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
  • Free Shipping
  • 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.

Just my 15%

28 comments:

Henrietta said...

Come January those bright people at eBay may be in for a rude awakening. Several of my readers told me they are hanging on by the skin of their teeth through the holiday season. At least two are interviewing for 'real jobs' after making a living on eBay. It is very sad.

Kids Coats said...

At what point does someone buy-out eBay to get their hands on PayPal. Google could make a ton of money off of PayPal and spin-off the marketplaces and all the other non core units. Heck eBay only has a $15 billion market cap. Imagine if Google kept marketplaces, how low the traffic acquisition costs would go.

Randy Smythe said...

Henrietta,

I think a lot of sellers will join them come January. It is very sad.

Kids,
Actually Google may look at this as a big opportunity. They are getting hit pretty hard with the decline in their advertising business.

It might make a lot of sense to buy eBay on the cheap.

tekgems said...

Your business still needs to make a profit overall regardless of the listing strategy you use on eBay. Or else, duh, you'll go out of business. With commodity product, you know scale plays an important role. When Jack Ma decides he wants to compete on the same product I've been carrying for three months, I have to let him have it because I don't have the scale to compete with him. But if he can sell at a lower price and maintain an overall profit, I don't see the problem? Of course, I'd like to continue selling what I brought to the market first, but that's what competition is all about isn't it?

Randy Smythe said...

TekGems,

I don't have any problems with sellers make their own decisions on lowering prices.

If you read the entire post, I have a problem with eBay trying to manipulate sellers to list items for less, not only to compete with sellers on eBay but also on other sites.

Cliff Aliperti said...

Very well stated, Randy.

I'll just point out the further irony of them taking their time to concentrate on driving out the very sellers who you logically conclude they really want--those with no COG.

Thanks,Cliff

David said...

The one thing that hasn't been pointed out is that I think it's misleading of eBay to show slides
I'm just trying to evolve with the eBay changes. I think I'm doing better than most sellers (and I'm destroying my competitors to the point where they will probably not even be on eBay in a few months) because I'm the only one trying to evolve with the changes while my competitors are asleep at the wheel.

I want to say one thing, about the price war on GPS devices at the top seller webinar.

The FVF is much lower for consumer electronics than other categories. With the 6% FVF and 15% discount (I'm leaving out the 20% discount as it's nearly impossible to achieve 4.9's) the fees are low.

Other categories such as the media category doesn't have that luxury.

MagnumOpusMusic said...

Spot on Randy. eBay are not retailers and have no clue. Profit seems to be some sort of alien concept to them. But hey no worries as one seller leaves another busy fool will replace them, but for how long will this continue? My guess is it's already slowed to a trickle and will dry up next year.

I'm on the first steps of my own site and it's so refreshing to once again be ruler of my own destiny. No eBay baggage to worry about, no fees, no office politics, no changes every five minutes. I know it's not going to be easy but your post a few weeks back Time Flies When You Are Having Fun! was a great inspiration to finally get my finger out and move away from eBay.

Anonymous said...

Great post Randy, I couldn't agree more. As a media seller, I have been telling my friends for years that they are extremely unlikely to get a "deal" buying media products on eBay. I have always recommended that they go to Amazon or a variety of other etailers to get a better price.

With the recent increase in FVF to 15%, this has never been more true. I'll admit, it is possible that you'll find what you're looking for from a liquidator or someone auctioning a gift they didn't want, but a traditional eBay seller buying from a distributor in the style of glacierbaydvd will NEVER have the best price online.

The push for free shipping furthers the impossibility of getting the best total price. Any seller with a $10 item who charges $3 shipping is not going to raise their price to $13 to offer free shipping, they must raise it to $13.45 to account for the extra FVF on shipping.

In the short run, eBay is the only winner; they make $.45 more on the transaction, the seller gets the same amount, and the buyer pays $.45 more than they would have. In the long run, this buyer is going to smarten up and head to Amazon or any of hundreds of other sites with lower total prices. In the long run, eBay is killing themselves and their sellers.

