eBay case study

eBay case study:

from Smart Insights Digital Marketing by Dave Chaffeyfrom Smart Insights Digital Marketing by Dave Chaffey

A case study focusing on eBay strategy

This case study summarizes the strategic approach used by eBay to take advantage of increased consumer adoption of the Internet. We have created it as an update for students and professional using Dave Chaffey’s books which feature this case study. In this article we summarise eBay’s objectives, strategy and proposition and key risks. At the end of the article we give sources to find the latest approaches used by eBay.

Recent Q1 2013 results, shows commerce up by 13% in 2013 and fixed listings up by 17%, it growing from strength to strength!.

Context

It’s hard to believe that one of the most celebrated dot-coms has now been established nearly 20 years. Pierre Omidyar, a 28-year-old French-born Software Engineer living in California coded the site while working for another company, eventually launching the site for business on Monday, 4 September 1995 with the more direct name ‘Auction Web’.

Legend reports that the site attracted no visitors in it’s first 24 hours. The site became eBay in 1997 and by 2012, it had 112 million active users globally defined as users who have bid, bought or listed an item during the preceding 12 month period, with the total worth of goods sold on eBay $60 billion, which is equivalent to $2,000 every second. Total revenue was $8.7 billion.

eBay’s Mission

eBay describes its purpose as to ‘pioneer new communities around the world built on commerce, sustained by trust, and inspired by opportunity’. At the time of writing (in x )  eBay comprises three major businesses of the marketplace, PayPal and GSI:

• 1. The eBay marketplaces (approximately 50% of net revenues in 2012). Originally only offering auctions, by 2012, the fixed price listing format accounted for approximately 66% of eBay’s gross merchandise volume, or GMV, with the auction-style format accounting for the remaining 34% of GMV.Marketplaces also include other sites like comparison site Shopping.com and StubHub (event tickets). The mission for the core eBay business is to ‘create the world’s online marketplace’. eBay has also created vertical formats, such as Classifieds, Daily Deals, Fashion, Motors (vehicles, parts and accessories), and Electronics.
  

  The marketplace platforms had more than 112 million active users at the end of 2012 compared to 100 million at the end of 2011. In 2012, nearly $13 billion was transacted on mobile platforms, more than double the mobile commerce volume from the previous year with expected to increase to $20 billion.

  In 2007, eBay’s SEC filing noted that the success factors for this business for which eBay seeks to manage the functionality, safety, ease-of-use and reliability of the trading platform. In 2010 the strategic priorities had changed to trust, value, selection and convenience.

• 2. PayPal (approximately 43% of net revenues in 2012). The mission is to ‘create the new global standard for online payments’.  Acquired in 2003 and is now a significant contributor to eBay revenue with the service incorporated in many other e-commerce sites.
• 3. GSI (accounting for 7% of revenues in 2012) was acquired by eBay in June 2011, GSI is a provider of e-commerce and interactive marketing services including websites and fulfilment centres to enterprise clients that include some of the world’s leading brands and retailers covering merchandise categories, including apparel, sporting goods, toys & baby, health & beauty and home.

eBay’s Revenue model

The vast majority of eBay’s revenue is for the listing and commission on completed sales. For PayPal purchases an additional commission fee is charged.

Margin on each transaction is phenomenal since once the infrastructure is built, incremental costs on each transaction are tiny – all eBay is doing is transmitting bits and bytes between buyers and sellers.

Advertising and other non-transaction net revenues represent a relatively small proportion of total net revenues and the strategy is that this should remain the case. Marketing services and other revenues accounted for an additional $2 Billion in 2012. Another part of the business, Skype Internet telephony, was acquired in 2005 by eBay and sold to an investor group in November 2009 with a 30% share retained by eBay.

Proposition

The eBay marketplace is well known for its core service which enables sellers to list items for sale on an auction or fixed-price basis giving buyers the opportunity to bid for and purchase items of interest. Software tools are provided, particularly for frequent traders, including Turbo Lister, Seller’s Assistant, Selling Manager and Selling Manager Pro, which help automate the selling process, plus the Shipping Calculator, Reporting tools, etc.

Today over 60% of listings are facilitated by software, showing the value of automating posting for frequent trading.

According to the SEC filing, eBay summarises the core messages to define its proposition as follows:

For buyers:

• Trust
• Value
• Selection
• Convenience.

In 2007, eBay introduced Neighbourhoods where groups can discuss brands and products they have a high involvement with.
For sellers:

• Access to broad global markets
• Efficient marketing and distribution
• Opportunity to increase sales.

In January 2008, eBay announced significant changes to its marketplaces business in three major areas: fee structure, seller incentives and standards, and feedback. These changes have been controversial with some sellers, but are aimed at improving the quality of experience.

Detailed Seller Ratings (DSRs) enable sellers to be reviewed in four areas: (1) item as described, (2) communication, (3) delivery time and (4) postage and packaging charges. This is part of a move to help increase conversion rate by increasing positive shopping experiences.

For example, by including more accurate descriptions with better pictures and avoiding excessive shipping charges. Power sellers with positive DSRs will be featured more favourably in the search results pages and will gain additional discounts.

Risk factors

Fraud is a significant risk factor for eBay. BBC (2005) reported that around 1 in 10,000 transactions within the UK were fraudulent; 0.0001% is a small percentage, but scaling this up across the number of transactions, this is a significant volume.

To counter this, eBay has developed ‘Trust and Safety Programs’ which are particularly important to reassure customers since online services are prone to fraud.

