The Amazon effect is getting deeper at eBay. The e-commerce giant that built its business around online auctions is stepping up an overhaul aimed at getting more users to sell items at fixed costs. On Aug. 20, eBay (EBAY) will announce plans to slash the upfront fees it charges to list sale items by as much as 75%, while increasing its final sales commission.
The goal is to make it easier to list items for a set, "buy-it-now" price on eBay. That, in turn, would increase the inventory of items for sale and—eBay hopes—attract more buyers seeking the Web's limitless selection and the convenience of one-click shopping. "We think that this is the biggest, most fundamental change we have made," says Lorrie Norrington, president of eBay's global marketplaces business.
Lower Up-Front Fees
What the change will also do is make eBay look a lot more like Amazon (AMZN), whose emphasis on fixed-price sales has surged in popularity as the more auction-oriented business on eBay declined (BusinessWeek.com, 7/17/08). Amazon doesn't charge sellers a cent to list items, and instead charges a commission on sales. EBay, on the other hand, has traditionally made as much as 60% of its shopping revenue from upfront fees—levied regardless of whether an item sells. The structure encouraged more sellers to list items for auctions, which at least guarantee a sale, than for fixed prices.
But eBay was slow to revamp its fees even as online shoppers shunned auctions in favor of fixed-price arrangements. "From 2000 to the end of 2007, eBay kind of fought the trends—they tried to keep auctions the focus of the company," says Scot Wingo, CEO of e-commerce software company ChannelAdvisor, which advises thousands of eBay sellers. "And buyers voted with their wallets."
Under the new fee structure, eBay will charge just 35¢ to list an item for sale on its site, but will raise the fees it charges when an item sells. It will also charge sellers who have multiples of the same item just once to list all of their identical inventory. The result is that eBay will earn 80% of its revenue from sales commissions and just 20% from fees to list items—and, eBay hopes, inventory for sale will surge. "We believe by making the fees more success-based, buyers will have more choice, better values, and that sellers will sell more," says Norrington.
Recent Moves Offered Hints
The move to a sales-driven price structure is one that eBay fought for years. Many sellers had long complained that eBay's upfront costs were too high. Those complaints grew louder over the years as buyers appeared to become less enamored with the site, resulting in more sellers with unsold merchandise that they had paid to list on the site. But eBay always insisted it needed to keep the upfront costs high as a deterrent to bad sellers flooding the site with fraudulent or junky merchandise. EBay executives also maintained that gaining access to eBay's community of buyers was worth the high up-front costs.
The company has presaged the price-structure overhaul in the past year with moves that have rankled some sellers who favor the old system. It instituted a ratings system that makes it easier for buyers to leave bad reviews without fear that the seller will flag them as a problem shopper—a move that helps identify risky sellers on the site. Meanwhile, eBay added a search system that de-emphasizes sellers with bad ratings, making it less likely that buyers will see their merchandise even if it's on the site. EBay has also pledged that its online system, PayPal, will refund money from fraudulent transactions, helping give buyers extra assurances that items are legitimate despite the lower barrier to entry for sellers. "We wanted to make sure that the trust factors were in place," Norrington says.
EBay's move to court more fixed-price sellers is likely to be just as controversial as its prior changes. Auction sellers have argued that eBay is favoring fixed-price goods to their detriment (BusinessWeek.com, 6/3/08), neglecting the business that made eBay the e-commerce giant it is today. EBay executives have countered, saying that eBay will always have auctions, though it has to give buyers the ability to shop the way they want. Increasingly, that means giving them the convenience of buying something for a set price (BusinessWeek, 6/19/08)—that is, ideally, priced-to-sell. "The vocal minority is going to be exceedingly vocal about this," Wingo says. "I think it is a great step…and for the fixed-price sellers it is a big step."