Do a search for your favorite movie on eBay and Amazon and you'll see what I mean. An example of a movie that all media sellers should be able to move hundreds of during the holday season, the Walton's classic "The Homecoming: A Christmas Story." Current best match results on eBay: $10.94 plus $3.00 shipping, $12.49 with free shipping, $10.75 plus $2.99 shipping. Amazon's price? $8.49 plus $2.98 shipping or FREE shipping with a $25 order. Buy.com? $9.00 with free shipping over $25. Barnes and Noble? $8.99 or, if you're a member, $8.09.

eBay's push for the lowest price is completely out of touch with reality until they are willing to lower their fees. eBay is probably the only company on the planet with a 15% margin on media items. It cannot last.

George

nadine said...

Randy,

A question - have you ever heard eBay address the question of seller profitability in one of their presentation? Does it come up? or do they just imply that the seller who does what they want him to do will have good placement ergo lots of sales ergo he must be doing great?

Randy Smythe said...

Nadine,

Back in 2007 at the ecommerce summit they made a presentation about seller profitability and they used my P&L

The problem was then and is today. They placed the blame for me going out of business on my overhead.

While my overhead was partly to blame I did run my company on 10% of sales while paying eBay 15% to 17% and PayPal roughly 4%

I accounted for eBay and PayPal fees as transaction expenses not G&A

They really don't care about seller profitability, IMO.

Beady Eye Guy said...

Anonymous:

Amazon charges 15% plus a variable to sellers on their platform.

The difference (for me at least) is that Amazon gives me traffic. I CAN compete because i don't waste time on stupid crap.

Ebay on the other hand makes me design the listing, maintain everything in a way where I feel I have to tweak all the time.

Not only that but I am paying them 12% in a store and 15% on the Fixed Price 30 day listing. They get Paypal fees as well.

Stupid greed is what Ebay is pulling here. I am a media seller and I cut my listings back. I am tired of wasting time with changing my shipping prices (last change), being told to remove the option for payment by check/MO and in the past changing other crap that adds up to wasted time.

Amazon is easy for me and worth the fees i pay them. They are STILL too much, but they do deliver and for me it's all about volume anyway.

ms.pat said...

I went thru my Paypal receipts for the past year and stripped out all the email address then wrote to all these past customers and invited them to my website. Put handy links to each section of the site within the email. I am having great results and have had many compliments on the site. Also, the buyers like being able to just outright buy my items without the ebay hassle....and they don't even have to leave feedback and star ratings ;-) I suggest everyone to get a website and start marketing it.

Bob said...

In an effort to "win the SKU" with FP30, I believe some commodity sellers have priced themselves completely out of profitablilty with alot of titles.

Sure, its a way to keep the cash flowing, but I believe it will catch up with them somehow down the line, as the overhead steadily increases.

A merchant has to actually make SOME money sometime. This last ebay webinar will only stoke that competitive fire in some sellers to "win the sale" but the problem is too many sellers were already living in complete denial about their P/L ever recovering....

nadine said...

They really don't care about seller profitability, IMO.

It does boggle the mind, doesn't it, Randy? Normal businessmen understand that a "customer" is the person who pays them for goods or services rendered, and if your customers go broke en masse, it's a bad lookout for you. But not eBay.

It seems that a good B-school education and a stint at Bain can teach you some wisdom that is deemed superior to such common knowledge.

Anonymous said...

re: diminishing returns on ebay

I am a Diamond non-Diamond Powerseller. In a recent discussion with my TSAM re: profit margins on ebay, they told me flat out that if my business wasnt profitable then I needed to find a different business model.

Why is it such a mystery that they do not care at all? One word, greed.

nadine said...

Anon,

Greed is normal. Shooting your own customers is not. The mystery lies in the degree of myopia.

tekgems said...

> They really don't care about seller profitability, IMO.

Your job is to be profitable. I don't listen to eBay if I know their suggestion is not a sustainable business practice for me. For example, I don't offer free shipping -- never will. Always take eBay advice with a grain of salt because the benefit to each seller may vary.

