In 1995, Pierre Omidayar, a French-Iranian immigrant, wrote the code for an auction Web site where everyone would have equal access to a single global marketplace. Omidayar couldn’t believe it when a collector bought the first item, a broken laser pointer, for $14.83.* Soon the site grew into a broader auction site where consumers could sell collectibles ranging from baseball cards to Barbie dolls. The momentum continued when individuals and small businesses discovered that eBay was an efficient way to reach new customers and other businesses, and large companies began using it as a means of selling their bulk lots of unsold inventory. The company grew from 250,000 auctions in 1996 to 2,000,000 auctions in 1997. In 1998, it hired Meg Whitman as CEO, and she helped take eBay public later that year.
eBay’s success created a pricing revolution because it allowed buyers to decide what they would pay for an item. The result pleased both sides; customers gained control and received the best possible price for the item, while sellers made good margins due to the site’s efficiency and wide reach.
For years, buyers and sellers also used eBay as an informal guide to market value. Even a company with a new-product design that wanted to know the going price for anything from a copier to a new DVD player checked on eBay. The online marketplace was fascinating to economists as well, who used it to analyze pricing theories and compare them with actual buying and selling behaviors.
eBay itself doesn’t buy any inventory or own the products on its site. It earns its revenue by collecting fees: an insertion fee for each listing plus a final-value fee based on the auction or fixed price. For example, if an item sells for $60.00, the seller pays 8.75 percent on the first $25.00 ($2.19) plus 3.5 percent on the remaining $35.00 ($1.23). Therefore, the final-value fee for the sale is $3.42. This pricing structure was developed to attract high-volume sellers and deter those who list only a few low-priced items. With eBay’s expansion into a wide range of other categories—from boats, cars, and travel to health and beauty and home and garden— collectibles now make up only a small percentage of sales.
eBay now offers more pricing options, including a fixed-price “buy it now” option to those who don’t want to wait for an auction and are willing to pay the seller’s price. Sellers can also use the fixed-price format with a “best offer” option that allows them to counteroffer, reject, or accept an offer.
The company’s business model is based on connecting individuals who otherwise would not be in touch. It was the first example of online social networking, years before Twitter and Facebook existed, and consumer trust is a key element of its success. While skeptics initially questioned whether consumers would buy products from strangers, Omidayar believed people are innately good, and eBay’s originators did two things well: They built a strong online community, and they developed tools to help reinforce trust between strangers. The company tracks and publishes the reputations of both buyers and sellers on the basis of feedback from each transaction. It now has four seller criteria: items as described, communication, shipping time, and shipping and handling rate. The ratings are anonymous but are visible to buyers. Sellers with the highest rankings appear at the top of search results.
Over the years, eBay has expanded its capabilities, services, and partnerships to continue building its community and connecting people around the world. For i nstance, the company acquired PayPal, an online payment service, in 2002 after eBay members made it clear that PayPal was the preferred method of payment. The acquisition gave consumers a safe way to transfer money, lowered currency and language barriers, and helped merchants sell their products around the world.
Although eBay was a darling in the dot-com boom and has achieved tremendous success since then, it has had its fair share of challenges. These include a worldwide recession, increased competition from Google and Amazon.com, and difficulties expanding globally into markets such as China.
Meg Whitman retired in 2008 after leading the company for 10 years and was replaced by John Donahoe. Under Donahoe, eBay has made 34 acquisitions— primarily e-commerce and payments businesses such as Shopping.com, StubHub, and Bill Me Later but also businesses offering back-end technologies. Donahoe is moving the company toward a business model that can compete with Amazon.com, including expanding its online marketplace to include many returnable goods at fixed prices. Only 30 percent of eBay’s sales now come from auctions. The company has also been promoting eBay Now, which partners with big retailers like Macy’s, Target, Home Depot, and Toys “R”
Us to deliver orders in about an hour for a minimum charge.
Today, people can buy and sell virtually any product or service on the world’s largest online marketplace. From appliances and computers to cars and real estate, sellers can list anything as long as it is not illegal and does not violate eBay’s rules and policies.
The impact of eBay’s global reach is significant. In 2014, the online marketplace had almost 150 million active users and more than 500 million items listed. A pair of shoes is sold there every two seconds, a man’s necktie every 23 seconds, a major appliance every 26 seconds, and an LCD television every six minutes. With its high volume, its acquisitions, and consumers’ increased use of mobile devices, Donahoe hopes to double eBay’s active-user count to more than 200 million by 2015 and increase revenue from $14 billion to $23 billion.
Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.