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How Do Coin Dealers Earn Their Income?
By Patrick A. Heller
June 25, 2012



Over the years I have heard a number of collectors and non-collectors state their opinions on how coin dealers earn their income. It both amuses me and dismays me that most of the ideas I have heard are simply incorrect.

For example, more than once someone has told me that 100 percent of the merchandise selling price represents pure profit for a dealer. I only wish that it would be possible to acquire inventory for free and that all the supplies, equipment, and real estate I use to package, display, and deliver merchandise did not cost anything except time.

There are several different means by which dealers try to make money in the business. Here are some venues:

A bricks-and-mortar store that buys and sells with the public and dealers. In general, such businesses earn the bulk of their income from buying from the public and other dealers. For instance, my company purchases merchandise from about five times as many different retail customers compared to the number of retail customers who buy from us. There are a few reasons for this. Perhaps the most important is that many sellers strongly prefer to sell to a business that is convenient for them to personally visit. In such circumstances the convenience, safety, and prompt payment are more important than possibly realizing a somewhat higher price at the risk of trying to deal with a stranger by mail-order and receiving payment that is not as fast as a local buyer.

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Some storefront dealers seek high volume by also handling significant coin show, mail-order, or internet sales. As a result, they tend to be aggressive buyers simply to acquire inventory to sell. Coin shops that are heavily dependent on walk-in traffic to cover overhead and generate a profit might be forced to try to work on wider profit margins as they may be more dependent on selling items on the wholesale market rather than to retail buyers.

A dealer with no store that sets up at shows and handles mail-order transactions. Such a dealer can operate such a business on a part-time basis to provide supplemental income or to occupy themselves at a slower pace after retirement. Such dealers may specialize in a particular niche (such as U.S. paper money), items of a specific era (like U.S. colonial issues or ancient Greek coins), or specific series (for instance, Morgan and Peace dollars or large cents). Such dealers have the dual challenge of developing sources of inventory that will probably cost them somewhat more than bricks-and-mortar stores pay the general public and of finding customers for the merchandise they acquire who will pay more than it costs them to acquire inventory. If such a dealer becomes known for their expertise in a certain numismatic category, they will tend to get “first shot” at some quality collections that are being put up for sale as well as accumulating want lists from serious collectors. Dealers with no store could either make more money on the buying side or on the selling end of their business.

A dealer that focuses on internet sales. There are some dealers who augment other operations by also listing or auctioning lots on the internet. But there are also many dealers who sell only by this venue. Some of these sellers are not really dealers in my mind as they are simply trying to sell collections they own, thinking that they will receive a higher net price by this means rather than selling to a dealer. If a seller does not put a value on the time commitment (and I know several who consider it as recreation rather than as a for-profit effort), this might be true. There are also some who enjoy browsing internet auctions looking for lots that they judge are selling too cheap. They try to scoop up such bargains and turn around and sell them for a higher price. In general, those who strictly sell through internet sales rely on making their income by making bargain purchases or are trying to realize higher prices for items they own than they could realize in selling them by a different method.

A dealer that focuses on general auction sales. A number of coin dealerships have major auction operations. In some instances, the auction business is the major part of overall operations. Here the challenge is for the dealer to attract enough quality lots for auction so that the fees earned cover expenses. An advantage for the auction company is that they make a percentage on the selling price, so don’t have to worry about the actual price at which an item sells. Once again, the success of auction companies depends on attracting consignors. The best way to accomplish this is by word-of-mouth testimonials with sellers who are satisfied with the prices realized. In a way, the auction house makes money by attracting consignors who will sell, but this appeal depends how well items sell in auctions. While auction houses have to do extensive work to attract lots for consignment to auction, they also have to promote the auctions themselves. If one of the two sides of this flow of inventory doesn’t succeed, the entire dealership will do poorly.

Dealers that market to non-numismatists. When you see merchandise offered on the television sales channels or in the Sunday newspapers, the dealers in that part of the market are trying to make money by selling attractive and interesting merchandise. Such dealers make their money on the sell side of the market rather than on the buying side. Unfortunately, there have been a number of instances of high-pressure, telemarketing, fly-by-night companies in this niche, who have taken advantage of non-numismatists to sell them excessively overpriced merchandise. As a result, these bad eggs have hurt the reputation of every coin dealer in the public’s perception. Generally, dealers who make their income by marketing to non-numismatists derive the bulk of their income when they sell the merchandise.

Dealers who cherry-pick undergraded/underpriced inventories from other dealers. As collectors know, the grading spectrum is a continuous range. A lot of Morgan dollars, for example, might all be graded Very Choice Mint State-64 by a dealer or even a third-party grading service. However, if grading were more precise, it would turn out that some of the coins might grade 64.008, 64.533, or 64.888. Further, some collectors focus more on specific elements of the grade as being more important than other attributes: strike, luster, marks, etc. It also happens that grading isn’t as objective as some dealers and grading services might want people to believe. So, there are some dealers who try to earn income by purchasing coins and paper money that, in their judgment, are graded or priced too low. Those with the best track record at “cherry-picking” earn the highest income, which is pretty much all earned by successful buying.

Dealers who operate grading services. Numismatists and the general public alike are largely comfortable with the benefits of independent third-party grading services. Though no service will ever be perfect, they generally screen out problem and counterfeit coins and are close if not right on in judging current grading standards. Grading services make money off the submissions they receive. The main way to encourage submissions is by providing quality services at reasonable prices. As with auction houses, the money is made by the receipt of submissions, but the ultimate results of the prices that certified coins trade for in the market place. So, some of the income is earned by more submissions, but that is prompted by turning out a quality product.

Of course, there are many dealers that operate their businesses in multiple venues. However, the simple fact to keep in mind is that just about any numismatic item is liquid at some price. Therefore, most dealers have the incentive to ascertain what they can get for coin or bank note and buy it for less than that. As a result, most of a typical coin dealer’s income is derived at the time of buying merchandise, not when it is sold.

By the way, a number of dealers might be well-educated numismatists. However, that does not automatically make them expert business people or skilled at good customer service. The most successful coin dealers are those who combine numismatic skills with competency at running a business and serving customers.



Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).



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Comments
On July 9, 2012 Gary Lewis said
This is a very good articile about how dealers earn their income and I enjoyed reading it.  The only thing that I might have added is cherry-picking varieties.

Something to add? Notice an error? Comment on this article.
 



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