eBay case study solution by Simon (BUBT)

(1)

eBay

eBay::

Connecting Internationally

A Rare success

Legend has it that Pierre Omidyar, a young engineer, connected the idea for eBay in 1995 so that Legend has it that Pierre Omidyar, a young engineer, connected the idea for eBay in 1995 so that his girlfriend would use an easy way to meet and trade with fellow Pez designer collectors.

his girlfriend would use an easy way to meet and trade with fellow Pez designer collectors. Omidyar envisioned eBay’s Internet site for becoming a place wh

Omidyar envisioned eBay’s Internet site for becoming a place wh ere a network of buere a network of buyers andyers and sellers could connect, forming a community. Bill cob,

sellers could connect, forming a community. Bill cob, the company’s global marketing director,the company’s global marketing director, calls eBay a step towards

calls eBay a step towards ““the first worldwide economic democracy.the first worldwide economic democracy.””

eBay is just a step in one sense. The company pales in comparison to, for example, Wal-Mart. eBay is just a step in one sense. The company pales in comparison to, for example, Wal-Mart. Wal-Mart raked in about $258 billion in sales in 2003 from its network of 3,551 stores, 1.5 Wal-Mart raked in about $258 billion in sales in 2003 from its network of 3,551 stores, 1.5

million workers, and countless warehouses. By comparison, eBay generated only $2.16 billion in million workers, and countless warehouses. By comparison, eBay generated only $2.16 billion in revenue from sales fees and advertising on the $24 billion in goods sold through 170 million revenue from sales fees and advertising on the $24 billion in goods sold through 170 million transactions using its systems- less than 10 percent of

Wal-transactions using its systems- less than 10 percent of Wal-Mart’s sales.Mart’s sales. However, eBay has noHowever, eBay has no stores or warehouses or inventory and accomplished its results with fewer than 6,000 employees. stores or warehouses or inventory and accomplished its results with fewer than 6,000 employees. Further, unlike most of the Dot-coms that sprouted in the late 1990s, eBay is proofable, having Further, unlike most of the Dot-coms that sprouted in the late 1990s, eBay is proofable, having produced a net profit of $441 million in 2003.

produced a net profit of $441 million in 2003.

eBay, however, is no flash-in-the-pan. Analysts predict that its revenue will double to about eBay, however, is no flash-in-the-pan. Analysts predict that its revenue will double to about $4.25 billion by the end of 2005 and profits would continue to grow at the rate of 40 percent per $4.25 billion by the end of 2005 and profits would continue to grow at the rate of 40 percent per year. Investors seemed to believe the predictions, as eBa

year. Investors seemed to believe the predictions, as eBa y’s stock was trading at an astoundingy’s stock was trading at an astounding 94 times earnings in mid-2004,

94 times earnings in mid-2004, despite the stock market’s depressed condition.despite the stock market’s depressed condition.

Now

eBayeBay

works

The idea for eBay’s business model is simple

The idea for eBay’s business model is simple-and old. Residents in rural and urban communities-and old. Residents in rural and urban communities have for centuries gathered in town squares and marketplaces to buy, sell, and exchange goods have for centuries gathered in town squares and marketplaces to buy, sell, and exchange goods and services. The

modern-and services. The modern-day “flea market” is aday “flea market” is a throwback to these markets.throwback to these markets.

eBay simply took this old idea and removed the need for physical meeting between buyer and eBay simply took this old idea and removed the need for physical meeting between buyer and seller. The internet provided the cyberspace where the marketing exchange could take place. seller. The internet provided the cyberspace where the marketing exchange could take place. eBay simply created the software programs to enable the transactions. The eBay system, eBay simply created the software programs to enable the transactions. The eBay system, however, improves on the old market s

however, improves on the old market s ystem in that the seller can “display” his/hystem in that the seller can “display” his/her items to aer items to a huge number of potential customers at the same time. Given that there may be more than one huge number of potential customers at the same time. Given that there may be more than one person interested in the item. Given that there may be more than one person interested in the person interested in the item. Given that there may be more than one person interested in the item, the seller can hold a auction, hoping that demand for the item will prefaces a higher price item, the seller can hold a auction, hoping that demand for the item will prefaces a higher price than a typical market where the number of potential buyers would be more limited or even than a typical market where the number of potential buyers would be more limited or even

nonexistent. Obviously, the process also depends on modern transportation and payment systems nonexistent. Obviously, the process also depends on modern transportation and payment systems