Anonymous said...

They will get the rude awakening when their Q4 numbers come out.

If I had the money I'd sell their shares short.

Probably the only way to make money on ebay!

Anonymous said...

By the way is anyone else bothered that best match creator Gupta left ebay?

Randy Smythe said...

TekGems,

Yes, it is the seller's job to be profitable. That is why I don't blame eBay for my business failure.

eBay only cares about their numbers. Sellers need to understand that.

It really helps to know that when it comes time to leave the site because your model doesn't work any longer or to reorganize and try a new model.

I chose not to re-organize again, it just wasn't worth it.

Randy Smythe said...

Anonymous,

I'm not surprised that he left. I would love to sit down with him for an hour though and pick his brain.

BMX said...

Gupta is on linked in you should try to get in touch with him. Provided he's not under NDA then you might get the story of the year.

Ginny said...

I just read the interview with Dinesh and left a comment there. I think that ebay management is "logically challenged".

The premise of my response to him was that if buyers get to set prices, then ebay sellers should get to set listing and FVFs.

Randy Smythe said...

Ginny, I like that idea: let Sellers set their FVF :)

Gene Guller said...

People help people maybe someone will help me. My ebayid is vbfunction_cards. My name is Gene Guller

I had serious health issue starting late December and ending few weeks ago, I was enable to work during the dates mentioned. Few days ago while driving to my doctor I received a call from ebay stating that my account will be suspended indefinitely.
Please read this message.
Because of that my seller performance decreased since eBay users was receiving delayed packages my account was suspended. They told me that my seller performance is only 1 which I don't believe.
Please check my feedback, also check my 4 year record. We all walk under god, as I did. Customer Support should have at least removed my power seller status for my abstinence, but account suspension it is just unacceptable in my mind. As I receive a feedback from a lot of people they are also concern, it just does not register in their minds that eBay Customer Report can do this. I don't like to repeat my self but for 4 years I invested my time to make eBay a better avenue. 20,000 satisfied customers and I had only 5 negative feedbacks. Right now everything is shipped and if eBay could just at least wait one week I guarantee my seller performance would rise. I feel cold writing this message and basically beg to reinstate my account, its hard when no one wants to help. And the funny thing is I helped ebay (sorry) again for 4 years. eBay you are suspending a hard working seller that brought 20,000 satisfied customers to you. I'm sorry I'm repeating my self but with everyone I talked, my friends and family. They knew how hard I work for eBay for all these years. And they were so sure that eBay will give me chance to continue and now I have to tell them the bad news. I'm sorry in advance if this might sound acvord, but I feel that I have been used up and thrown away without even given a chance to improve. Please if someone can help me you would be basically saving my life. My ebay power seller status is gold, my email is gene@vbfunction.com
Thank you

Gene

Thoughts That Make You Think said...

I was a HUGE eBay seller when it first started and for the first 2 years.... now... I rarely sell and I only buy smaller items that are new or otherwise hard to find... If I go to Macy's and try on shoes and I have to have them, I can go to ebay and find the same shoes for less. DO I as a consumer care how they can be priced at this number? No... as long as they are authentic and come as new...

After reading the article I realized that something that I knew but never thought about it. Many of these sellers are not making any money or making $1-$5 an item. Unless you are walmart you really can't make it on that unless you can move millions of units and then you need millions of dollars to buy inventory.

The only things that work on eBay for seller AND buyer is: hard to find items where people pay a premium, vintage or older items that have interest, parts, and anything you just want to get rid of for any price.

Don't get me wrong... I love the deals... but I just don't know why you bother unless your selling clearance and you have other streams of income.

webmaster; ttmyt.com

chenmeinv0 said...

wizards jerseys
ralph lauren outlet online
authentic louis vuitton handbags
louis vuitton purses
coach factory outlet
coach outlet store online
giuseppe zanotti sneakers
coach outlet
coach outlet store online clearances
moncler outlet
2016.12.26xukaimin