eBay Merchant Economics

I recently asked Michael Beveridge, buySAFE's Sr. Director of Business Intelligence, to share with us some of the interesting eCommerce data that buySAFE has developed over the last eighteen months.  We consider data and analytics to be critical to buySAFE and our merchant customers' businesses, and obviously, every merchant is interested in having solid, reliable data on the ROI associated with buySAFE.  At the request of hundreds of our merchant customers, buySAFE has invested heavily into developing an amazing data and analytics platform that can deliver incredible insights beneficial to buySAFE Merchants.  We will be sharing some of our new insights with you over the coming months, and I hope you enjoy the content. With that intro, here is Michael Beveridge's first contribution to this blog...

-------------------------------

When describing the challenges their online businesses face, buySAFE’s merchant customers have highlighted a couple of similar themes – including a growing sense that business on eBay is extremely competitive and the growing need to diversify their businesses across multiple online channels.

At buySAFE, we decided to shed some light on these two issues.  In the Spring of 2006, we began to conduct a detailed analysis of the business performance of nearly 200 of the most successful and respected e-retailers doing business on the web and on eBay. As head of buySAFE’s Business Intelligence group, I directed a research effort to better understand the economics and needs of our customers. Under the auspices of buySAFE’s Impact Guarantee (BIG) program, as well as detailed financial interviews and reviews with BIG participants, we have been able to build a picture of the economics of online retailers.

Understanding the financial economics for online merchants is important to buySAFE for a number of reasons.  The most important reason is that buySAFE guarantees the transactions for its merchant customers. Having strong, financially stable merchant customers is a critical requirement for buySAFE because it helps us avoid large losses due to merchant financial defaults.  The bottom-line is that helping merchants optimize their businesses is good for everyone.

I would like to point out that we are always extremely careful about not disclosing any customer specific insights.  We do aggregate the information that is collected across our entire merchant base in order to understand general trends on the whole.  We believe this information offers some very interesting insights that can benefit everyone, but again, we will never share customer specific data in any form without explicit permission from the merchant customer.

The results of our recent research, shared below, appear to confirm the conventional wisdom regarding eBay and competing channels. Specifically...

1. Margins on eBay are very tight. Taking into account all costs of business, including listing fees, fixed overhead, product sourcing costs, etc, the average net margin on eBay is 8%. Product sectors such as cameras, cell phones and consumer electronics are particularly fierce with net margins falling to the 2-4% range.
   .
2. Diversification across non-eBay channels has become the norm.  Merchants no longer view non-eBay channels as a “nice to have”. Rather, these channels are now critical and expanding parts of their businesses. Two out of every three merchants have already built non-eBay businesses, and the trend is accelerating very quickly.
   .
3. Net margins on off-eBay business are significantly higher than on net margins received on eBay.  Of the 2/3 of merchants already diversified off of eBay, profitability nearly triples, as eBay net margins hover around 8% and off-eBay margins increase to 23%. Of note is that the average net margin for sellers exclusively on eBay is around 9%, while for merchants that have started diversifying off eBay, the net margins are only 8%.

It is worth noting that the merchants addressed in this buySAFE study had, on average, an eBay Feedback Rating of 33,810 and gross monthly sales of $188,000. While results for other customers may vary, this appears to be very representative of the large and professionalized portion of the eBay seller community.

This research is consistent with concerns we have heard from eBay’s merchants -- it also raises at least one important question: Why are the margins on eBay so thin?  A couple of potential answers include:

1. eBay has become very good at extracting full rent out of its seller base. Much like the owner of prime real estate charging higher commercial rents to get a bigger piece of the value stream created by their customers -- eBay’s pricing structure seems to allow eBay to share a high proportion of the value created. This would be consistent with a consistent refrain from customers that eBay’s fees are ‘too high’. However, our study is not supportive of this conclusion. Excluding costs of goods sold, the fixed, overhead and variable costs are roughly the same for eBay and non-eBay sales. This would suggest that while listing fees may be high, they are offset by higher infrastructure and marketing costs required to sell off-eBay.
   .
2. Online sellers see eBay solely as a “loss leader” and/or lead generation tool. While it is difficult to measure the lifetime value of a customer acquired through any channel including eBay, online retailers clearly benefit from capturing customers through one channel and then migrating these same customers to a channel with lower service costs. In our analysis, 25% of the merchants had active warranty and/or cross sales programs.  While there are obviously lots of sellers using eBay as a “loss leader”, we don’t believe this is why margins are so thin on eBay.  Rather, we believe this is actually symptomatic of the real answer to the eBay margin question.
   .
3. Prices on eBay are less than off eBay. The adage that eBay is a mile wide and an inch thick is mainly true.  This characteristic makes it difficult to test pricing disparities directly. Simple price comparisons between the prices found in comparison shopping engine search results versus eBay search results seem to indirectly validate pricing disparities.  Anecdotal commentary by merchants clearly points to lower eBay prices.  One of many examples would be from a very large jewelry merchant who indicated to us that his "average eBay margin had fallen to about $6.00 while for the same product off eBay, his margin was now more than $45.00."  The Auction Trust Network recently published figures that suggested that off-eBay prices were, on average, 34% higher than on eBay.  Piper Jaffray & Co. recently published a report on the subject of eBay that suggests, for the luxury sunglasses segment, prices for the same product sold by the same merchant were 75% higher on Overstock.com than on eBay. 
   .
   buySAFE's research pointed to price differentials that were less severe than these examples, but nevertheless, the figures were material in nature.  In our research, customers shared the sourcing cost of their goods sold as a percentage of final sales price.  Comparing this between on-eBay vs. off-eBay sales, suggests differentials in pricing by as much as 20%.

The bottom-line, is that much of the conventional wisdom we’ve heard about selling on eBay is, in fact, correct. The marketplace is extremely competitive with very tight margins. Large professional sellers are reacting to eBay's deteriorating margins in two ways.  First, they are diversifying off eBay into higher margin channels at an accelerating pace.  Second, large merchants are also working very hard to economically differentiate themselves from the competition in a positive manner and on non-price terms.  In the case of the very large eBay merchants that helped develop these insights, they were leveraging buySAFE as one of their strategies for accomplishing meaningful differentiation. 

Plainly, these merchants adopted buySAFE in order to send a message to consumers about seller integrity in a manner that plainly influences consumer behavior and thereby boosts conversion rates.  One would expect that as a eBay sellers find their pricing power compressed to the cost line, that they will have to compete on other terms.  Safety and security should naturally emerge as a key differentiator – providing high value to shoppers at a low cost to merchants.

We expect these trends to continue and we will continue to share insights on this subject with you on a regular basis.

Related blog posts:
"What's Wrong With eBay? It's Simple Economics" by Steve Woda
"What is a Market for Lemons?" by Steve Woda