March 31, 2011, 12:00 AM

eBay bets on free shipping

It's the latest strategy designed to revitalize the online marketplace giant, and, as usual, eBay sellers are divided on its merits.

Internet Retailer
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Ask a consumer to describe eBay five years ago and a likely answer may have included the words: deals, auctions, questionable sellers and confusion. Ask eBay the same question today and the answer is: customer, customer and customer.

"We're listening to our customers and striving to meet their needs," says Todd Lutwak, vice president of seller experience for eBay. "E-commerce needs to evolve with their needs and we want to get sellers to move along at their same rate."

And what about the eBay sellers that make up Lutwak's constituency? They're divided, as they've been for much of the last three years since John Donahoe took over as eBay Inc. CEO from Meg Whitman. Donahoe has tried various strategies aimed at restoring eBay to its former glory. Some, like redesigning the site to make it less confusing, drew praise, while others, such as wooing large retailers to sell overstock goods on eBay, appear to have fizzled.

The argument that Lutwak and other eBay executives make is that eBay sellers will benefit if eBay buyers are happy, and that few things make an online shopper happier than free shipping. With that in mind, eBay unveiled its latest pricing schedule last month, and it gives a big boost to eBay merchants that don't charge for shipping.

"Buyers have spoken very clearly," Lutwak says. "Buyers want free shipping. Research shows one of the key reasons shoppers abandon carts is high shipping fees."

Merchant reaction to the new fees was strong and mixed. Robert Bitto, owner of the SuenosImports eBay store, says the new price structure will cause him to remove his products from eBay, and focus on other online selling sites and his own e-commerce site. "I'm going to pump up my web site, pump up my sales on and by the end of the year I will have weaned myself off of eBay," Bitto says.

Other merchants were unconcerned, even if they have to raise prices to cover the cost of shipping. "It doesn't matter how you package it, what it comes down to is your overall gross price including shipping," says Rich Rothbard of specialty camera retailer Cameta Camera, which sells on eBay, and its own e-commerce site. "After price, the first thing a person looks at is if you offer free shipping."

Analysts aren't expecting miracles from eBay's latest move. Lazard Capital Markets analyst Colin Sebastian said after eBay's fourth quarter earnings call that eBay's recent marketplace growth has been slow and steady, and that while eBay continues to grow more slowly than its principal marketplace rival, Inc., he expects that gap to narrow.

While the eBay marketplace, the selling platform that made eBay an early powerhouse of online retailing, struggles to escape its multiyear doldrums, eBay has two rising stars in its PayPal online payment system and its industry-leading mobile commerce initiatives. EBay is investing heavily in these star performers, hoping to give both consumers and retailers reasons to give eBay another look.

Still a force

To be sure, eBay remains a powerful e-commerce company that generated $9.16 billion in revenue in 2010, up 5% from $8.73 billion the prior year. Its $40 billion stock market capitalization speaks to investor confidence in the company and its business model.

But Amazon's market value is $73 billion and a big reason for the difference is that Amazon has been growing faster than e-retailing as a whole, while eBay has trailed the market. Amazon's sales grew 36% in the fourth quarter of 2010, while U.S. e-commerce sales increased 16.1% according to the U.S. Commerce Department, and the value of merchandise sold on eBay's marketplace excluding autos increased only 5.6%. EBay executives have projected 5-7% growth for global marketplace sales in the next few years, suggesting that they, too, aren't expecting miracles.

But they are committed to making eBay the starting point for shoppers' online and mobile shopping, and their latest strategy for accomplishing that is to make sure more eBay sellers offer the free shipping that shoppers love. To that end, eBay's new fee schedule includes the shipping cost of an item when figuring eBay's commission on a sale, but reduces that commission, which eBay calls a final value fee.

Here's how that encourages free shipping: In the apparel category, eBay is reducing its commission to 10% from 12%. That means if a merchant sells an apparel item for $40 and offers free shipping, he will owe eBay $4 (10%), whereas before he owed $4.80 (12%). A seller who closes a $40 sale but charges $10 for shipping will pay eBay a $5 commission under the new rules, 20 cents more than previously, as eBay's final value fee will now be based on a $50 total sale.

