The online auction powerhouse is fast becoming a mainstream web shopping mall featuring fixed-price merchandise as well as auctions. Will this strategy fly?
by Katie Deatsch
Using the power of the Internet, eBay Inc. created the nonstop, global garage sale that made eBay a household word and a giant in online retailing. But the evolution of the web into an everyday shopping tool for many consumers made the auction format less appealing, and eBay has steadily lost market share in recent years. A new leadership team is working to turn that around.
Led by CEO John Donahoe, who took over in March 2008 from longtime chief Meg Whitman, eBay is carrying out sweeping changes, putting more emphasis on the kind of “here’s the price, buy it now” listings that consumers are used to on other e-commerce sites, wooing larger merchants with vast inventory to sell on eBay, and, most important, putting the interest of the eBay shopper first, even if that means offending the thousands of small merchants that make a living selling on eBay.
And eBay’s new leaders are not mincing words about the challenge they face. “We have been losing ground,” says Stephanie Tilenius senior vice president and general manager, eBay North America. “That’s why we’ve been driving so much change, and we’re going to do more in 2009. Change is hard for everyone, but we are committed to making sure there are no bad experiences for buyers.”
The change that’s coming has broad implications for online retailers, even beyond eBay sellers. EBay’s new strategy of partnering with larger online merchants such as Buy.com and SmartBargains.com opens the door for other e-retailers to sell to eBay’s still-massive customer base. And for other web merchants, eBay’s transformation could mean the emergence of a new, powerful competitor for the loyalty of online shoppers.
While eBay is not going to abandon the online auction business that it still dominates, a lot is riding on whether the company can also appeal to the fixed-price shopper.
By the numbers
For now, consumers are registering with their clicks their declining interest in eBay, a trend most evident when comparing eBay with Amazon.com, by far the two most-trafficked retail web sites.
From Dec. 1 to 24, 2008, traffic to eBay fell 4% from the comparable period a year earlier, while Amazon’s traffic increased 7%, comScore Inc. says. And in November, after years atop Nielsen’s monthly ranking of the most-visited retail web sites, eBay yielded that title to Amazon.
Sales at eBay are taking a hit, too. Merchandise sold on eBay declined for the first time in history in the third quarter, falling 1% to $14.28 billion from $14.40 billion a year earlier. And in the fourth quarter of 2008, sales of merchandise, excluding vehicles, fell 12% year-over-year from $13.10 billion to $11.47 billion. Amazon’s third-quarter sales increased 31%.
Wall Street has registered the contrasting fortunes of the two companies, slashing eBay’s stock price by 60% from January 2008 to January 2009 while Amazon’s share price, also suffering during the market meltdown, fell 41%. As of mid-January, Amazon had a market value of $22.1 billion compared with $16.9 billion for eBay. A year earlier, eBay’s market value was $36 billion and Amazon’s was $34 billion.
“One of the key themes emerging in the e-commerce industry over the past two years is the shift of marketplace momentum to Amazon from eBay,” says Colin Sebastian, an equity analyst at Lazard Capital Markets.
EBay aims to regain momentum by focusing intently on what it believes today’s online shoppers want: more merchandise on offer at fixed prices for easy purchase, lower prices and better customer service from eBay sellers. If the changes eBay makes in catering to consumers irk some eBay sellers—and they do—eBay appears willing to pay that price.
One of the clearest signs of eBay moving toward the mainstream of web retailing is its strategy to encourage eBay merchants to offer more items at set prices for immediate purchase. “Consumers today want to get in and get out,” Tilenius says. “Fixed price is a format that people understand and it’s the fastest. We wanted to create incentives to grow it.”
EBay did just that in August when it announced a new fee structure that charges just 35 cents for 30-day fixed-price listings, down from as much as $4 for seven days. In the new structure, eBay now gets most of its fees only after a fixed-price item is sold, bringing it more in line with Amazon, which only charges merchants that sell through Amazon.com a fee after a shopper makes a purchase.