For example, the eBay feedback forum can help establish credentials of sellers and buyers. Every registered user has a feedback profile that may contain compliments, criticisms and/or other comments by users who have conducted business with that user. The Feedback Forum requires feedback to be related to specific transactions and Top Seller status was introduced in 2010 to increase trust in the service.

There is also a Safe Harbor data protection method and a standard purchase protection system.

The fees model that eBay uses is often changed and this can cause problems with users, but the impact is calculated that it does not affect overall sales. In their 2012 SEC filing eBay note: ‘We regularly announce changes to our Marketplaces business intended to drive more sales and improve seller efficiency and buyer experiences and trust. Some of the changes that we have announced to date have been controversial with, and led to dissatisfaction among, our sellers, and additional changes that we announce in the future may also be negatively received by some of our sellers. This may not only impact the supply of items listed on our websites, but because many sellers also buy from our sites, it may adversely impact demand as well’.

In common with other global platforms like Amazon, Facebook and Google, eBay note the potential threat of the shift to tablet and smartphone platforms noting that one risk factor is: ‘Our ability to manage the rapid shift from online commerce and payments to mobile and multi-channel commerce and payments’.

There is also the common risk factors for online pureplays of retaining an active user base, attracting new users, and encouraging existing users to list items for sale, especially when consumer spending is weak.

Competition

Although there are now few direct competitors of online auction services in many countries, there are many indirect competitors. SEC (2012) describes competing channels as including online and offline retailers, distributors, liquidators, import and export companies, auctioneers, catalogue and mail order companies, classifieds, directories, search engines, products of search engines, virtually all online and offline commerce participants and online and offline shopping channels and networks. In their SEC filing, eBay states that the principal competitive factors for the Marketplaces business include the following:

• ability to attract, retain and engage buyers and sellers;
• volume of transactions and price and selection of goods;
• trust in the seller and the transaction;
• customer service; and brand recognition.

Although eBay is one of the largest eCommerce businesses, these factors also need to be actively managed by the smallest online e-retailer.

For their online and mobile competition, they describe additional competitive factors including:

• community cohesion, interaction and size;
• website or mobile application ease-of-use and accessibility;
• system reliability;
• reliability of delivery and payment;
• level of service fees; and
• quality of search tools.

Before the advent of online auctions, competitors in the collectables space included antique shops, car boot sales and charity shops. Anecdotal evidence suggests that all of these are now suffering. Some have taken the attitude of ‘if you can’t beat ’em, join ’em’. Many smaller traders who have previously run antique or car boot sales are now eBayers. Even charities such as Oxfam now have an eBay service where they sell high-value items contributed by donors. Other retailers such as Vodafone have used eBay as a means to distribute certain products within their range.

Objectives and strategy of eBay

The overall eBay aims are to increase the gross merchandise volume and net revenues from the eBay marketplace. More detailed objectives are defined to achieve these aims, with strategies focusing on:

• 1 Acquisition – increasing the number of newly registered users on the eBay marketplace.
• 2 Activation – increasing the number of registered users that become active bidders, buyers or sellers on the eBay marketplace.
• 3 Activity – increasing the volume and value of transactions that are conducted by each active user on the eBay marketplace.

The focus on each of these three areas will vary according to strategic priorities in particular local markets. eBay marketplace growth was driven by defining approaches to improve performance in these areas.

• First, category growth was achieved by increasing the number and size of categories within the marketplace, for example Antiques, Art, Books, and Business and Industrial.
• Second, formats for interaction. eBay Stores was developed to enable sellers with a wider range of products to showcase their products in a more traditional retail format including the traditional ‘Buy-It-Now’ fixed-price format.

eBay has constantly explored new formats, often through acquisition of other companies, for example through the acquisition in 2004 of mobile.de in Germany and Marktplaats.nl in the Netherlands, as well as investment in craigslist, the US-based classified ad format. Another acquisition is Rent.com, which enables expansion into the online housing and apartment rental category. In 2007, eBay acquired StubHub, an online ticket marketplace, and it also owns comparison marketplace Shopping.com.

Finally, marketplace growth is achieved through delivering specific sites localized for different geographies as follows.

You can see there is still potential for greater localization, for example in parts of Scandinavia, Eastern Europe and Asia. Localized eBay marketplaces:

• Australia
• Austria
• Belgium
• Canada
• Singapore
• South Korea
• Spain
• France
• Germany
• Hong Kong
• India
• Ireland
• Sweden
• Switzerland
• Italy
• Malaysia
• Netherlands
• New Zealand
• Philippines
• United Kingdom
• United States

In addition, eBay has a presence in Latin America through its investment in MercadoLibre.

eBay’s growth strategy

In its SEC filing, success factors eBay believes are important to enable it to compete in its market include:

• ability to attract buyers and sellers;
• volume of transactions and price and selection of goods;
• customer service; and brand recognition.

This implies that eBay believes it has optimized these factors, but its competitors still have opportunities for improving performance in these areas which will make the market more competitive. According to its 2010 SEC filing: Our growth strategy is focused on reinvesting in our customers by improving the buyer experience and seller economics by enhancing our products and services, improving trust and safety and customer support, extending our product offerings into new formats, categories and geographies, and implementing innovative pricing and buyer retention strategies.

Updates on eBay case’s study information

• eBay company pages
• eBay investor relations 
• eBay SEC filings
• eBay Youtube commercial strategy