Margaret C. Whitman took over as chief executive of Web auctioneer eBay in early 1998, after founder Pierre Omidyar already had it growing 70% a month. Hailing from a traditional marketing background at Hasbro, Walt Disney, and Stride-Rite, Whitman initially wasn't sure what to make of what looked like a funky online garage sale. But under her stewardship, eBay has grown into the world's largest e-marketplace, offering everything from its trademark Pez dispensers and Beanie Babies to automobiles and homes.
Whitman's secret: Let the customers tell eBay what to do. As the auctioneer has grown to a community of 38 million buyers and sellers, Whitman has pushed eBay to devise new ways to tap its customers' opinions and expertise. In two conversations in September and October, Whitman talked with BusinessWeek Senior Correspondents Robert D. Hof about the unusual way such a company must be managed and what she will do next to keep eBay growing. Following are edited excerpts of their conversations:
Q: Can you explain how eBay views the unusually active role of its customers in the company?
A: We created the marketplace, but the site was actually built by the users. The users listed the items, the users handled customer support, the users shipped out the items, and the users were buying the items. Without them, we actually didn't have a business.
Q: Although you have compared eBay to financial marketplaces such as the New York Stock Exchange, it seems that eBay's customers have an even more direct influence on its business than at those marketplaces.
A: We were creating something that did not exist before. It's possible that in the earliest days of the New York Stock Exchange, they were perhaps much more driven by what their users needed or wanted. This notion of individuals buying from one another on opposite sides of the country was completely revolutionary.
So when you're creating something new, you have to tap into what the users think and what they want, because otherwise you're completely flying blind. Involving the users in the strategy of the company, the product development of the company, and the direction of the company was central to our ability to build a successful, long-term marketplace.
Q: It must have seemed a strange way to run a business when you came, given your traditional background.
A: It was really different. But the Internet was different too. When I came to eBay, this company was growing 70% month-over-month. So my objective in the first several quarters was to really understand what was leading this wildly successful little company. The real inkling that I got as to what was unique about this company was the focus groups that I went to in the middle of March of 1998. I remember after going, I called [founder Pierre Omidyar] and said, "I've never seen anything like this in 20 years of business." The depth of attachment, the community feeling of these users and their attachment to one another and to what eBay does for them was something I had not seen.
EBay had fundamentally changed their lives. Folks who had had trouble making a living all of a sudden were making a very good living. People who had lots of experience to share, whether that was about coins or Barbie dolls or computers, were able to lend that expertise to others. The ability to earn a reputation, for a small businessperson, was really quite extraordinary on a virtual basis. That validation was tremendously powerful. When I wear an eBay jacket or T-shirt in an airport or restaurant, people will come up to me and they'll say, "I just want you to know I've been on eBay for six months, and my feedback rating is X." It's the first thing they tell me.
Q: How have you kept this community going as eBay grows?
A: Every month, the company evolves a bit. We're still growing so fast that we evolve our thinking almost every month. It started quite early on, with the first Voices group [eBay's name for its ongoing focus group]. We began to make changes to the site and got quite a bit of backlash from the users. I said, as we go from 20 people to 300 people at the company, we have got to get the users here so our executives, our managers, our engineers, and our customer-support reps can actually meet users face to face.
It's quite easy when you're running a transactional engine as large as ours to forget that there are people at the other ends of these transactions. We still have that program where groups come in every couple of months.
The other innovation is eBay University. Anywhere from 800 to 1,200 people come together for a day [to learn selling techniques]. It is a fabulous reminder of who's using eBay, what they love, what they don't like, what new users' concerns are. I said everyone on senior staff by the end of the fourth quarter had to go to one eBay University or they wouldn't get their bonus check.
Q: Do you have other incentives to keep eBay staff connected to customers?
A: The biggest incentive is that, as we introduce new features and functionality, we watch how much disagreement is there, how much take-up is there. And we hold people accountable for the innovations they make to the site. If we have enormous user dissatisfaction, then we know somewhere along the line that process didn't work.
That doesn't mean that we can't do things that are innovative but that the community may not initially embrace entirely. A perfect example is the Buy It Now feature [which allows users to buy an item at a fixed price without going through the auction process]. When we first introduced it, there was a fair amount of misgivings on the part of the users: Is this going to hurt the auction business? What is this going to do to my sales? But it worked really well, and now above 35% of the items on eBay use Buy It Now. You have to be able to push the edge of the envelope, but you have to be able to do it in a way that you can see what the community of users' reaction is.
