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

December 9, 2007

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 behaviour 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?