the most expensive stamps you can afford within your stamp budget and in the best condition possible. High quality early US issues have steadily increased in value over the years. Space fillers and common material won't appreciate in value very much. If you're going to invest in stamps, you need to know what you're doing. It's not easy to invest in stamps.

Sell your stamps to another collector. This isn't always as profitable or easy as it looks though. If you sell to a dealer, it's an immediate sale and your expense is very low. If you sell to another collector, you are doing the work to find a customer. In other words, you are now acting like a dealer even if it's only for a short while. It takes time to find a buyer. You have expenses too like postage to write to other interested collectors.

I hope this makes your experience with a dealer more pleasant. I hope you have an appreciation of the many factors that go into determining the value of a stamp. Catalog value is just the tip of the iceberg.