The online auction site is cutting fees at least 33% and making other changes in an effort to woo back customers. Question is, will it work?
Many of the folks who list items for sale on eBay have never been happy about rising fees imposed by the e-commerce giant. Nor have they hesitated to make those feelings known—in blogs, chat sites, and elsewhere across the Web. Finally, executives at eBay (EBAY) have heeded those complaints.
Faced with increasing competition for sellers and the buyers who bid for goods online, eBay said on Oct. 17 that it's going to start slashing fees for listing items. In what eBay considers a test of major changes to its pricing model, it will reduce fees at least 33% through the beginning of November and make other price tweaks in hopes of spurring sellers to put more items on eBay's site at desired prices, leading to large sales growth and higher overall profits.
Google and Amazon Competition
If successful, the fee changes could become permanent, says eBay Chief Financial Officer Bob Swan. "We are doing a variety of different pricing tests in different categories," Swan said in an interview. "We are going to collectively learn from these tests." The initial response from some sellers was positive. "It's a good step in the right direction," says Michael Syiek, president and CEO of Andover Network Liquidators in San Francisco, who has been selling on eBay for about seven years. "I'm surprised it has taken so long for the light to go on."
The announcement, made during a call to announce third-quarter results, represents a major shift for eBay. Traditionally, eBay has increased profits by raising fees for sellers. It could do this despite the complaints of sellers because for a long time, small-business owners really didn't have anywhere else to go. To get noticed by shoppers, sellers had to get their items in front of eBay's massive, global audience.
Not anymore. Sites such as Amazon.com (AMZN) and Google (GOOG) offer sellers alternative ways to get noticed by the masses. Sellers can either list items on Amazon or drive traffic to their Web sites by buying ads that show up alongside search results when would-be buyers hunt for a particular product on Google. Partially as a result, eBay has seen declining sales growth in its U.S. marketplace over the years. "Having unlimited pricing power over your sellers—those days are over," says Tim Boyd, an analyst for American Technology Research. "eBay pushed its seller base a little too far and pushed it into the arms of the competition a little bit and now it has to bring them back."
Investors Still Wary
eBay has been working to reinvigorate shopping growth in its core U.S. and German online auction and shopping sites for some time. This year, it largely focused efforts on getting more buyers to spend time and money on the site, launching new tools and site features (BusinessWeek, 9/18/07) aimed at making it easier for buyers to find items they want and, in some cases, buy those items immediately for a set price rather than try to bid on them in an auction. The company has also made it easier for buyers to ensure they get the items they want with tools that help purchasers bid on identical items until they win an auction.
Some of eBay's efforts are beginning to pay off. In the third quarter, eBay posted 14% growth in the total price of goods sold on its site and had better-than-anticipated revenue growth of 26%. "Overall, the core business in the U.S. and Germany is a bit healthier," CEO Margaret "Meg" Whitman said during the earnings call. "We've already seen conversion rates improve."
But eBay has a long way toward assuring investors that their core shopping business can stand up to the competition and keep growing. The total number of goods listed on the site decreased 5% in the third quarter, compared with last year, indicating that sellers are placing some of their merchandise elsewhere. "There is still a lot of work to do," Whitman said.
The fee decreases acknowledge that some of that work has to involve getting sellers to keep more of the merchandise on the site at a price that buyers want. Whitman also said that the mix of items on eBay's site will likely include more fixed-price items. Analysts have argued for some time that online shoppers want the convenience of simply clicking and buying what they want, even if it means they don't get the thrill of winning an auction or pay slightly more.
The danger for eBay is that decreasing prices could be too little, too late to encourage more shopping. Another risk: eBay's margins may come under pressure. That fear was fueled by Swan, who said during the conference call that eBay planned to invest in areas of its business such as the Skype calling service and concentrate less on making a profit from them in the short run. "We believe we may have monetized Skype a little too early and a little too much, so we will like reinvest some of those profits," Swan said.
The company's shares had staged a brief rally in extended hours, immediately after the company announced rising sales, despite a loss related to a previously announced writedown of Skype, which has not performed as well (BusinessWeek, 10/01/07) as eBay had hoped when it acquired the company for $2.6 billion. The stock gave up those gains, however, as shareholders digested the prospect of thinner profit margins. For now, eBay is hoping sellers respond more favorably to news of lower fees.