The strategy seems to be working, albeit gradually. By the end of the third quarter of 2008, fixed price listings accounted for 46% of total listings, up from 41% a year earlier. What’s more, the new fees appear to have encouraged merchants to list more items: new listings were up 26% in the third quarter of 2008 from a year earlier.
In another step to attract shoppers, eBay last year introduced a new top-tier category of merchants called diamond sellers. The category, designed for merchants that sell upwards of $500,000 a month, offers special fee discounts and incentives to large, reliable sellers who offer extensive inventory.
EBay didn’t issue a press release about the new program, and it is vague about qualifications for the tier. But Tilenius says diamond merchants pay no listing fees, and the final value of fees paid to eBay after a sale are “negotiated,” which suggests they are lower than eBay’s posted rates.
Online electronics and general merchandise retailer Buy.com and off-price e-retailer SmartBargains.com are among the first members of the diamond club.
Buy.com started selling on eBay under the radar in late 2007 before eBay announced the special tier, says president and CEO Neel Grover. “We went to them,” Grover says. “We said, ‘We have the second largest catalog of merchandise on the web, and you have the most traffic. Let’s talk.’” Buy.com attracts six million unique visitors each month.
Grover says Buy.com lists on eBay about 1 million products of the 4.5 million items on its own e-commerce site. “It’s all priced the same—it’s our A-stock merchandise,” Grover says. He doesn’t say how Buy.com chooses the items to put on eBay.
Build consumer trust
Grover says incorporating reliable, big-name merchants will build consumer trust and in the long run help other eBay merchants. But some eBay sellers disagree. The Professional eBay Sellers Alliance, a trade group of eBay merchants, wrote a letter to eBay in September arguing that favoring bigger merchants will drive away the smaller retailers that offer the unique goods that made eBay the place to go for items consumers could not find anywhere else.
“Merchants that used to prioritize the eBay channel now regard the marketplace as a venue of last resort used mainly for liquidation of product that doesn’t sell elsewhere,” the letter said. It added that eBay “fails to recognize that the supply issue on eBay is a direct result of their relationship with their customers, the sellers.”
For all the stir that wooing big-name merchants is causing, it’s unclear how much it’s driving sales. Buy.com, which doubled its customer service staff in anticipation of growth in sales from eBay, has yet to experience big returns on its eBay investment, Grover says. “We went into this expecting pretty big results,” he says, “and I think long term it will be a good, beneficial relationship.” But, he adds, “we are still scratching the surface of selling on eBay.”
Grover would like to see diamond merchants like Buy.com given more prominence on eBay. Today, Buy.com is listed as an eBay store called Buy and easily lost in the shuffle of the thousands of other shops. “The overall benefit of what shoppers get with the diamond tier and the advantages of such merchants could have some branding around it,” Grover says.
As with its move to attract bigger merchants, eBay has angered smaller eBay sellers with its steps to revise site search and prod sellers into providing better service.
When auctions were the core of eBay’s business, the top search results would show the auctions that would expire soonest. Now eBay is incorporating fixed-price listings and giving weight to lower-priced listings as well as preference to merchants that garner favorable feedback from buyers.
Tilenius says the aim is to make the site better for shoppers. “For the first time we’ve seen sellers competing on price to drive up their search results, which is a good experience for buyers,” Tilenius says.
But the changes frustrate Doug Day, owner of eBay store Recordsaliendotcom, which sells about $9,000 worth of collectable records a month. “You’ve got millions of items going up and then all of a sudden you change the way that search works, and that makes it confusing for everyone,” Day says. “They are just making it more complicated for buyer and seller to get together.” Day now also sells on Amazon, where his sales average between $2,000 and $4,000 a month, he says.
Merchants have also objected to changes in two eBay programs that enable consumers to comment on their buying experience.
