Ebay Held at Bay

The eCommerce space is a key digital transformation in the last decade, and has quickly become crowded with new niche or vertically integrated players emerging. In the growth of this sector, I identify Ebay as a loser primarily due to its failure to adopt new technologies to create lock-in to its platform. I will also identify thredUP and Amazon as winners because their successful adoption of digital innovation to improve the customer experience.

 

Ebay was a global first mover in creating a global auction platform. However, the company has faced challenges in expanding to new markets, which foreshadows its eventual demise domestically. New companies in niche or targeted verticals have emerged to compete with Ebay, and Ebay has not proven able to keep up with digital innovation in areas like marketing and customer service.

 

In classic Judo strategy, new entrants in a market can attempt to use the incumbent’s size and assets against them. In Ebay’s case, the sheer volume and variety of items sold on the platform can also be its downfall: today’s experience of shopping on Ebay is overwhelming and unfocused. Competitors who choose specific niches, such as TheRealReal’s exclusive focus on luxury goods in accessories, can create a customer experience that it is difficult to Ebay to compete against.

 

As a two-sided marketplace, Ebay solved for the problem of keeping users on the platform with its reputation system: as a seller, you build a good reputation on the site when you fulfill orders correctly and efficiently. This means that a trusted seller has a disincentive to leave Ebay to auction goods on another platform, because they would need to rebuild that reputation from scratch in order to have the priority among buyers that the seller enjoyed on the Ebay platform.

However, new entrants into the resale market have discovered that it is possible to render Ebay’s reputation system useless by simply inventorying items themselves. For example, thredUp has become the world’s largest online thrift shop by selling high quality items from users who mail items into thredUP’s processing department. At thredUP, actual humans review goods, instead of relying on peer to peer transactions and slowly letting sellers develop reputations. With this approach, thredUP minimizes the risk of a customer having a poor shopping experience: perhaps that customer will contribute to a negative rating for a seller, but they also may not return to your platform for a repeat sale. I believe that thredUP is a winner in this space because of its ability to leverage insights about consumer preferences and translating those insights into strategy. As a last example, thredUP discovered that thitsis human-powered processing system became cumbersome if it was costless for users to ship low quality goods to the site, so they introduced a processing fee that was waived if items were accepted. Until the company refines news methods to algorithmically evaluate goods, they have saved themself significant operational cost by adopting this strategy.

 

Other startups in the space have employed additional digital strategies. For example, RueLaLa and Gilt.com have extensively optimized their landing pages to ensure that recommendations are tailored to a specific user’s past preferences. Additionally, Gilt.com leverages flash sales at certain optimized times. Using techniques such as collaborative filtering, these sites are able to estimate how likely a given user is to buy something that they have never seen before, and they promote the “most likely” items to the front of the site.

 

Furthermore, reputation systems have decreased in importance as a barrier to entry as the sharing economy and digital innovation as a whole become the norm in society. From Uber to Airbnb, we expect to be able to trust strangers if they are verified by the platform we trust. By failing to manage its sellers as effectively as these new digital platforms do, Ebay has fallen behind.

 

Reputation systems are not Ebay’s only category of technical debt and failure to adopt new technologies. Ebay’s data structure has historically posed challenges for the company in SEO, as sites like Google have a difficult time indexing the listings to appear in Google search results. In today’s internet, it is foolish to assume that consumers will navigate to your site to find items they want, rather than Googling. Ebay should have prioritized faster advances in its data organization in order to capture traffic from search engines.

 

The demand for and introduction of Ebay’s “Buy it now” button belied an important learning about consumer preferences in the digital era: in buying second-hand goods from others, consumers prefer not to deal with the hassle of an auction. Amazon has emerged as a winner in this space, taking that lesson to heart: it is possible to buy second-hand goods on Amazon, such as textbooks, but prices are set. Amazon also does not force the research task of evaluating a seller on the consumer. Indeed, Amazon’s forays into the auction space have been limited to B2B “liquidation auctions” to sell bulk quantities of overstock merchandise or customer returns. As a regular consumer, Amazon spares you from the auction experience.

 

Amazon dominates Ebay in customer service. While part of this success is attributable to Jeff Bezos’s focus and spending on customer service, it is primarily a result of a superior leveraging of digital trends: Amazon focuses on customer needs before it even comes to a complaint, by closely analyzing shopping patterns, searching for “one click” solutions, and designing self-service solutions around common problems.

 

Unlike Ebay, Amazon has leveraged its data gathering operation to identify opportunities for expansion of its business. One of the most consumer facing ways Amazon has leveraged its data gathering operation is to identify products to include as part of its “AmazonBasics” line. Amazon can observe which niche products are disproportionately popular on its service, then identify the subset of these products that they can sell at a lower price than the competition (in products where consumers care less about brands). Because they have effectively outsourced the product development process to third party suppliers, they are able to offer a cheap and profitable product while assuming none of the risk associated with bringing the product to market. Ebay, despite having access to similar information, has not made an effort to produce its own line of goods.

 

Ultimately, I do not believe that Ebay can survive as a used goods seller because it faces threats from better-positioned competitors such as Amazon and thredUP. As a consumer, I look forward to the developments in the eCommerce space from companies that understand the importance of leveraging technology to create flawless customer experiences.

 

Sources:

Planet Money podcast “Antitrust 3: Big Tech”

https://www.ecommercebytes.com/2018/10/25/amazon-launches-auction-marketplace-to-liquidate-returns/

https://www.channeladvisor.com/blog/marketplaces/ebay-moves-toward-structured-data-and-why-it-matters/