April 1, 2005, 12:00 AM

Follow that margin

Small retailers who began life on eBay are branching out

Todd Rath launched his discounted golf equipment business online in 2002, with eBay.com as the exclusive sales outlet. Three years later, he`s pushing as much of his $14 million-plus annual sales as possible off eBay and onto other online platforms, including his company`s own web site, Rockbottomgolf.com, launched in 2003. The reason? Smaller margins on eBay. For Rath and some other eBay sellers, the auction site`s January announcement of fee hikes is just one more reason to keep moving in the direction of finding additional sales channels and building their own brand.

With gross merchandise sales of $34 billion last year, eBay is the largest marketplace on the Internet. And against eBay`s net income of $778.2 million in 2004 on revenues of $3.27 billion, counting the contribution of its PayPal unit, Rockbottomgolf`s decision to seek greener pastures might amount to less than a blip on eBay`s radar screen. Except for one thing: what makes sense for Rath`s business also makes sense for other e-retail operators selling on eBay.

More merchants

EBay is firmly fixed in consumers` minds as a place where auctions can get them a cheaper price on goods. Drop out p2p auctions, however, re-frame eBay as simply a venue that brings buyers and sellers together online, and the picture changes. EBay doesn`t break out how many of its sellers are commercial enterprises including online merchants, though it`s a safe bet it`s sizeable and growing. In fact, CEO Meg Whitman told a recent gathering of analysts at Goldman, Sachs that the size of merchant opportunity was "bigger than we had anticipated."

If those merchants are like Rath, however, their interest isn`t in auctions specifically, but in whichever selling format delivers the best return and whichever venue does. That means that within this group, eBay`s seller base isn`t threatened so much by defection to other auction sites already in place or just popping up to try to scoop up disgruntled eBay sellers. EBay`s real competition is any e-commerce platform where the margins are better. "All these platforms are basically trying to do the same thing--bring a buyer together with a seller," says Michael Jones, COO, of Channel Advisor. "So their challenge becomes, how do they incentivize sellers to have their platform be the one sellers want to sell the most goods on?" he says. "Over the next five years, this is going to be a pretty big battleground." That turns eBay`s fee increase into a wakeup call for more than a few e-retailers, sparking more interest in other selling platforms and in search marketing.

One of the most successful enterprises on the Internet, eBay has no significant competition in p2p auctions and isn`t likely to soon. The cost of sizing up to a scale that would represent a threat is just too high. Yahoo and Amazon have auctions, but it`s not a business either focuses on. The only other contender of note to emerge, Overstock.com Inc., stands above a field of here today/gone tomorrow auction venues with a recognized brand name. It`s poured millions into supporting and marketing its auctions and it deliberately differentiates its offering on the basis of what people don`t like about eBay, with lower listing fees, price breaks on volume listings and a soft close that short-circuits the automated sniping that has buyers complaining about eBay auctions. Even so, Overstock`s aspirations for its auction business appear to extend only as far as supplementing eBay among sellers.

Competing platforms

"Our goal is not to get people to leave eBay, but to look at us, too," Holly MacDonald-Korth, Overstock`s vice president of auctions, told Internet Retailer in December. Overstock Auctions, which launched last year, has a long way to go in catching up with the sheer bulk of eBay`s listings. EBay itself underscored that point in a recent analysts` day conference presentation. In a slide titled "Understocked?" eBay compared all 45,902 live listings across Overstock on Feb. 3 to 58,259 live listings in a single eBay category.

"I don`t see vulnerability coming from other auction platforms," observes Safa Rashtchy, an analyst with investment firm Piper Jaffray & Co., who downgraded his rating on eBay shares after eBay`s fourth quarter earnings fell 1 cent short of Wall Street`s forecast and the company cut its outlook for first-quarter earnings. "It`s coming from competing trading platforms, e-commerce platforms, search, and even smaller web sites that are selling goods directly."

That`s where Rockbottomgolf is headed. "What I`m starting to find the farther I go down the marketing path is that you can actually create traffic on your own site for almost the same it costs you to get sales on eBay," says Rath. He estimates that eBay`s various fees cost him about 7% of the value of each transaction and that by contrast, each transaction on his own site, a Yahoo storefront, costs about 0.5%--Yahoo`s share of the transaction. Rockbottomgolf.com also pays Yahoo a monthly subscription fee for the store, an amount Rath terms "minuscule, when you think about how much we run through the site in a month." In January, for example, he sold $270,000 in merchandise on Rockbottomgolf.com, and about $500,000 on eBay.

Using the services of provider Channel Advisor to syndicate XML feeds of its electronic catalog, Rockbottomgolf is now also listing on additional platforms such as Shopping.com. "My ROI on Shopping.com is sometimes better than on eBay because my margin is higher," says Rath. "In my opinion, that`s where eBay starts to break--when it costs me more to create the sale there than when I can go to Shopping.com, BizRate, and Froogle."

A swift kick

Retail is a small but growing segment for another Channel Advisor customer. B2B computer and accessories wholesaler Exel-I.com also sells laptops and parts b2c on LaptopBroker.com. "We were fortunate on eBay in the past to be able to support our retail transactions in a volume that was acceptable to us at a cost that was profitable," says John Wieber, president. "But recent events at eBay including their most recent price increase really gave us a swift kick that told us it was time to start looking at other places for retail."

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