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Business Model – eBay Essay

eBay, Inc. is the largest and most popular marketplace on the Internet, allowing members to buy and sell almost anything. It was launched in 1995 by Pierre Omidyar whose vision was to create a virtual marketplace for the sale of goods and services for and by individuals. Together with Meg Whitman, branding guru and Harvard Business graduate, they created a site which is a person- to- person interface for buying and selling products. eBay proclaims “trust” between buyers and sellers as the key to the success of the marketplace.

From its inception, eBay has trodden the different path to get to where it is (Gopalkrishnan & Gupta 2). It has thrived by advertisement done through word of mouth and through agreements with a few Internet companies such as AOL and Disney. The large portion of savings from low advertising costs is invested in innovative marketing strategies to keep them ahead of its competitors. Its philosophy of giving the power to users has facilitated creation of a wide base of users who have faith in its services. Also eBay’s ability of provide access to such a broad variety of products at relatively low prices will continue to attract more users and profits

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in the future.

So how is eBay different from traditional auction houses like Christie’s and Sotheby’s? The difference between traditional and online auction houses is elaborated in the table below:

Feature Traditional Auction Houses Online auction through eBay
Product Type Luxury products Diversified product offering
Product Accessibility Real. Can be seen by the potential buyer. Virtual
Market reach Local Worldwide
Customer base Select small group Wide customer base of more than 150 million people
Payment mode Direct Through intermediaries
Delivery of product Instant Delayed. With a time lag

eBay being an online auction site, the internet, its features and connectivity have had a big impact on the success of the portal. There have been advantages and disadvantages of using the internet as a medium to reach customers and conduct online sale and purchase of commodities.

Advantages Disadvantages
Convenience to the customer:

Lower prices for the buyer

Wider customer base

Wide and diversifies range of products

No product expiry or perishability issues

 

Low barriers to new entrants

Customers cannot ‘see’ or ‘check’ the actual product

Low control over product quality

Threat from hackers, fraudulent transactions

No direct interaction with the seller -hence trust is an issue.

Risk of delayed payments / product delivery

Absence of ‘shopping experience’

No facilities for trial of the product

 

Pricing Strategies:

Historically, online sales have been increasing rapidly, the worldwide Internet population has been growing dramatically, and there has been a veritable influx of online sellers and intermediaries. One consequence of this growth is a wide variety of choices for buyers. The Internet also eliminates local and regional protections for sellers as now buyers can buy from anywhere in the world. The direct supplier-buyer relationship in Internet transactions also reduces or eliminates the various intermediaries in traditional distribution systems. Each of these trends increases competitive pressure and puts a downward pressure on prices (Kung, Monroe & Cox).

On one hand although prices are lower on the Internet because of the above reasons, it is not clear that prices are consistent with the expectations based on perfect competition. One research has shown that online consumers are not as price sensitive as had been previously thought. Consumers become less price sensitive and more loyal as the level of quality information on a site increases (Lynch and Ariely 83-103).

Furthermore, although price is an important factor in a buyer’s purchasing decisions, a J.P. Morgan report found a variety of other attributes including customer support, on-time delivery, shipping and handling, product content, privacy policies, ease of ordering, product information, Web site navigation and locks, and product selection that were rated more heavily in the purchasing decision than was price. In addition, a McKinsey study discovered that the majority of online buyers do not actively search competing sites to find the best deal.

Given the fact that online consumers do not actively search competing sites, it is not surprising that online retailers often set higher prices than those of their competitors. Developing a reputable brand name and receiving a price premium for the products is also a pricing strategy similar to what exists in the brick-and-mortar world (Latcovich and Smith 217-34).

The internet also acts as a medium for creating a market with dynamic and variable pricing strategies. Because of an auction mechanism, the final price of the product on eBay is unknown (except in Buyitnow or Half.com where the pricing is fixed). It purely depends on the customers’ bidding values.

Revenue Model:

The revenues of eBay are mainly from transaction fees from:

  • Paypal, an online paying service system for users to buy items online more conveniently.
  • Final value fees – a percentage of the final sale price of the item
  • Listing and special placement fees: sales from the service of listing customer’s product to be sold to other users
  • Advertisement fee.

As the size of its community grew, profits grew also. The e-commerce company posted first-quarter revenue (2010) of $2.2 billion, up 9% year over year, or up 18% excluding Skype. The increase was due primarily to the growth in the Payments and Marketplaces businesses, as well as the positive impact from foreign currency movements against the U.S. dollar.

Way Forward:

Since the medium for conducting the business is the Internet, the risk of entry by potential competitors is relatively high due to low barriers to entry. New entrants can launch similar sites at a very nominal cost using commercially available software. Again, due to diversified product offering,  there are many more opportunities for new competitors to enter in. eBay also competes closely with traditional brick and mortar companies, as well as a large variety of online retailers. Due to this complex competitive industry, sustainability may become an issue if eBay is not able to adapt quickly to the changing environment, which is unlikely (Grewal, Iyer & Levi 703-713).

In order to ensure its market leader position, eBay must concentrate on many competitive factors such as: ability to attract buyers, volume of transactions and selection of goods, customer service, system reliability, brand recognition etc. Some other concerns are prevention of fraudulent transactions like redistribution of stolen goods or sale of counterfeit goods or hacking of customer accounts.

As with many technology companies, systems breakdowns could disturb the trading activities of eBay. In the past both eBay and its payment brand Pay pal have encountered shutdowns and outages. International competitors competing in their domestic markets may have the cultural experience that could give them a competitive advantage over eBay. For example, Yahoo! dominates the Japanese market.

However, no matter what the challenges are, from the past performance of eBay and its current core competencies, it seems to be anybody’s guess that eBay is here to stay, and in a big way as the market leader.

Works Cited

Gopalkrishnan, J, Gupta, V.K. “eBay: “The world’s largest online marketplace”- A Case

            Study”, Conference on Global Competition & Competitiveness of Indian Corporate:

            2.

Grewal, D., Iyer, G.R., Levy, M. “Internet retailing: enablers, limiters and market

            consequences”, Journal of Business Research Vol. 57 No.7 (2004): 703-13.

Kung, M, Monroe, K.B & Cox, J.L. “ Pricing on the Internet” , Journal of Product & Brand      Management Vol 11 No. 5 (2002).

Latcovich, S, Smith, H. “Pricing, sunk costs, and market structure online: evidence from book

            retailing”, Oxford Review of Economic Policy Vol. 17 (2001): 217-34.

Lynch, J.G, Ariely, D. “Wine online: search costs affect competition on price, quality, and

            distribution”, Marketing Science Vol. 19 (2000): 83-103.

www.eBay.com

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