The eBay ecosystem is abuzz about the fee change - What will it mean?

As reported, John Donahoe @ the UBS gig strongly messaged that eBay is going to consider significantly ('near zero') lowering listing fees (fixed-price was mentioned, not clear if this is stores only or core+fp) - also eBay is talking more about category-based pricing, so all of this maybe isolated to something like the media categories.  Also, JD said that the changes would be take-rate neutral, meaning that when something sells, the overall % a seller pays eBay (approx 8% ex-paypal) won't change.

In any case, the old eBay Strategies email and phone were humming this week with Sellers, Wall St buy-side and sell-side and even ex-eBayers sounding off on what this all means.

First, I think everyone agrees that eBay's actions are an incrementally positive long-term indicator.  You have eBay working on Finding and now Fees for the first time in years (well Fees down).  The only thing I'd say is missing is Fraud (or perception of fraud) from the big initiatives.  Anyway, what people are concerned about is the short-term.  I think much of this stems from the old SIS debacle from early 06.  In that situation, eBay made a quick change without testing and it resulted in some unintended consequences (sellers leaving core for store listing formats in droves and an 'overabundance' of listings).

Everyone has a different view on what the fee change will/could do for eBay.  I've been thinking about this a good bit and wanted to share my thoughts (I know you've been sitting on pins and needles waiting for them ;-)

Here are two facts to frame the discussion:
1. Currently across eBay (varies per seller of course), the listing fee portion of a seller's total fees is about 2/3 or 66%.  The other 33% is Final Value Fees (FVF).
2. Remember that GMV=listings*CR*ASP (GMV is Gross Merchandis Value, CR is Conversion Rate and ASP is Average Selling Price).

It's interesting to think about the fee changes in a couple of scenarios that are along the lines of what eBay has tested and then 'test' those scenarios by varying some things to see the impact on these variables (and ultimately eBay's revenue).

Scenario 1: Near free listings and GMV doesn't change

In the scenario where listings are 'near free', what happens is:

• Listings - increase dramatically - with no economic hurdle to listings, they increase dramatically.  In fact sellers start to do thing like list the same item with 8 different titles to game the finding system.
• ASP - drops dramatically - The bulk of long-tail items out there (wide inventory) lives in the media categories.  These categories tend to be sub $20 which will bring eBay's overall ASPs (from a mix perspective) down dramatically.  It's hard to tell what will happen to like-items after this change.  If eBay doesn't nail Finding, then the super-abundance of listings could impact like-item ASPs also.
• CR - when listings go up dramatically, guess what CRs do?  Yep, they go down dramatically.

One element that's hard to predict is the impact this will have on the auction/core format.  If fixed-price is near-free, then sellers will abandon the auction format immediately.  If we're talking stores, then this fee change won't have that much of an impact at all because stores are largely buried in the site since they are only found via store discoverability (if core returns less than 20, you get some store listings or something like that).

Ok, what's the economic impact?  Let's say that listings/asp/crs change in such a way that GMV doesn't change, well as JD said, the take-rate will remain the same, so the net result is no change to eBay.

Scenario 2: Near free listings and GMV goes down.
In this scenario, the mix of listings rising, ASPs dropping and CRs dropping cause the overall GMV on eBay to go down.  Of course eBay's revenue would be impacted in unison with the GMV decrease.  I suspect the culprit here would be either:

A. Finding 2.0 couldn't handle the overabundance of listings and buyers can't find what they are looking for.
B. Seller behavior is different than what eBay expects.  Like the aforementioned risk to the auction format should the near-free fixed-price listings be mixed in with auction items in a SIS-like manner.  (Note: that best match can help here).

Scenario 3: Near free listings and GMV goes up.
In scenario 3, let's say that listings go up 4x, but CR only goes down by half and ASP only goes down 20% ($50 to $40) in this scenario, GMV would effectively go up and if eBay is take-rate neutral, then bang, you get a bump in revenue.

In the history of eBay (free listing days, discount days, etc.) I've never seen the ratio of listings and CR not stay in sync (listings up 2x, CRs down by half) so, again, some magic has to happen on the buying interface side to change that.

The bottom line is the impact of the fee change lies on the shoulders of Finding 2.0 (J. King if you're listening out there, no pressure dude) and on how eBay rolls this out and if sellers react the way they want.

One thing is for sure, we're entering a period of great change where the risk/reward (beta?) is going to be much larger in 08 than it has in the last 2-3 years in the life of eBay.

eBay Strategies readers, what's your vote - GMV up/down/no change?

Comments

[Mike Pearson]

Hi Scot,

A very interesting article and a great analysis (as always).
Now that Q2 results are out and eBay has analyzed and shown the outcome of this move, it might be worthwhile to re-visit this topic.

In any case, I am wondering about your assumption that the "the listing fee portion of a seller's total fees is about 2/3 or 66%". Can you explain how did you get to that?

Looking forward to your reply.

Mike

[Peter Leeflang / CEO of Leeflang Archives Corporation]

I love the increase in accountability of Ebay itself, built in a lowering of listing fees. It will force Ebay management and its staff to watch our bottom line and work harder to help us improve it. This will take time though and I do not know if I have that patience.

Short term the repricing a mediocre product of declining quality, is not going to bring anyone back.

Ebay's only hope is that in teh long run the increased accountability will force itself to improve the product.