One of the programs, introduced last year in a move to weed out unscrupulous sellers, provides final value fee discounts for eBay merchants that get high marks from eBay buyers. The ratings system asks buyers to rank a seller’s service from 1 to 5 in four categories: how the item was described, seller communication, shipping time, and shipping and handling charges. A 4.6 average garners a 5% discount off standard fees, a 4.8 average earns 15%, and 4.9 or higher gains the seller a 20% discount.
EBay says a 5 rating means a merchant has exceeded expectations, while a 4 means it met expectations. The problem, merchants say, is that a seller who follows through on a promise to, for example, provide free shipping is merely meeting expectations, and is likely to get a 4 in the shipping charge category.
“The negative impact of buyers leaving 4’s for a seller can be significant, even though the eBay site makes it look like a 4 is a pretty good rating,” wrote Steven Grossberg, president of the Internet Merchants Association, a non-profit e-commerce sellers group, in announcing the launch last year of a web site to explain eBay’s ratings system to consumers.
Tilenius says the ratings system is part of eBay’s efforts to satisfy consumers. “We’ve evaluated the shopping experience with the buyer in mind and we are rewarding the best sellers,” she says.
Sellers also objected to eBay changing its feedback system in May to prohibit sellers from leaving negative feedback about buyers, although buyers can still complain about sellers. Feedback is important for a merchant because merchants must keep a positive feedback score of at least 98% to retain power seller status and qualify for fee discounts.
Dishonest buyers
The merchants say the new rules leave them open to dishonest buyers who make unfair demands, such as for discounts or free shipping, and threaten to leave negative feedback if sellers don’t comply. Without the ability to post negative feedback about buyers, the system essentially leaves merchants open to blackmail, they say. But eBay says sellers posted too much unwarranted negative feedback, noting sellers left negative feedback eight times more often than buyers in 2007, up from twice as often four years earlier.
As it tries to reinvent itself, eBay has backed off some changes it has implemented. For example, the marketplace last year tried out a policy that counted a neutral rating by a buyer as a negative in a merchant’s feedback score, noting that oftentimes a consumer’s neutral rating is a “soft negative.” It’s since reversed that. EBay also for a period took away the ability for a seller to work with a buyer to remove negative feedback, then added that back in October.
Ultimately, if merchants are dissatisfied with eBay they can move to other selling platforms, such as Amazon.com and Overstock.com.
Some have, says Rick Raesz, co-owner of PinkSmoothie Boutique, an eBay store that sells between $125,000 and $150,000 a month in baby items and bridal accessories, and head of a Fort Worth, Texas-area eBay merchants group. Raesz says about 50 of the merchants in the 350-member organization are selling elsewhere, and most of the rest are considering it. The Professional eBay Sellers Alliance, in its September letter, claimed that merchants are using other platforms at the highest rate ever, but did not provide data on the number of defections.
EBay’s own statistics do not suggest a big exodus of sellers. The number of eBay stores at the end of September 2008 was 534,000, up 3% from 520,000 a year earlier, eBay says.
Tilenius says eBay recognizes the importance of attracting and retaining sellers of all kinds. “We thrive when we have multiple types of sellers,” she says.
And, she notes, eBay offers a big advantage to sellers compared with Amazon, in that eBay does not compete with merchants by selling its own goods the way Amazon does.
Whether merchant defections will weaken eBay remains to be seen, along with other details about eBay’s strategy, such as communications with buyers and sellers. For instance, eBay has yet to embark on a major effort to speak directly to a mass consumer audience about how eBay is getting better. An eBay spokesman says the company’s communications strategy includes meetings with customers, hundreds of thousands of e-mails to sellers, onsite marketing, web seminars and public relations work.
The new eBay will no doubt be testing its wings in many ways in the months to come. The new management team has made clear it believes the company can’t stand still. Now they have to prove they have a flight plan that will get eBay where they want it to go.
katie@verticalwebmedia.com