(2)

that allow the buyers and seller

that allow the buyers and sellers to arrange for the product’s phs to arrange for the product’s physical delivery as eBay plays noysical delivery as eBay plays no role in closing the transaction.

role in closing the transaction.

eBay charges the sellers insertion fees for listing an item, picture services fees, final value fees eBay charges the sellers insertion fees for listing an item, picture services fees, final value fees upon a sale, and listing upgrade fees. The following table presents the impact of the final value upon a sale, and listing upgrade fees. The following table presents the impact of the final value fee structure at various closing values;

fee structure at various closing values;

Auction’s Gross Closing Value

Final Value Free

$0-$25

5.25% of the closing value

$25-$1,000

$1.31+2.75%of the amount above $25

$10,000

$26.81+1.5%of the amount above

$1,000

Because eBay does not take title to anything sold over its system, it has a gross margin of about Because eBay does not take title to anything sold over its system, it has a gross margin of about 81 percent! Even with eBay’s projected

81 percent! Even with eBay’s projected growth, analysts predicted that its sales andgrowth, analysts predicted that its sales and marketing expense would hold at 30 percent of revenues.

marketing expense would hold at 30 percent of revenues. eBay’s

eBay’s average auction lasted 6.55 days as of the first quarter of 2002, and the average grossaverage auction lasted 6.55 days as of the first quarter of 2002, and the average gross value per auction was $22.50. As of early 2002, the average seller sponsored 3 auctions and value per auction was $22.50. As of early 2002, the average seller sponsored 3 auctions and produced $1.72 in net revenue for eBay per auction. eBay classified its offerings into 18,000 produced $1.72 in net revenue for eBay per auction. eBay classified its offerings into 18,000 categories, with high-priced merchandise, like cars and computers, continuing to grow as a categories, with high-priced merchandise, like cars and computers, continuing to grow as a percentage of total sales value. In fact, eBay Motors was the company’s fastest growi percentage of total sales value. In fact, eBay Motors was the company’s fastest growingng

category. Collectibles, like the Pez dispensers, accounted for only about

one-category. Collectibles, like the Pez dispensers, accounted for only about one-third of eBay’sthird of eBay’s items.

items.

eBay’s members, or users (never called customers), would tell you that o

eBay’s members, or users (never called customers), would tell you that o ne reason the systemne reason the system has been successful is that they like “winners” whenever they

has been successful is that they like “winners” whenever they are successful at an auction. Theare successful at an auction. The members police themselves, providing feedback points to each other so that disreputable buyers members police themselves, providing feedback points to each other so that disreputable buyers and sellers are quickly identified. Members also communicate

and sellers are quickly identified. Members also communicate directly with eBay’s staff to pointdirectly with eBay’s staff to point out problems and suggest solutions. And, it is very easy for members

out problems and suggest solutions. And, it is very easy for members to use eBay’s system.to use eBay’s system.

A New CEO

In 1997, eBay recruited Meg Whitman to become the company’s CEO. Whitm

In 1997, eBay recruited Meg Whitman to become the company’s CEO. Whitman had worked atan had worked at Disney and Hasbro, but was not an Internet junkie. She had degrees from Princeton and Harvard Disney and Hasbro, but was not an Internet junkie. She had degrees from Princeton and Harvard and brought with her a marketing background built on a commitment to customer satisfaction. and brought with her a marketing background built on a commitment to customer satisfaction. When Whitman took over, the company had only $49 million in merchandise sales. She helped When Whitman took over, the company had only $49 million in merchandise sales. She helped the company go public in 1998.

