Why has eBay succeeded as an online auction marketplace while so many others have failed?
In 1995, Pierre Omidayar, a French-Iranian immigrant, wrote the code for an auction Web site where everyone would have equal access to a single global marketplace. Omidayar couldn’t believe it when a collector bought the first item, a broken laser pointer, for $14.83.* Soon the site grew into a broader auction site where consumers could auction collectibles such as baseball cards and Barbie dolls. The momentum continued when individuals and small businesses discovered that eBay was an efficient way to reach new consumers and other businesses. Large companies began using eBay as a means of selling their bulk lots of unsold inventory. Today, people can buy and sell virtually any product or service, on the world’s largest online marketplace. From appliances and computers to cars and real estate, sellers can list anything as long as it is not illegal or violates eBay’s rules and policies. eBay’s success truly created a pricing revolution by allowing buyers to determine what they would pay for an item; the result pleases both sides because customers gain control and receive the best possible price while sellers make good margins due to the site’s efficiency and wide reach. For years, buyers and sellers used eBay as an informal guide to market value. Even a company with a new product design that wanted to know the going price for anything from a copier to a new DVD player checked on eBay. eBay has evolved to also offer a fixed-price “buy it now” option to those who don’t want to wait for an auction and are willing to pay the seller’s price. Sellers can also use the fixed price format with a “best offer” option that allows the seller to counteroffer, reject, or accept an offer. The impact of eBay’s global reach is significant. In 2009, over $60 billion worth of goods was sold on eBay—that’s almost $2,000 worth every second. The site has 405 million registered and 90 million active users and receives 81 million unique visitors a month. More than 1 million members make their living from the site. Yet eBay itself doesn’t buy any inventory or own the products on its site. It earns its money by collecting fees: an insertion fee for each listing plus a final value fee based on the auction or fixed price. For example, if an item sells for $60.00, the seller pays 8.75 percent on the first $25.00 ($2.19) plus 3.5 percent on the remaining $35.00 ($1.23). Therefore, the final-value fee for the sale is $3.42. This pricing structure was developed to attract high-volume sellers and deter those who list only a few low-priced items. With eBay’s expansion into a wide range of other categories—from boats and cars and travel and tickets to health and beauty and home and garden—collectibles now make up only a small percentage of eBay sales. eBay’s business model is based on connecting individuals who otherwise would not be connected. It was the first example of online social networking, years before Twitter and Facebook existed, and consumer trust is a key element of its success. While skeptics initially questioned whether consumers would buy products from strangers, Omidayar believed people are innately good, and eBay’s originators did two things well: they worked hard to make their Web site a community, and they developed tools to help reinforce trust between strangers. The company tracks and publishes the reputations of both buyers and sellers on the basis of feedback from each transaction. eBay extended its feedback service in 2007 by adding four different seller categories: items as described, communication, shipping time, and shipping and handling rate. The ratings are anonymous but visible to other buyers. Sellers with the highest rankings appear at the top of search results. eBay’s millions of passionate users also have a voice in all major decisions the company makes through its Voice of the Customer program. Every few months, eBay brings in as many as a dozen sellers and buyers and asks them questions about how they work and what else eBay needs to do. At least twice a week the company holds hour-long teleconferences to poll users on almost every new feature or policy. The result is that users (eBay’s customers) feel like owners, and they have taken the initiative to expand the company into ever-new territory. eBay continues to expand its capabilities to build its community and connect people around the world by adding services, partnerships, and investments. The company acquired PayPal, an online payment service, in 2002 after eBay members made it clear that PayPal was the preferred method of payment. The acquisition lowered currency and language barriers and allowed merchants to easily sell products around the world. eBay also acquired Skype Internet voice and video communication service in 2005, which allowed buyers and sellers to communicate over voice or video free and generated additional ad revenue for eBay. However, in 2009 eBay sold a majority stake in Skype to focus more on its e-commerce and payments businesses, leading the company to acquire S, StubHub, Bill Me Later, and others. eBay now has a presence in 39 markets around the world. Although eBay was a darling in the dot-com boom and has achieved tremendous success since then, it is not without challenges. These include a worldwide recession, increased competition from Google, and difficulties as it expands globally into tough markets such as China. Its CEO, Meg Whitman, retired in 2008 after leading the company for 10 years and was replaced by John Donahue. Under its new leadership, the company continues to focus on one of its founding beliefs: a strong commitment to and investment in technologies that help people connect. Recent efforts to adopt mobile applications, integrate with iPhones, and become more green have helped take the company to the top of such lists such as Newsweek’s Greenest Companies in America and Fortunes 100 Best Companies to Work For in backto-back years.
1) Why has eBay succeeded as an online auction marketplace while so many others have failed?
2) Evaluate eBay’s fee structure. Is it optimal or could it be improved? Why? How?
3) What’s next for eBay? How does it continue to grow when it needs both buyers and sellers? Where will this growth come from?