Follow that margin

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."

In January, eBay announced changes in its fee structure that boosted the listing fee for a 10-day auction to 40 cents from 20 cents, and raised the fee for a basic eBay store subscription to $15.95 per month from $9.95. It increased the final value fee on items sold from eBay stores in a tiered scale that rose from the original 5.25% to 8% of the value of items priced at up to $25. Above $25, it`s now 5% up to $1,000 and 3% of the remaining balance, up from 2.75% to $1,000 plus 1.5% of the remaining balance to (see box).

An experiment

But it was the fee increases for the gallery and Buy It Now features that got Wieber`s attention. Gallery fees that permit sellers to post photos of an item rose to 35 cents from 25 cents per listing, while Buy It Now fees went from a flat rate to being tied to the value of the listed item. The new Buy It Now fees are 5 cents for items priced at under $10, 10 cents for items priced at $10 to $24.99, 20 cents for items priced at $25 to $49.99, and 25 cents for items priced at $50 or above.

All told, "If we had not changed any of our listing strategies on eBay, the last increases would have meant about a $55,000 increase in our eBay fees," says Wieber. "We stopped using gallery and we stopped using Buy It Now."

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Besides getting Wieber to reduce his spending on some eBay seller features, the fee hikes also have accelerated an upgrade of LaptopBroker.com, which currently operates as a Channel Advisor storefront, and sparked an experiment in selling on Amazon. Currently LaptopBroker lists about 115 items on Amazon as a selected merchant. It hopes to increase that number to 2,000 by June. Amazon charges a flat fee and no listing fee to sellers using that format, and it offers something else: a different kind of buyer than frequents bargain-focused eBay. "Amazon can deliver full retail price buyers. For some products, we can almost double and sometimes triple what we get on Amazon from what we get on eBay," Wieber says.

Wieber adds that after the site upgrade, LaptopBroker expects to branch out into paid search marketing and getting onto shopping comparison sites. "It`ll be expensive at first, because we are going to be paying per click, paying Amazon, and paying eBay. But I see our sales on eBay going down and us converting that spending to PPC," he says.

Hytechgear.com, a marketer of professional sound and lighting equipment, launches auctions on eBay with the services of provider Vendio Services Inc. CEO Eric Johnson is also looking for sales channel alternatives to eBay, which represents about 25% of sales, with the balance from the company`s web site, telephone orders and a small amount of walk-in business.

Johnson finds that what sells on eBay has lower margins than what sells on the site and on the phone. "When I put an item on eBay and everything`s said and done, I`ve sold the item and pretty much just covered the cost of marketing it," he says. While the margins may be less profitable, however, Johnson notes that eBay provides much broader marketplace exposure than he would have on just his own site. "For us, eBay is paid advertising," he says. "It`s a way of letting people know you`re there and allowing them to make a purchase from a vendor they didn`t know before. I have a 20,000-person mailing list that was acquired by being on eBay."

Unbeatable market reach

Johnson`s experience shows that while sellers may complain of fee increases, they recognize that nothing beats eBay`s market reach. It`s the largest e-commerce platform, getting 10.6 million unique visitors on an average day, according to February figures from comScore Networks Inc. Though it`s a goal of retailers such as Rath to eventually use eBay primarily as a liquidation channel, eBay also remains a better market for specialized merchandise that requires a big marketplace to move, left-handed golf clubs, for example. "I will never ignore the millions of hits eBay gets in a day," Rath says. "I`ll always have product on eBay for brand recognition, and to acquire customers."

While it makes intuitive sense to follow the margins to the commerce platforms where they are best realized, plenty of retailers selling on eBay haven`t yet reached the point of distributing sales across multiple online outlets or swapping out eBay fees to spend more on PPC advertising. That`s for a couple of good reasons. Mike Effle, executive vice president of sales management at Vendio, points out that eBay requires a minimal upfront investment to start realizing revenue immediately. "The business owner lists today, sells within seven days, and realizes the cash from that sale quickly after that. It may not be the margin he desires, but the pump works," Effle says.

By contrast, moving beyond eBay to other platforms requires retailers to invest now for returns that won`t happen for months or into the next year. "Some decide it`s worth the broader investment if they have a good source of supply, a unique product, or otherwise want to create a brand for themselves," Effle says.

While continuing fee increases and opportunities elsewhere are causing some retail sellers to look beyond eBay, eBay, for its part, has set its sights on increasing its share of e-commerce in the U.S. Counting all eBay transactions in all formats, that`s already about 24% of all e-commerce in the country, according to figures from IDC. To achieve that, eBay has outlined a strategy that seeks to brings more new sellers and buyers into its platform, for instance, by continued innovation in trading formats such as its new Want It Now and Best Offer features.

Doing things right

EBay also will seek to expand user activity in categories it already has and launch new categories, with the idea of getting buyers in one category to buy in related ones. In January, Whitman told Goldman Sachs analysts that a high percentage of eBay buyers buy only in one category and a small percentage regularly buy in two. "We have work to do to move that up to three and four," she said. "If you buy jewelry, you should also buy cosmetics. If you buy cosmetics, you should also buy other health and beauty aids." EBay will change its marketing mix slightly so as to expand the daily consideration of categories among buyers, a build on its historic focus on customer acquisition, Whitman said. EBay--already a big buyer of paid search advertising--says it will continue to leverage natural and paid search to market eBay listings to buyers, and it issued its first catalog last year. And that`s just in the U.S. EBay has also announced plans to spend significantly in expanding internationally and continuing to export PayPal abroad.

"They are doing the right things," says Rashtchy. "They`re expanding geographically, expanding categories as much as they can, and increasing the activity level. I would contend there is still significantly more there than meets the eye in what we saw as represented by their Q4 performance."

But what eBay does globally in the future to maintain or boost its share price is less immediately relevant to retailers than what eBay can do for their business right now.

As retailers evolve online, so does the way in which they use eBay. For some, eBay`s importance as a quick and inexpensive route to online sales and a way to get in front of the widest possible set of potential buyers is giving way to new thinking in which eBay`s greater value is as a liquidation strategy and a means of finding new customers. "I don`t think we`ll ever leave eBay completely," says Wieber. "It`s good for a certain type of product, and we have been doing it for a long time. We have very good systems for selling on eBay. To scrap all of that would not be smart."

Wieber`s position represents the view of many that expect to keep a foot on eBay`s platform while exploring new options as they move along that evolutionary curve. "EBay`s a fabulously strong platform and will continue to be so," Effle says. "But what we are seeing is that there are now other companies that can do an efficient job of driving customers to merchants."

mary@verticalwebmedia.com