(3)

Whitman has led eBay through many changes. Rece

Whitman has led eBay through many changes. Recently, the company instituted a “buyntly, the company instituted a “buy-it--it-now”now” pricing system that lets a seller set a fixed price at which a buyer can purchase the item without pricing system that lets a seller set a fixed price at which a buyer can purchase the item without going through the traditional auction process. Whitman estimates that this type of purchase will going through the traditional auction process. Whitman estimates that this type of purchase will increase from 20

increase from 20% to 33% of eBay’s sales.% to 33% of eBay’s sales.

Although the company began as a way for individuals to buy and sell, many people have realized Although the company began as a way for individuals to buy and sell, many people have realized that it is a perfect vehicle for their own businesses. As a result, analysts estimate there are over that it is a perfect vehicle for their own businesses. As a result, analysts estimate there are over 430,000 businesses that exist only on eBay.

430,000 businesses that exist only on eBay.

New Frontiers

eBay has announced that its goal is to achieve sales of $4 billion by 2005. To reach this lofty eBay has announced that its goal is to achieve sales of $4 billion by 2005. To reach this lofty target, Whitman realizes that eBay must develop

target, Whitman realizes that eBay must develop international marketsinternational markets – – especially in light of especially in light of analysts’ suggestions that the company’s

analysts’ suggestions that the company’s core U.S. market growth rate is slowing and advertisingcore U.S. market growth rate is slowing and advertising revenues are down due to the economic slowdown.

revenues are down due to the economic slowdown. eBay has already ventured

eBay has already ventured into international markets. It has operations in into international markets. It has operations in Australia, Austria,Australia, Austria, Canada, France, Germany, Ireland, Italy, New Zealand, Switzerland, the United Kingdom and Canada, France, Germany, Ireland, Italy, New Zealand, Switzerland, the United Kingdom and other countries. In the first quarter of 2002, international revenues accounted for 21% of eB other countries. In the first quarter of 2002, international revenues accounted for 21% of eBay’say’s revenues, up from 18% in the last quarter of 2001; and its 2001 international revenue reached revenues, up from 18% in the last quarter of 2001; and its 2001 international revenue reached $115 million, up from $34 million

$115 million, up from $34 million a year earlier.a year earlier.

Despite eBay’s progress in international markets, all has not gone well.

Despite eBay’s progress in international markets, all has not gone well. Yahoo! Japan beat eBayYahoo! Japan beat eBay to the punch by offering online auctions in Japan in September 1999. ebay entered Japan five to the punch by offering online auctions in Japan in September 1999. ebay entered Japan five months later, but those five months were critical. eBay charged a fee for each transaction, which months later, but those five months were critical. eBay charged a fee for each transaction, which Yahoo! did not, and required users to provide a credit cards, preferring to pay by cash or bank Yahoo! did not, and required users to provide a credit cards, preferring to pay by cash or bank draft. Further, although many observers thought online auctions would not work in Japan due to draft. Further, although many observers thought online auctions would not work in Japan due to Japanese reluctance to buy used goods from strangers, its economic recession and the emergence Japanese reluctance to buy used goods from strangers, its economic recession and the emergence of environmental awareness helped to overcome this reluctance. Plus, Yahoo! users could adopt of environmental awareness helped to overcome this reluctance. Plus, Yahoo! users could adopt local touches, like horoscopes and newsletters, which it needed to attract users. eBay

local touches, like horoscopes and newsletters, which it needed to attract users. eBay

compounded all this by taking a low-key approach to promotion, while Yahoo! bought billboards compounded all this by taking a low-key approach to promotion, while Yahoo! bought billboards and opened an internet café with Starbucks.

and opened an internet café with Starbucks.

