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Ebay Business Case Study Business Model

For sellers looking to unload grandma’s things, the decision to sell online is easy, and whether you list things while at home in your pajamas, have money sent directly to you, or drop packages off in the mail, it’s all way easier than the yard sales of yesteryear. But, you still must choose which big e-commerce site to list with: eBay (EBAY) or Amazon (AMZN).

eBay: The Site Your Grandma Probably Would Have Used

The company that everyone and his brother seemed to use 10 years ago has fallen a bit out of favor in recent years. However, the eBay of today has snapped up quite a few companies since it first launched in 1995, including Paypal, kijiji, and StubHub, and, according to the company, had 800 million listings and 155 million active buyers at the end of 2014.

So how does eBay make money? First, and most importantly, is Paypal. Paypal will be spun off sometime this year in a move that’s expected the halve eBay’s value. The money transfer/payment website is enormously profitable for eBay and, in 2014, contributed almost half of the company’s revenue. With a 2.9% + $0.30 fee for each sale, Paypal fees can easily cut into a seller’s margins.

But let’s focus on the part of eBay that’s comparable to Amazon: the Marketplace. Back in its heyday the eBay Marketplace would charge users an insertion fee based on the item’s starting bid, and, when the item sold, a final value fee. Today, every seller on eBay gets at least 20 free listings. Unfortunately, eBay still charges a final value fee. However, the final value fee calculations have been simplified, and these days, eBay is charging a flat final value fee of 10% of the sale price.

For power sellers, eBay offers subscription packages which, for a monthly fee, give sellers between 150 and 2,500 free listings, a lower insertion fee for sellers who go over their allotment, and a less-simplified but lower range of final value fees that run from 4-9% depending on the item’s category.

Along with the marketplace, sellers can choose to upgrade their listings (better place in the search results, more pictures, etc.) or to list their items at a fixed price. Fixed price listings are subject to the same fees as auction listings and really only have the advantage of satisfying consumers who need to “buy now.”

Amazon: The Site For Web-Savvy Millennials

Amazon has an even more complexfee structure than eBay. The company offers two options for sellers: they can either list as Individuals or as Professionals. For Individuals, Amazon charges $0.99 per item to list along with a referral fee that ranges from 6-45% depending on the item’s listing category. On top of that, there is a variable closing fee which, for BMDV (books, media, DVD and video) items, is not variable at all, at a fixed $1.35 per item. Other products are charged a variable closing fee that is calculated by the item’s weight.

Sellers can list their items in 20-30 different categories (depending on whether they are selling as Individuals or as Professionals) and for BMDV sellers, have set shipping rates set and collected by Amazon. These set shipping rates are great for buyers who know that, when purchasing BMDV items on Amazon, the total price can be easily calculated without searching for individual sellers’ shipping rates.

Amazon allows sellers selling products already listed on the site to list their product simply by entering in the item’s UPC or SKU number. This process cuts down on the time a seller needs to prepare a listing because the relevant information has already been input by Amazon employees. Payment is completed by periodic bank transfers to the seller’s account and sellers are protected by Amazon’s Fraud Protection service.

eBay vs. Amazon

eBay, the original auction site, used to have complicated and expensive selling fees. Since streamlining their fees on May 1st, the structure actually looks simple and easy to understand. Amazon, by comparison, can be confusing and frustrating to navigate.

Sample calculations would be helpful to compare the two sites but, with multi-tiered pricing structures and closing fees which vary by item category, item weight, and buyer payment option, any examples could be construed as cherry-picking or biased towards one company or the other.

Amazon has a few advantages over eBay. For starters, the site does a really good job of making a buyer feel that he is buying directly from Amazon. Seller’s items are listed alongside Amazon’s, purchases can be made using “1-click buying” and, unlike eBay and Paypal, buyers can complete their payment without leaving the Amazon site. With Fulfillment By Amazon, a seller can even have his items stored and shipped directly from Amazon’s warehouses.

On the other hand, a seller might prefer to use eBay in order to customize and personalize his listings. With the ability to post catchy full-color ads within a listing, it might be more appealing and more likely to result in a sale than Amazon’s neutral listings. In an effort to improve efficiency among sellers, eBay has begun a Valet Service that allows sellers to have their items listed and sold by eBay employees.

If a seller is worried about being scammed, he needn’t bother; both companies offer seller protection services as we as the ability to directly contact a buyer if an issue arises. Both companies also offer tutorials and customer support for sellers who are just starting out.

Finally, there’s the question of getting paid. Amazon has a multi-step procedure to set up a seller’s account. Users are automatically signed up for a Professional account and for Fulfillment by Amazon. Account information is input based on a user’s existing account (if any). Finally, there’s a section for Tax Identity Information. That’s right, there’s no shirking the IRS when selling with Amazon.

