Thursday, March 25, 2010


Power of eBay

“Just get it on eBay!” This is what my dad said when I couldn’t find cheap enough headphones at the store. It makes me wonder how it all started. Who suddenly woke up one day and decided to invent an online marketplace? A place where people across states, countries can a

uction their used, semi-destroyed items and actually get some money back? Well whoever did (his name is Pierre Omidyar by the way, more on him later…) created a phenomenon, and has revolutionized the meaning of a marketplace through using the Internet.

The start of eBay

The online auction website was founded in San Jose, California, in September 1995 by Pierre Omidyar. He decided on this idea of an online marketplace and went ahead and created a simple program for it. Once he did he put up an ad for a broken laser pointer, and someone actually bought it for $14.83. Astonished, he contacted the buyer and asked them why they bought it, and the buyer explained, “I’m a collector of broken lasers.” This spurred the idea of creating a marketplace for the sale of goods and services for individuals.

In 1998, Pierre and his cofounder Jeff Skoll brought in Meg Whitman to sustain the success. Meg created an experienced management team with an average of 20 years of business experience and built a strong vision for the company -- that eBay is a company that's in the business of connecting people, not selling them things.

They quickly shed the image of only auctioning collectibles and moved into an array of upscale markets where the average sale price (ASP) is higher. ASP is a key metric in determining eBay's transaction fees, so increasing the ASP became an important item. By forging partnerships with namebrands such as GM, Disney and Sun, eBay has managed to do exactly that. Sun has sold 
$10 million worth of equipment and it now lists between 20 and 150 items per day.

The business model

In simple terms eBay has streamlined the person-to-person trading with their web interface. How? By allowing buyers and sellers to collaborate in a manner where sellers are permitted to list itemsfor sale and buyers bid on items of interest and all eBay users can browse through listed items in an automated way. Now knowing how eBay works, the question is how is it profitable?

Though browsing and bidding on auctions is free of charge, sellers are charged. For one, if an item is listed a non-refundable fee is charged which ranges between 30 cents and $3.30. A second fee is if the seller wants to promote the item, like advertising or changing the style of the item that is displayed, an additional fee is charged. A third and final fee is the end of the seller’s auction.

eBay notifies the buyer and seller via email once the costs are below the minimum price. The binding contract of the auction is between the winner bidder and seller only.

eBay and adversity

How does eBay keep its users? What is their pull? For one, the application itself is definitely a plus point. But the other point is the user trust that eBay has built. Since eBay at no point is directly in the exchange of the item between the seller and buyer, it is hard to build the trust. For eBay to be able to convince users to participate, they must deal with the inevitable delay between the buyer buying the item and receiving it, which is not an issue in the tradition model.

eBay introduced Feedback Forums. At the completion of a transaction, users are encouraged to submit compliments or criticism to the trading profile of the trading partner to the Feedback Forum. By looking at the trading partners history of trades, the user will be able to estimate more accurately the trustworthiness of the trading partner.

eBay and competition

eMay’s idea could easily be copied and these industries did just that: Yahoo and Amazon. Amazon in partnership with the well known auctioneer Sotheby's.

These (and many other) competitors have not only longer operating histories, but larger customer base and greater brand recognition. So why does eBay currenly control more than 80% of the online auction market, with Yahoo and Amazon lagging far behind?

eBay utilized their first mover advantage admirably, quickly and constantly building a community of buyers and sellers.The network effect is important in this market, since the number of buyers and sellers increases the value of the service for other buyers and sellers. If eBay remains price competitive with its competitors there is minimal incentive for the users to switch between auction sites, meaning it becomes more and more difficult for a competitor to displace eBay's trading community.

A different kind of threat is not a direct competitor but a service which can act as a substitute to auctioning, of which is a good example. designed a site which allows people to sell used books, music, movies and games at a fixed price. eBay dealt with that threat by buying the company and experimenting with adding their own fixed-price option to their auction listings.

eBay and Future

eBay has become an online middleman for buyers and sellers in a way which traditional brick and mortar companies cannot touch. Using the web has also brought along with it some challenges, especially regarding trust issues between buyers and sellers.
eBay seems to have dealt adequately with those trust issues, since users don't seem to mind and continue to use their service.

eBay is operationally sound, especially considering it is still in its buildup period and it has a business model that scales extremely well. The management has shown that it responds quickly and well, and has been working hard to expand the business without jeopardizing the core business.


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