All these missteps, analysts argue, resulted in the “network effect.” Sellers want to go

All these missteps, analysts argue, resulted in the “network effect.” Sellers want to go wherewhere there are buyers, and buyers want to go where there is a large selection, i.e. sellers. Once this there are buyers, and buyers want to go where there is a large selection, i.e. sellers. Once this network reaches critical mass, it

network reaches critical mass, it becomes very difficult for a competitor to succeed becomes very difficult for a competitor to succeed Sellers andSellers and buyers flocked to Yahoo!; and by mid-2001, Yahoo! had captured 95% of the $1.6 billion online buyers flocked to Yahoo!; and by mid-2001, Yahoo! had captured 95% of the $1.6 billion online market

market – – eBay had only 3%. By early 2002, eBay threw in the towel and announced itseBay had only 3%. By early 2002, eBay threw in the towel and announced its withdrawal from Japan.

withdrawal from Japan.

Within weeks, however, eBay announced it had purchased 33% of a China Internet auction site. Within weeks, however, eBay announced it had purchased 33% of a China Internet auction site. EachNet, for $30 million. Two young entrepreneurs who met at Harvard Business School started EachNet, for $30 million. Two young entrepreneurs who met at Harvard Business School started EachNet in 1999. Shao Yibo and Tan Haiyin studied Internet businesses as part of a class project EachNet in 1999. Shao Yibo and Tan Haiyin studied Internet businesses as part of a class project

(4)

and decided that the eBay model was the only one that would work in Asia. With support from and decided that the eBay model was the only one that would work in Asia. With support from Asian venture capitalists, they launched their site, which by 2002 had 3.5 million registered users Asian venture capitalists, they launched their site, which by 2002 had 3.5 million registered users and 50,000 items listed for sale.

and 50,000 items listed for sale.

Although eBay executives argue that the eBay model has

Although eBay executives argue that the eBay model has universal application, the company’suniversal application, the company’s experience in Japan and China highlight key differences as companies move from one national experience in Japan and China highlight key differences as companies move from one national market to another. In China, for example,

market to another. In China, for example, EachNet’s customers hurried to the site to tradeEachNet’s customers hurried to the site to trade

practical items like apparel or cellular phones, not the collectibles that fueled growth in the U.S. practical items like apparel or cellular phones, not the collectibles that fueled growth in the U.S. market. Rather than use the postal or courier systems to make payment, as one might do in the market. Rather than use the postal or courier systems to make payment, as one might do in the United States, Chinese traders mostly s

United States, Chinese traders mostly sell within their own cities. Although ell within their own cities. Although transportationtransportation systems are improving, they are still creaky by U.S. standards; so shipping items is not easy or systems are improving, they are still creaky by U.S. standards; so shipping items is not easy or reliable.

reliable. Many Chinese still don’t feel comfortable doing business online, especiallyMany Chinese still don’t feel comfortable doing business online, especially when theywhen they are dealing with other individuals rather than companies. Moreover, e-commerce companies are dealing with other individuals rather than companies. Moreover, e-commerce companies have also been concerned about regulation by the Chinese government. In early 2002, the have also been concerned about regulation by the Chinese government. In early 2002, the government blocked access to foreign-based news and information sites.

government blocked access to foreign-based news and information sites. China represents the world’s fifth largest online economy with 47 million

China represents the world’s fifth largest online economy with 47 million Internet users. Of Internet users. Of these, some 32 % indicate they made purchases online in the past year. Yet 3o% of users say these, some 32 % indicate they made purchases online in the past year. Yet 3o% of users say they rarely visit an e-commerce site. With a population of over one billion people, however, they rarely visit an e-commerce site. With a population of over one billion people, however, there certainly is plenty of room for growth.

there certainly is plenty of room for growth. In recognition of this potential, eBay purchased In recognition of this potential, eBay purchased thethe remainder of Eachnet.com in mid-2003, although the company was still not profitable. However, remainder of Eachnet.com in mid-2003, although the company was still not profitable. However, Yahoo also sees China’s potential. In early 2004,

Yahoo also sees China’s potential. In early 2004, it announced that it was pit announced that it was purchasing another urchasing another Chinese online auction business, Sino.com, signaling that it would battle eBay.

