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.

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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 Etsy.com 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, Amazon.com 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, Amazon.com 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.

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