Randy Smythe's musings on the world of ecommerce, social networking, Web 2.0, Google, Amazon, Buy.com,Yahoo, Squidoo, online marketing and still probably a lot of stuff about eBay.
Sunday, November 16, 2008
eBay Chases the Lowest Price
Most of us know that for commodity items, the lowest price usually gets the sale. That is especially true when it comes to media items. So, after listening to the eBay Top Seller webinar the other day and reading The Brews News' take on eBay's Low price Limbo, I figured I would give you my 15%.
What eBay wants for Christmas:
Lowest price on the Internet
World Class Service
Now, how are they going to accomplish this? Oh, that's right, they will pull levers to motivate (manipulate) sellers to do their bidding.
When eBay was an auction site, low prices were not a major concern. Most items started with a very low bid (1 cent to 99 cents) and then established a price based on the bidding. All you really needed was two bidders willing to duke it out for the item. Sometimes a seller was fortunate to get much more for their item than they would have, had they established a fixed price -- it was a very efficient marketplace. Today, unfortunately eBay has become a fixed price marketplace.
A fixed price marketplace requires low everyday prices on items in order to achieve the same sales velocity as with auctions. Sellers already understood this and early on began gaming the system with low item prices and high S&H. The consumer just looked at the purchase price and bought the item -- of course they then complained that the S&H was too high.
A perfect world for eBay would be to have those low prices from earlier this year in addition to low or free S&H -- that would be Utopia for them. Instead sellers (trying to make a profit) reduced their shipping or made it free by adding that extra S&H money into their purchase price. Basically the price now was way too high for the buyer -- they like Free Shipping, but they like their low prices more.
eBay has no skin (no inventory) in the game, but they know that the consumer wants the lowest price, so they have a dilemma. If sellers do not price competitively, not only with other eBay sellers, but also with Amazon and other websites, then the consumer looking for that deal will go elsewhere to buy that item. That is especially true in this current economic climate. Heck eBay even gives them sponsored links and banner ads to find that deal elsewhere.
For most eBay buyers though, "Free Shipping" is only a good deal when they feel they get a really good price on the item. eBay managers don't seem to grasp this. They look at the data and read the focus group reports and say just add "Free Shipping" and all will be well -- Hello McFly!
Here is an example from a media seller who tested "Free Shipping" and lower shipping on his items for a month when FP-30 was launched:
Low purchase price and $6.99 for S&H
Medium Price and $2.99 for S&H
Higher Price and free shipping.
The seller tried to make the same amount of profit off of each option.
Guess which format sold the best ... of course option number 1 did by a 10 to 1 margin over Free Shipping listings and the $2.99 S&H didn't fair much better.
So my guess is with this recent drive to lower prices that eBay isn't seeing the velocity of sales that they want and are now pushing the lower your price strategy -- It boggles the mind, how bright people can be so utterly clueless.
I know they know how to read a P&L because that is one of the first classes taught at B-school, but since they don't actually buy product they don't have COG (Cost of Goods) in their P&L.
There isn't enough money in the whole process to buy product, ship items for free, pay eBay, discount the price, and walk away with any money for the seller. BTW, that is the reason they sell in the first place so they can make a little money -- it is basic math.
I think the problem must be; eBay believes that sellers have no COG, or they have 80% margins because in the old days that was the case -- stuff from the sellers garage or some kind of surplus deal. Today sellers are buying from distributors and paying more for product. There margins are usually very tight. If eBay managers actually took the time to read a sellers P&L they would see that there isn't enough money in the deal now at their current prices, let alone after they discount more and offer free shipping.
I just wish John Donahoe and crew had a clue what a seller's P&L looked like.