Not sure though if that is their intended effect. And of course they can change their mind anytime, if they lack the courage, and reverse the repricing.

[JooL]

Having been jerked around by eBay for the last several years, I have opted for stability over constant (and mostly cockeyed) change. The lower fees you suggest may be in the offing may (probably will) attract lots of new and may entice the return of some big media types....but those of us who have been struggling through eBay's management whims probably aren't going to play.

I have invested in another site that produces revenue - not as much, but easier and cheaper - and my own site. From now on eBay is going to be a place to attract buyers to convert to my own site and not a place that I look to for any meaningful income

eBay has screwed around with their long-time buyers once too often in my opinion.....I am not interested in increasing the number of listings I have on eBay I am only interested in the number of sales I have...and eBay cannot produce the buyers....right now, eBay is broken.

[Fruity]

I'm going to put up my million toothpicks and mark them with pencils just so I can suck up their bandwidth. I'm also going to put up everything in my house which everyone else will do because we all know the only people who will benefit out of this will be the megasellers and the brick and mortars. oh and Marty. lol

[Sandy]

Again sheer desperation on Ebay's part. Obviously the goal is to build Ebay listing numbers without thought as to what will be attracted to the site with almost zero upfront listing cost. I just removed 1200 listings from Ebay to my own website and Amazon. I don't see this news altering my plans. The site issues that drove me off in the first place are not addressed- software glitches, constant business model changes and need for revisions, DSR's, Finding mess, store inventory disadvantaged, dwindling site traffic and page views, etc. Until they fix the other issues nothing has changed and my business will use Ebay strictly as a buyer acquisition site not one for revenue production. That means significantly less listings to minimize my expenses while maximizing the use of their traffic and user base.

[Brian Lawe]

The smart way to do this is to offer the seller the CHOICE of pricing and let them determine listing fee % and FVF %.

Those sellers who choose to set their own listing fee and FVF % can get preferential treatment in the listing if eBay calculates their "total value would produce more revenue for eBay than another seller's max bid/CR on the same item.

This lets the seller choose the AMOUNT they want to pay for a listing and FVF fee in the same way a seller chooses the amount they want to bid for Adwords. Those who do not want to pay listing fees, can enter 0% and enter only a % for FVF (or vice versa). That might be perfect for one category, but terrible for another.

This strategy will have the effect of optimizing eBay's revenue regardless of the success of finding 2.0 .

By doing this, much like Adwords, the "best performing/revenue producing" listings get placed near the top of all eBay search results and each product category gets optimized from eBay's perspective. Sellers paying inappropriate amounts (high or low) will quickly be culled.

By knowing the "close rate" of each seller, eBay can quickly determine if a seller's listing fee/FVF is optimal or if the "next best sellers" items should be shown above the original seller's.

Lower performing sellers can move to the top of search results only by either raising their listing/FVF %'s or simply by having stronger feedback/listing layouts/shipping/return policies, etc.

From a seller's perspective, the "choice" makes listing strategies much more complicated. But from eBay's perspective, a move as I am proposing would INCREASE revenue across the board at virtually no risk to eBay as each category would find its own "optimum" level. Where there is a sub-optimal level in any product category, sellers in that category will quickly adjust their listing strategies to pounce on the sub-optimization.

There is also a powerful "fairness" mechanism here -- where eBay is no longer the "devil" for charging higher prices. Like Adwords, eBay can hide behind the "market" setting the right price. Many of you know that on Adwords the key word "Mortgages" is bid far far higher than the keyword "left-handed smoke shifter." The same thing will happen on eBay -- more profitable items will pay higher fees to eBay and less profitable items will produce lower revenue.

But -- over time, this new pricing strategy will always result in maximum value to eBay.

It would also drive sellers who cannot afford to compete off the site, and reduce the items in the category.

Bottom line: The most efficient seller wins the most share in each category. The buyers get the best "deals" and eBay maximizes revenue.

Who loses? All the sellers below the most efficient seller -- since those other sellers are dependent on eBay to get "their" buyer and because the pricing mechanism I describe effectively ensures eBay gets the maximum amount from the value it has created in identifying the buyer.

Here's the bottom line for sellers: If you depend on any other company (google adwords, eBay, Overstock, Amazon, etc) to source your customers, you should expect those other companies will design pricing structures that MAXIMIZE the fees they collect for getting your customer. If you are not aggressively following a strategy to find and acquire customers for yourself, you are always going to be behind the 8-ball.

Brian

[Randy Smythe]

Like you said Scot, "the impact of the fee change lies on the shoulders of Finding 2.0" If they have a workable search engine they can handle the increased listings. They should also have learned from the SIS fiasco and can serve up listings in a way that drives GMV. Sellers will try and game the system, its what they do to eek out an advantage.

I see this being rolled out in baby steps. Media will most likely be the first category to see it. So basically I agree with you.

[Mark Freeman]

So with this speculated new pricing, if I sell FP and have deep inventory, does that mean I don't need to manage sell through anymore? Just launch 10 sets of everything and see what sells?

I vote that GMV will go up.

[BILLSTUFF]

Scot – You once suggested the risks of attaching your business model to a company whose own business model continually changes. From what you say, it appears eBay is changing its business model again. Only five months ago I removed over 6,000 items from my eBay Store and placed them in my new Marketworks Store. If eBay significantly reduces store fees, I would then be facing a decision of whether to put all or most of my inventory back again.