eBay – The internet behemoth, estimated to have a market cap of $28.8 billion and with annual revenues of $8.59 Billion, is easily the world’s biggest online marketplace. Over 100 million people, all over the world, are active participants in the eBay marketplace, either as buyers, or as sellers. This kind of incredible success is all the more amazing because, it was only about 20 years ago that eBay was started, in the living room of a small San Jose apartment of a very easy going young man called Pierre Omidyar. Here, we discuss more on eBay, what makes it tick, the reasons behind its phenomenal success, and try to understand its business model. Do read on.
How does eBay work?
The most important thing about eBay is that, it is a company that connects tens of millions of highly passionate and very diverse buyers and sellers from over 40 countries all over the world, and of several different cultures – eBay does not actually sell any of its products itself. Further, with its Rating system for buyers and sellers, eBay has made the process of buying from and selling to total strangers on the internet, a completely safe and profitable way to trade goods and make money.
eBay’s Business Model
eBay’s business model can be simply described as creating a person to person online community for trading, making use of the World Wide Web. Or in even simpler terms, eBay connects buyers to sellers on the internet. Sellers have online stores of their own on eBay, where they list the items offered by them for sale. The sellers may either list the item on a fixed price basis, or send the items to an online auction, for the buyers to bid on. While the fixed price items can only be had for the stated price, the price at which the auctioned items may be got depends on how many buyers bid on them, and on the bids raised.
eBay arranges all its items by topics, and places each item in its own category. For instance, a novel by John Grisham that is offered for sale, may be placed in the “Fiction” category of “Books” – making it easy for a prospective buyer to search for products on eBay, very efficiently.
How does eBay make money?
eBay makes its money in 2 ways.
- By charging what is known as an “Insertion Fee” on each of the items that are put up by the seller for sale. This fee varies from item to item – is very low for, say, books and DVDs, and relatively higher for Plasma TV and laptops – and usually ranges from 50 cents to $3. The Insertion Fee may be increased for listing the item in more than 1 category, or displaying additional photographs, and for other such promotional purposes.
- By charging a “Final Value” on the items that are sold. This Final Value is usually around 7 to 8 % of the final sales price of the item that is sold.
After the sale, eBay sends e-mails to both buyer and seller, notifying them about the sale, the expected date by which the seller is to ship the item and the expected the delivery date. On receiving the item, the buyer confirms the same on eBay, and gives a feedback and a rating to the seller – positive, if satisfied with the product, and negative, if dissatisfied. This rating is important, as a seller with a very good rating, is considered a safe option to buy from, by future buyers – while a seller with a low rating is avoided by buyers. This way, eBay enables its huge online community to act as self-appointed regulators, separating the good sellers from the bad sellers. While this ensures that the better sellers stay on at eBay, do a lot of selling and make a plenty of money for themselves, the poor sellers are essentially weeded out of the system.
Why is the Ebay business model so cost-effective and efficient?
Remember, unlike the other internet giant, Amazon, eBay is never actually in physical possession of the products at any point of time. This saves eBay a huge amount on what would otherwise have been expensive warehousing and inventory costs. So eBay has very little expenses of its own.