Already, 30% of items sold by U.S. eBay sellers include free shipping, which reflects previous changes eBay made to drive down shipping fees. In September, eBay announced it would give sellers offering free shipping and who meet shipping time requirements an automatic 5, the highest ranking, in ship time and ship cost, two of the four categories in the Detailed Seller Ratings that eBay uses to determine which merchants get discounts on fees. Buyers typically rate sellers to create the seller score, but in this case eBay assures merchants top scores in two categories for offering free shipping. EBay also gives items with free shipping preference in search results and places a free-shipping icon next to those results.

Sellers speak out

The changes figure to benefit some of eBay's 25 million sellers and hurt others. For a seller like Bitto of SuenosImports, the change will cost him $1,000 this year. He says he merely passes along his shipping costs and can't lower those costs, regardless of eBay's rules.

Comments | 4 Responses

  • What a STUPID statement. Surely no-one is dumb enough to believe there is such a thing as FREE SHIPPING. Sure, UPS and FEDEX are going to deliver packages for FREE. And the Tooth Fairy will drive the truck. FREE shipping doesn't exist. Sellers PAY a cost to ship everything. eBay may call it that. But Sellers will just increase the price of the item. Without Paypal eBay is gone.

  • ebay struggles in vain to boil the ocean. This doesn't have anything to do with buyer satisfaction. It's about ebay skimming more money off an already strained seller profit margin. Both ebay and Pay Pal now will now collect a commision on shipping charges while not providing any shipping services themselves. ebay operates in the grayest areas of the law this side of illegal. As for sellers being split? Sellers are split in that half of them are angry about the latest scam to rip them off and the other half are apathetic. Sellers that continue to do business with a unscrupulous entity like ebay deserve what they get. The author of this piece would do well to research the facts further before publishing. ebay has set shipping caps of 3 dollars on DVD's.

  • This is one eBay buyer who detests so-called 'free shipping". I often buy a number of items from a single seller at the same time and generally expect that seller to give me a discounted, combined shipping cost. With"free shipping", the actual shipping costs are hidden in the item cost, so there is nothing to discount. "Free shipping" works fine for one-shot buyers, but is horrible for the traditional eBay buyer. But Donahoe apparently doesn't care about us anyway.

  • Did someone mention PreyPal? “Bank customers of participating financial institutions will have the option to select a Visa account as the destination for funds when making a personal payment. By simply entering the recipient’s 16-digit Visa account, email address or mobile phone number, consumers can send funds directly from their bank account to a recipient’s Visa account.”—Visa (16 March 2011) Draft eBay Media Release re PayPal “It is with great sadness that eBay’s Chief Headless Turkey, John Donahoe, announces the probable demise of eBay’s most ugly adopted daughter, PayPal. Donahoe says that PayPal is expected to be soon stricken by particularly virulent strains of Visa/Mastercard simplified “online” payments processing, and these afflictions will be greatly aggravated by PayPal’s lack of any direct financial institutions support and a great deal of PayPal merchant dissatisfaction, particularly with respect to PayPal’s grossly unfair, “all responsibility avoiding” user agreement, most primitive risk management processes, and grossly unprofessional, buyer-biased and fraud-facilitating (indeed, effectively non existent) transactions mediation—to name just a few of the problems that PayPal “merchant” payees have to endure. “Donahoe says that following such affliction PayPal’s health may be expected to deteriorate rapidly and, if ultimately not completely incapacitated, will most likely be kept alive only with the aid of the “life support” provided by eBay’s mandating of PayPal’s use on what little there will eventually be left of the Donahoe-devastated eBay Marketplaces. There is no cure for this condition and the “eBafia Don” is particularly saddened by the inevitable presumption that it is unlikely that PayPal will be able to continue to underpin the eBay Marketplaces’ deteriorating revenues too far into the future.” Undoubtedly, if and when the retail banks decide they want to take the final step (and probably the increased risk and therefore the possible extra work involved) and offer a simpler, “online” payments process, similar to that which PayPal offers, to the many amateur merchants who may otherwise not want (or not qualify for) a bank credit card “merchant” account, and the banks offer that service in their usual professional manner via the likes of Visa/Mastercard, the clunky PayPal will very quickly disappear into the history books—there is simply nothing surer than the sun will rise in the morning. Enron / eBay / PayPal / Donahoe: Dead Men Walking.

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