For eBay sellers, the process is simple: open an eBay account (or use an existing one) and start selling. Getting money into a bank account is a bit more complicated. Amazon users get paid via a direct deposit to their bank account whereas eBay users (usually) get paid through Paypal, a site that takes an additional 2.9%+$0.30 fee before allowing a user to transfer money to a bank account.

The Bottom Line

Whether selling through eBay or through Amazon, the key is to do your research. Given the different pricing schemes associated with each company, an item that might be cheaply sold on Amazon could demand high fees from eBay. For others, the higher price could be justified for the customer service received.

9.19 eBay Inc.

eBay Inc., an online auction and shopping website in which individuals and businesses buy and sell a broad variety of goods and services, is the world's largest online marketplace. The company went public in 1998 at $18/share, and was trading at $282/share by March 1999. {2}

Initially intended as marketplace for individuals, eBay was started by Pierre Omidyar and Jeff Skoll in September 1995, but three years later brought in Meg Whitman, who had studied at the Harvard Business School and knew the value of branding. Whitman in turn brought in staff from companies such as PepsiCo and Disney, and turned eBay more into the business of connecting people than simply selling things. Her team forged partnerships with GM, Disney, Sun, IBM, Dell, Sony, Sotheby's and other large companies, increasing the average sale price (ASP) and therefore eBay's commissions. An important acquisition was PayPal, in 2002, which today serves millions of small merchants in 190 markets and 24 currencies.

eBay Business Model

eBay has been successful by:

1. Meeting an existing need, an online auction, particularly for secondhand goods, {9} in which: {1} {16}

    a. Sellers are charged a non-refundable insertion fee: US$ 0.10 to $2.00, depending on the opening bid.
    b. Browsing, bidding and buying are free of charge.
    c. Sellers are charged a final fee: 9 % of closing price (up to $100).
    d. eBay acts only as a third party, does not take possession of sales items, or guarantee them.
    e. eBay does offer forums, however, a dispute settlement system {9} and a star rating of sellers based on purchaser feedback.

2. Creating a large customer base by: {2}

    a. Forging relationships with over 60 websites, including AOL.
    b. Preventing those companies from competing by contractual arrangements.
    c. Setting up 'business exchanges' where new and existing businesses, merchandise and equipment could be bought and sold.

3. Expanding operations on national and international levels: the company trades in 190 markets today, and 24 currencies {2}

4. Depending on viral marketing to create a strong brand. {2}

5. Seeing off the early competition by: {2}

    a. Acquisitions: the auction house Butterfield and Butterfield, half.com
    b. Expansion into market niches.

6. Fostering a sense of community among buyers and sellers. {2}

7. Making the process easy: sellers need only write a compelling description and add a photo. {2}

Performance

eBay weathered the dotcom crash and expanded rapidly: {15} {16} {19}

Year

Sales

(US$ million)

Net Income

(US$ million)

Operating margin

1997

44.4

7.1

26.3%

1998

86.1

7.3

12.9%

1999

125

9.5

9.9%

2000

431

48.3

18.9%

2002

1214

250

32.9%

2004

3271

778

34.8%

2006

5970

1,126

26.0%

2008

8,541

1,779

23.5%

2010

9,156

2,299

23.7%

2011

11,651

3,229

21.3%

2012

14,072

2,609

21.2%

Also important is the so-called Motley Fools' Flow Ratio, defined as (Current assets - Cash) / (Current liabilities - Short term debt), which measures the performance of working capital on a day-to-day basis. A Flow Ratio below 1.25 is considered attractive, but eBay did better with a Flow Ratio around 0.90 for the first three quarters of 2000 and 0.76 in the fourth. {1}

Acquisitions

eBay has acquired companies to: {13}

1. Protect its position: half.com, Butterfield and Butterfield (later sold to Bonhams), Rent, Markplaats, etc.
2. Extend its market segments: Skype (also bought to enable potential customers to call sellers, but didn't mesh sufficiently and was sold).
3. Improve customer relations: cheap and easy ways to pay for purchases: Billpoint (shut down) and PayPal (still part of eBay) and GSI Commerce.

Threats

1. In the higher ticket bracket, eBay faces competition from specialist auction houses that appraise items and guarantee quality. {11}
2. Fraud remains a serious concern, for eBay and PayPal. {9} {10}

Points to Note

1. First mover advantage applies, since competitors have difficulties in building up a rival customer base and/or offering appreciably lower selling fees.
2. eBay has extended its market segments and improved its customer relations by organic growth and acquisition.
3. eBay has become a more sophisticated marketplace, with fixed-price merchandise now accounting for 68% of sales. {20}

Questions

1. Briefly describe the seven strategies that have made eBay successful.
2. Which eBay acquisitions were beneficial, and which not?
3. What threats to its business does eBay currently face, and what countermeasures is it taking?

Sources and Further Reading

Need the references and resources for further study? Consider our affordable (US $ 4.95)  pdf ebook. It includes extensive (3,000) references, plus text, tables and illustrations you can copy, and is formatted to provide comfortable sequential reading on screens as small as 7 inches.

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