Chinese online auction business, Sino.com, signaling that it would battle eBay. Moreover, in mid-2004, eBay announc

Moreover, in mid-2004, eBay announced that it would enter India, following a sed that it would enter India, following a strategy similar totrategy similar to the one it followed in China.

the one it followed in China. eBay indicated that it would acquire the eBay indicated that it would acquire the country’scountry’slargest onlinelargest online auction site, Bazee.com, Inc. for $50 million. Even though India ranks just behind China in auction site, Bazee.com, Inc. for $50 million. Even though India ranks just behind China in population, it lags far behind the U.S. and other nations in Internet usage, with only 17 million population, it lags far behind the U.S. and other nations in Internet usage, with only 17 million users.

users.

Meg Whitman and eBay’s other executives know

Meg Whitman and eBay’s other executives knowthat to meet their sales and that to meet their sales and revenue targets,revenue targets, they must be successful in international markets

they must be successful in international markets – – especially in China and India. eBay is theespecially in China and India. eBay is the world’s largest person

world’s largest person-to-person trading community. Whitman hopes that C-to-person trading community. Whitman hopes that China and India, withhina and India, with the world’s two largest populations, will be perfect fits for eBay’s business model.

(5)

Questions for discussion

1.

1. What are the forces shaping the development of Internet businesses like eBay in theWhat are the forces shaping the development of Internet businesses like eBay in the United States? How are these forces similar or different in other countries, such as Japan, United States? How are these forces similar or different in other countries, such as Japan, China or India?

China or India?

2.

2. How do the text’s terms “customization” and “customerization” apply to eBay’sHow do the text’s terms “customization” and “customerization” apply to eBay’s marketing strategy?

marketing strategy?

3.

3. How does eBay create vaHow does eBay create value for the members of its community?lue for the members of its community?

4.

4. What marketing recommendations would you make to eBay to help it be successful as itWhat marketing recommendations would you make to eBay to help it be successful as it enters the Chinese and Indian markets?

(6)

1. 1. What are the forces shaping the development of

What are the forces shaping the development of Internet businesses like

Internet businesses like

eBay in the United States? How are these

eBay in the United States? How are these forces similar or different in

forces similar or different in

other countries, such as Japan, China or

other countries, such as Japan, China or India?

India?



 The forces shaping the development of Internet businesses like eBay in the United States:The forces shaping the development of Internet businesses like eBay in the United States:

Digitalization and connectivity. Digitalization and connectivity. Customization.

Customization.

The explosion of the internet. The explosion of the internet. New types of intermediaries. New types of intermediaries.

These forces are similar or different in other countries such as Japan, China or India like the These forces are similar or different in other countries such as Japan, China or India like the following way: following way:

Digitalization &

connectivit

The explosion of the

internet

New types of

intermediaries

Customization

Internet

Business

(7)

Other factors: Other factors:   Geography Geography   Population Population Attractivenes

Attractiveness s to to investors in internet investors in internet related businesses related businesses

Private and foreign Private and foreign investment in investment in Internet product Internet product Political ideology: Political ideology:

Govt. regulation and involvement Govt. regulation and involvement

Usefulness and ease of Usefulness and ease of the use of the Internet the use of the Internet business (eBay) business (eBay) Development in Development in technology technology

Ability and willingness to Ability and willingness to use the internet business use the internet business

Availability and price Availability and price structures of IT structures of IT infrastructures, infrastructures, Education and Education and other cultural other cultural factors factors International and International and global forces global forces Economic factors: Economic factors: Income level Income level Consequences of Consequences of internet adoption: internet adoption:

(8)

2.

How do the text’s terms “customization” and How do the text’s terms “customization” and “customerization” apply to “customerization” apply to eBay’s marketing strategy?

eBay’s marketing strategy?



