Thursday, February 21, 2008

A Short Word About eBay's Performance Discount!

A reader forwarded a link to an eBay workshop on the topic; "How to Improve your DSR Ratings", while I won't turn this into a DSR (Detailed Seller Rating) rant, I do want to point out that a sellers DSR rating will be the determining factor in whether they will receive a FVF discount under the new rates. In the case of US and Canadian sellers, if you achieve 4.6 ratings across all 4 DSR's, you will be in line for a 5% discount on your FVF for the month. If you achieve a 4.8 DSR rating across all 4 DSR's you will receive a 15% discount on your FVF.

Anyway, this whole discussion got me thinking about the new 15% discount on fees and I thought I would do a little exercise on what that discount would have meant to my business had it been in effect, when I was selling.

Stats for the comparison: 200,000 (under $25) store listings generate $300,000 in GMV (I'm using an avg. monthly GMV number and avg store listings from Glacier Bay's good years). When I sold on eBay the FVF for stores was 8%, but I will use the most recent FVF of 10% to calculate my base numbers. The new fees, that went into effect on 2-20, have a 12% FVF for Store sales. (Have I confused you yet.)

Listing Fee Calculation: (200,000 under $25)
  • 200,000 items under $25 cost me $10,000 to list with the old fee structure.
  • 200,000 items under $25 costs me $6,000 to list under the new structure.

Savings on Listing fees: $4,000 a month

FVF Calculation: ($300,000 a month in GMV)
  • Under the old FVF structure of 10% my cost was $30,000 a month in FVF fees.
  • Under the new rate of 12% my cost would be $36,000 a month in FVF.

Savings, oops! I mean increase: $6,000

So, if all things are equal and I don't qualify for any FVF discounts I would pay $2,000 more per month to eBay on the same GMV. Let's see what that discounts will get me.

  • If I was able to qualify for the 15% discount it would save me $5,400 on my FVF. (It is not likely a media seller will ever qualify for the 15%)
  • If I qualified for the 5% discount it would save me $1,800

So let's see how I did before and after the fee changes on $300,000 in GMV and 200,000 listings.

  • Prior to the new fees I paid $40,000 in fees to eBay ($30,000 in FVF and $10,000 in listing fees)
  • Qualifying for the 15% discount under the new rates, I would pay $36,600 in fees to eBay ($36,000 in FVF, $6000 in listings fees, minus $5400 in discount (15% of $300,000) A savings of $3,400 a month.
  • Qualifying for 5% discount under new rates, I would pay $40,200. ($36,000 in FVF, $6,000 in Listing fees, minus $1,800 in FVF discount (5% of $300,000) An increase of $200 a month.

So as it stands, if I want to get my DSRs to 4.8, I can work my butt off in customer service (spend additional money on reps) reduce my S&H rates (give up revenue from shipping) to earn a $3,400 a month savings. I can tell you from experience that I would have to spend close to $3,400 a month to even get close to a 4.8 DSR and if I spent that money and did not qualify for the discount I would be pissed.

The point of this exercise, is that eBay is just playing with the numbers. I can change nothing in my operation and pay $200 more a month in fees, or I can spend at least $3,400 to save $3,400.

Does that make sense?

Update: Before you ask. No, 200,000 store listings did not genreate $300,000 in GMV. The GMV number came from a mixture of CORE and Stores. The numbers just made for an easier calculation.

Perspective: Just in case you were curious - When I shutdown GB in January of 06 the store fees were $0.2 cents per listing and 8% FVF or a total cost (using the numbers above) of: $28,000. How's that for a discount? And eBay management wonders why S&H increased and you can't find a deal on eBay anymore.

Just my 12%

6 comments:

Anonymous said...

Sure but in the new fee structure you can now list more with less conversion rate risk. You can slightly raise ASPs because the risk of unsold items is less. So 200k listings and $300k GMV may no longer be the optimal strategy.

I'm not saying its not a worse fee structure but you need to compare the optimal strategy in the old structure with the optimal strategy in the new structure don't you?

Randy Smythe said...

Anonymous,

Fair enough but I didn't want to make the comparison too complicated. This is an Apples to Apples comparison (as close as I could get) Each seller will have to work out a new strategy to make the fee structure work. You know on Amazon the fees have been 15% at least since 2004. On eBay you have to reinvent your business every year.

Doug Feiring said...

Randy,
I appreciated your analysis. It certainly does put things into perspective.

Here's a couple more perspectives:
- We need to start looking at this as a pay-per-performance model like Google's adWords. If I write a lousy ad copy or post something that nobody's interested in, I risk little - because the bulk of the expense occurs only after a successful transaction.

- Under the new fee structure - eBay is assuming more risk. They don't get paid unless we make sales. Therefore, they have much more motivation to help us generate those sales. Any policy decisions they make - be it feedback changes, search algorithm changes, marketing decisions, fraud detection & prevention, etc. are going to be made with this concept (if we don't sell - they don't get paid) in mind.

- This change significantly reduces the cost to enter the market and reduces the risk to the new sellers. Alot of complaining and speculation has been made about these recent policy decisions being bad for the small seller. Some say that Donahoe wants to squeeze the small seller out of the eBay marketplace altogether eventually. I say hogwash. (Seen the default SYI form lately?) There's never been a better time to enter the market -- especially this week - less competition :-)

Those are my AuctionInsights.

Randy Smythe said...

Doug,

In the scheme of things eBay is really not taking much risk. Sure the balance of riak has changed a little, but they've covered their downside very well as I've shown in my post.

Best match is the key to turning the site around. The sellers who can master BMO will have the advantage, so I see a whole new industry rising from these changes.

I do agree that Small sellers who make the needed changes can thrive in this new environment.

Gary N said...

I agree with the first comment. EBay have changed the rules of the game so you can't play the same strategy and complain you are worse off. You need to play a new strategy and I would argue the new few structure is actually better if you do this.

Tony P. said...

Randy, if you'd like to see a simplified version of your scenario, take a gander:

http://imamerchant.org/blog/with-ebay-fee-changes-look-at-your-own-economics/

All that for 19-cents? I think not. It illustrates the absurdity of the whole ebay 'discount' program. I just find it difficult to believe that those people understand true business, or that they understand that we do!

side note: See? I pester other people, too.