Friday, February 1, 2008

Ebay and - From a Merchant's Perspective

As none of you (probably) know, along with writing this blog, managing my portfolio, and attending college, I also founded, own, and operate a small ski wax company, Whacks Wax.

(I founded Whacks Wax in 2004 as a sort of science project. But the wax worked well, so since then, I've been selling the stuff commercially, having now sold to customers in over 20 countries.)

I owe the existence of my little company to the internet, and for most of the company's existence, exclusively eBay. I set up a website to provide background information, but until this winter, virtually all of WW's sales (90+%) came through eBay. I loved and appreciated eBay; a magical marketplace existed where an unheard-of company could peddle their products for a tiny fee. I didn't have to borrow money to advertise - my item could be seen by many interested customers for virtually no cost to the company.

I'm still very content with eBay (though not a fan of the new fees - but more on that later). This winter marked a big divergence from WW's exclusively-eBay model of the past. By some stroke of SEO (Search Engine Optimization) genius or dumb luck, I managed to push my website into the top-ten results for ski and snowboard wax queries on Yahoo!. The influx of organic traffic created many more off-eBay purchases than in the past.

Also, this winter, I enrolled in a little-known program offered by called "Fulfillment." Fulfillment is a wonderful thing for tiny e-entrepreneurs like myself. Here's how it works:

With Fulfillment, the merchant prints out scannable labels and affixes them to his products. He then ships products to an warehouse (my warehouse is in Lexington, Kentucky, which is excellent because the area also has huge shipping hubs). Amazon scans the items as they enter the warehouse, and then store them right next to Amazon's own merchandise. Then, when someone purchases a piece of wax through my website, I simply provide with that customer's information, and they'll ship it out of their warehouse, usually the same day. (Also, a participating merchant can choose to sell their product through's website; my listing can be seen here.)

I actually decided to sign up in October because it was free through the end of the year, but now, all of that supply-chain streamlining will come at a price; Amazon charges:

  • A flat fee per month for participation in the program
  • A processing fee for each transaction
  • A storage fee based on average square footage per month
(The above information is accurate to my best knowledge; maybe I'll be blindsided with some fee I don't know about this month.)

I have had almost 20% of my purchases come through, so it's certainly a powerful marketplace, even ignoring the Fulfillment service. Coupled with the organic traffic, eBay has become less important to me. That's a bad thing for them, especially as they hiked fees (in a way that hurts consistent sellers like myself most).

Here's a realistic example (based on my company) of how the higher fees will crush big sellers:

Current listing fees for a fixed-price listing of $199.99 of product: $2.40
20 $6 pieces of wax sell - $6 x 5.25%= .30c/each, = $6 total

Total fees for listing = about $8.40

New fee structure:

New listing fee = $2.00 (oh boy, huge savings!)
current final value fee = .50c/each, $10 total

Total under new structure = $12

That's about 30% more for sellers of small items like myself. Ok, so a snowboard wax company isn't crucial to eBay's business, but the sellers of CDs, DVDs, iPod cases, video games, and all other knickknacks under $25 are. (Above $25, the fees don't change significantly.)

Considering Fulfillment, Amazon's excellent, easy-to-use supply chain, coupled with fees at eBay that will squeeze profit margins, eBay is dangerously close to completely alienating high-volume small-item sellers that are crucial to its success.

eBay, as a corporation, has one great thing going for it: PayPal. There's still no serious competitor, and more traditional merchants (airlines, hotels, etc.) are accepting it. Also, I read an article about six months ago that more immigrants are sending remittances through PayPal - its instant and easy.

Revenue from items sold through Amazon's site is accumulated in an account and then transfered into a linked bank account. Since Amazon is a household name, they have no need for the trust, security, and ease of PayPal that has made it successful with other merchants.

So, logically, I think Amazon is making advances while eBay may be making a huge mistake. But when it comes to investing, eBay sports a 15 forward P/E while Amazon's ratio is still bloated at 35. But as Amazon expands overseas and steals domestic business, eBay may be forced to reevaluate its structure if it wants to remain a premier internet marketplace.

P.S. If you ski or snowboard, give Whacks Wax a try.

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