Q: What else do you do to tap customers' expertise?
A: We spend a lot of time watching what the community does on eBay. We didn't set out to create an auto category. One month, we saw the miscellaneous category had a very rapid growth rate, and someone said we have to find out what's going on. It was the buying and selling of used cars. So we said, maybe what we should do is give these guys a separate category and see what happens. It worked so well that we created eBay Motors.
Most companies that I've worked at, executives would have sat in a room and said, O.K., here's our business, what about cars? And done all this sort of MBA analysis, here's how big the market is, here's how many used cars are sold, here's the typical profile of a car buyer and seller. We didn't do anything. This was completely an idea that was gleaned from our community of users, and we simply enabled them to do what they do best.
Q: So are most of the new features and categories driven by the customers?
A: I would say between 75% and 85% of ideas germinate within the user community. Sometimes we veer off from that, and it's usually not as successful as we thought. The high-end auction business, which has not been as successful as we had hoped, was not a user idea. That was our idea. Ultimately, we may well be successful in developing a business there. But it has taken a lot longer than virtually any other business that we have done. Time to success is directly related to user demand.
What we have is millions of entrepreneurs who make small changes to the marketplace. That adds up to an optimized marketplace. It is far better to have an army of a million than a command-and-control system that tries to make the decisions. If you look at those millions of entrepreneurs and try to see what they are doing and then glean the corporate strategy from what they're doing, it's actually a much better way than to sit up on top and try a strategy.
Q: As eBay adds more large, commercial companies such as IBM and Walt Disney, do you worry that the company's business could become more volatile?
A: We think about that a lot. Today, the big companies probably represent less than 1% of our gross merchandise revenues. So I think we have a long way to go before a small number of big companies accounts for a large percentage of our business. But we're going to keep our eye on that.
Q: Isn't it possible to listen too closely to certain customers who might not be representative?
A: Yes. You have to have a filter on what makes sense. The users today probably would like to have no fees. But you can't run a business if you don't have revenue. So sometimes you have to make financial decisions that the users would probably not have you make. We've gotten much better at that. We did a price increase in January, and it was just that. In the announcement to our community of users, we said it's a price increase, and we know this is something you're probably not delighted about, but...our cost of doing business has gone up. We didn't try to put some flowery language around it.
Q: You've often referred to eBay as an economy. How does that dictate how you run the company?
A: People will come to me and say, "The price of collectibles is going down in certain categories, are you concerned about that?" And the answer is, actually, I'm not concerned about that, because that is the natural progression of an economy. It may be that Beanie Babies are out of favor, and so the price will go down. But that may turn around and there may at some time be more demand than supply. It is not eBay's role to manage supply and demand within the economy.
Q: During the economic downturn, eBay exceeded expectations quarter after quarter. Is that due in any way to this strategy of allowing sellers and buyers to do their own thing?
A: The power of having millions of buyers and millions of sellers who can make adjustments far faster than any company could is a huge advantage for us. Our community of users is pretty resilient. They started to come back within days of September 11.
Q: Given eBay's uniqueness, do you have any models for determining what to do next?
A: There isn't really anything that has been done that is like eBay. That is the fun and the challenge -- there is not a clear roadmap. Another metaphor we use is of a small town growing into a big city. When you have a small town, everyone meets in the small town to do business. The fruit stand is right next door to the basket stand, which is right next door to the pop stand, and everyone interacts across all of those.
But as you get to the size of, say, New York City, there's a diamond district, there's an apparel district, there's a flower district, and those districts are communities of users. It's because their buyers come there. So as we grow, we will think about creating separate communities of interest, like eBay Motors.
Q: What improvements does eBay need to make?
A: We continue to need to make the site easier and simpler to use. We have come a long way. But as we continue to bring brand-new users to the Internet, they need to be able to get started really quickly. For example, Auction for America [eBay's charity for victims of the September 11 terrorist attacks] could bring an enormous number of new people to eBay who would not have come otherwise -- maybe a million people a week. So as we designed that site, we tried to make it much simpler than the overall eBay site.
Q: Given eBay's very different customer experience, is it ever going to get mainstream consumers?
A: EBay has a different brand proposition than an Amazon.com. The two companies do two quite different things very well. We're not going to be the retailer. And unlike an Amazon, the items are going to be unique and hard to find or value items. This is our only business. A lot of our competitors' businesses are primarily something else. We know more about managing a marketplace than anyone else in the world. Brands are like quick-drying cement. It's very hard to expand a brand beyond what the true core of the company is.