Thursday, May 10, 2007

eBay's Power of Three To Control Sellers

We've all heard the eBay messaging about "The Power of Three". This is a reference to eBay (Marketplace Biz), PayPal and Skype as the three most powerful brands at eBay. One of the three is now struggling (eBay Marketplaces), one is humming along at a nice pace (PayPal) and the jury is still out on the third (Skype).

I want to discuss a different "Power of Three", one that eBay managers use to control sellers within the marketplace. This "Power of Three" consists of Price (fees) Policy (Trust & Safety) and Product (Visibility, restrictions etc.)

The Power of Price (Seller Fees)
Up until recently the preference of eBay managers was to use Price (fees) to control the marketplace because, of course, this is the easiest of the three to implement and it improves the bottom line. While many sellers believe that eBay raises fees solely to make more money; that is far from the case. eBay raises fees to control a marketplace that they think is unbalanced or headed in the wrong direction. The main motivation for the store fee increase of 2006 was not to make more money but to put pressure on store owners to reduce the number of items they listed; the side benefit was a boost to the bottom line because many sellers didn’t do what eBay wanted.

Again, in Feb of 2007 eBay targeted one segment of Core listings ($1.00 to $9.99) with a 5-cent increase in listing fees. This again was an effort to reduce the number of fixed price and auction listings in this range therefore encouraging sellers to either list items at 99 cents and let the market determine the value of the item or reduce the number of items sellers listed in that range. Lowering the starting bid to .99 cents improves conversion rates, that is a no brainer. They went after this price range because it was where the majority of product was being listed. The benefit, of this move, was higher conversion rates and marginally higher ASP’s and again if sellers didn’t change there listing strategies then there was an improvement to the bottom line.

Unfortunately, because eBay has used fees to mold seller behavior for so long the impact of these moves is lessening. So what’s a senior executive to do? How about using Policy to mold behavior.

The Power of Policy (Trust and Safety)
This approach is much more direct than using fees to mold seller behavior and therefore less appealing. It also requires a beefing up on the cost side of the ledger, which no business wants to do. Policy is like hitting sellers with a hammer while fee increases are more of a shove. Policy changes are meant to keep sellers in line, stop gaming of the system and get rid of undesirables. This is a lot of work and costs a lot of money so it is often a move of last resort. I could go more in-depth on specific moves eBay has made in this area but I’m sure you get the point.

The Power of Product (Visibility, Restrictions etc)
Until recently this third element of the Power of Three was used infrequently but since some of these other options haven’t worked it has become the last option management has in their arsenal.

If store sellers will not reduce the number of slow selling items that they list then management will reduce visibility of their listings effectively forcing them to remove these listings. One little aside on this subject, eBay doesn’t want those low velocity items on the site, unfortunately many sellers live in “The Long Tail” and don’t want to miss out on any sales even it they move only once or twice a year.

The new Search eBay is testing (they call it finding) is ostensibly to improve the buyer experience but a side benefit for eBay is that they can manage visibility by improving ranking of higher velocity items and reducing ranking of slow movers and store items. All items will show up but preferential position will be given to the high velocity items.

I think that eBay will continue to use policy to change behavior but it appears that product (visibility) will be the preferred method they use going forward. I think fee increases may be put on the sidelines for a while. Just my 5 cents!


Ina Steiner said...

Very thoughtful post, a lot to think about.

Joey said...

I am getting ever closer to closing my store. I have seen my store sales decline. So, I have been moving some items to another channel. I'll stay on Ebay but I probably won't have my store with 200 to 300 listings much longer. As for running core listings I will also do less of those. In the past a marginal item that may or may not sale at core I would run on auction and if it didn't sale relist it as a store listing. Those items will go straight to another sales channel instead of Ebay.

By the way, your post was very well written.

Randy Smythe said...

Joey, thanks for your comments. Your response is the response they want to hear from other sellers.

I don't believe they want to get rid of stores but they want to reduce items that are listed that sell maybe once a year. They want more sales velocity.

Unfortunately, not every items sells as fast they want it to and sellers need to figure out that maybe eBay is just no longer the right venue for those items.

The uncertainty comes from not having many other options. Hang in there will be more options.

Siren Cristy said...

In a fairly recent ebay announcement, they stated their intent to drive the ASP to $25. Not long after is when they bumped the fees in the 1.99 - 9.99 category; hardly a coincidence.

This article is well-written but a few examples of policy as control would've been illuminating, especially for the reader not quite as illuminated with ebay's behavior.

You're absolutely right on another point as well. Ebay wants to increase high-velocity items because it makes their statistics improve. Instead of increasing the visibility and velocity of the slower items, they choose to implement changes which push them out.

You say there will be more options, but where? Yahoo just announced the closing of their auction platform, and while other online shopping venues exist, none have the inventory, traffic, or branding of ebay.

Corey Kossack said...

I think eBay is off target with their attempts to mold seller behavior. With increased competition in the eBay market over the last few years, and conversion rates falling, insertion fees are becoming more and more of a risk for sellers. As a result, I believe sellers are doing one of two things.

1) Sellers are listing more duplicate listings in auction or fixed price to try and get attention from buyers, causing their conversions to fall further. Sooner or later these sellers realize that because of how much they are listing in core, their profitability is falling, and they become frustrated and give up.

2) Sellers are so afraid of losing extra eBay fees by listing in core that they move almost everything to their eBay store. Of course, without a hefty amount of items in core to drive people to purchase more items out of an eBay store, the store will get little attention - and sales.

What has worked best for my eBay business is to monitor costs and profit margins carefully to make sure my listings are generating profit, not just sales.

Randy Smythe said...

Siren Cristy - What they are doing in the policy area is Feedback 2.0 and delays in listing items in search while they vet them as well as an increase in Trust & Safety actions against sellers.

Some of these moves are needed but most are meant to mold seller behavior.

As for future options, there are none if you want high velocity auction sales but there are numerous options for Fixed Price sales which are often more profitable.

Sellers will have to rely less on the marketplace to bring them customers and more on their marketing. They will find that there are many less expensive options to eBay.

Thanks for your post.

Randy Smythe said...

Corey, more sellers need to take your approach. It doesn't matter how many sales you have if they aren't making you any money.

eBay has found that molding seller behavior has not been very effective. There domination of the Auction market is still strong but 40% of their transaction in CORE are Fixed Price or BIN so the writing is on the wall.

The independent spirit of the entrepreneur is not easily moved.