 At first, we have to know what customization is and what customerization is.At first, we have to know what customization is and what customerization is.

needs. needs.

tomerization with tomerization with customized marketing in a way that empowers consumers to design the product and customized marketing in a way that empowers consumers to design the product and service offering of their choice.

service offering of their choice.

Because the software was programmed in a way by which a buyer can easily choose a Because the software was programmed in a way by which a buyer can easily choose a product which s/he wants to purchase by clicking the category of that product.

product which s/he wants to purchase by clicking the category of that product.

Because the customers (members) have

Because the customers (members) have to follow that system which software isto follow that system which software is programmed by the eBay. There is no chance to fix the terms and conditions by the programmed by the eBay. There is no chance to fix the terms and conditions by the customers. Although the system is ever upgraded by eBay for gaining the customer customers. Although the system is ever upgraded by eBay for gaining the customer satisfaction.

satisfaction.

Customization

: Delivering marketing offers which is based on individual customer: Delivering marketing offers which is based on individual customer

Customerization

: Combination of operationally driven mass cus: Combination of operationally driven mass cus

eBay’s customization

eBay’s customization: From the beginning, the functions of eBay were customized.: From the beginning, the functions of eBay were customized.

eBay’s customerization:

eBay’s customerization: Normally, eBay doesn’t follow the customerization str Normally, eBay doesn’t follow the customerization strategy.ategy.



 Diffusion level Diffusion level 

 Diffusion pattern Diffusion pattern



 Integration of Integration of

internet in existing internet in existing ways of lives

(9)

3. 3. How does eBay create value for the

How does eBay create value for the members of its community?

members of its community?



 The steps by which eBay create value for the members of its community are shownThe steps by which eBay create value for the members of its community are shown below with a figure:

below with a figure:

Divide the total Divide the total market on the basis market on the basis of Internet users. of Internet users.

Select the segments Select the segments that are eager to that are eager to buy and sell on the buy and sell on the

They

They differentiadifferentiate te their market offer their market offer from the others by from the others by implementing auctions, implementing auctions, “

“ -- -- ””

Taking position of the Taking position of the market offerings in the market offerings in the mind of the target mind of the target Create value Create value for the for the community community Segmentation: Segmentation: Targeting Targeting:: Differentiation: Differentiation: Positioning Positioning::

(10)

4. 4. What marketing recommendat

What marketing recommendations would you make to

ions would you make to eBay to help it be

eBay to help it be

successful as it enters the Chinese and

successful as it enters the Chinese and Indian markets?

Indian markets?



 InIn Chinese and Indian market eBay couldn’t able to make the desired turnover Chinese and Indian market eBay couldn’t able to make the desired turnover . For being. For being successful they might take the following steps:

successful they might take the following steps:

Venture

: They may venture with the other online business site like it in those: They may venture with the other online business site like it in those countries for being more available.

countries for being more available.

Trading practical item

: In china and India peo: In china and India people hurried to the site to tradeple hurried to the site to trade practical items like cellular phones. So they make available this type of practical practical items like cellular phones. So they make available this type of practical product on the site.

product on the site.

Reduce formality

: Without create an account on: Without create an account one can’t enter to this site. So,e can’t enter to this site. So, after reducing this formality, people will know this site

after reducing this formality, people will know this site better from previous andbetter from previous and will be transferred to the actual customers from the

will be transferred to the actual customers from the potential customers.potential customers.

Promotional activities

: They can advertise in the popular site such as: They can advertise in the popular site such as

facebook, yahoo!, skype, bing etc. it also may set billboards on the busy roads or facebook, yahoo!, skype, bing etc. it also may set billboards on the busy roads or take the sponsorship of international game like IPL for becoming more popular. take the sponsorship of international game like IPL for becoming more popular.

Reduction of fees

: As the promotional activities, firstly they may reduce the: As the promotional activities, firstly they may reduce the entry fee and closing fees in those countries.

(11)