Market Opportunity eBay.com
Market Opportunity
eBay.com is the worlds largest person-to-person (P2P) trading community. It has 18.9million registered users and has captured 80% of the online auction market.
.1 Advantages and disadvantages of conducting an auction online
There are a number of advantages and disadvantages of conducting auctions on-line to both the auctioneers and the customers. Advantages to eBay include:
* Low set-up cost as there are no premises and the auction is fully computer automated making staffing needs lower.
* Contract is between the buyer and the seller eBay do not intervene in the sale - they are a neutral provider of the trading forum.
Advantages to buyer and sellers include:
* International arena so wide universe of potential buyers for people selling goods
* More choice for people wanting to purchase goods, as they are not restricted to buying from sellers within travelling distance from themselves
* On-line auctions also offer a much more convenient way to shop. They are open 24 hours a day, seven days a week, which is extremely beneficial for people who can not find the time to go to a store or for those who just want to be able to shop at a time more convenient to them.
On-line auctions do however also offer a number of disadvantages.
* Most customers like to be able to see a product before they purchase it. People are less likely to buy products that they cannot inspect the condition of before the purchase takes place.
* eBay have no control over how people act on the site.
* Unscrupulous sellers could be attracted by the fact the buyers cannot see the products. Incidents where people are defrauded could damage eBay's reputation amongst consumers.
* Not really suitable for large objects due to transportation costs and issues. Although eBay have attempted to address this issue by creating local sites.
* Very impersonal way of shopping and many people enjoy the personal interaction and experience of traditional shopping.
* Impersonal nature of shopping on-line may mean that eBay find it harder to build relationships with their customers as they do not have a human face to the company.
2 Brand Development Strategy
2.1 Overview
eBay had a multi-stranded strategy to develop their brand in the e-commerce environment.
"A brand is a name, term, sign, symbol or design or combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors"
Kotler 1997
Brand management principles are widely understood and applied in the traditional economy. Their application in e-commerce is less appreciated, even though the need for branding is often as compelling. According to David Bunnell, Meg Whitman made building the eBay brand one of her first initiatives. First she sort to clarify exactly what eBay stood for.
"a personal trading community where users can buy and sell almost anything"
Meg Whitman
This definition set eBay apart from its existing competitors and most of its future ones. She then set about making sure that all marketing communications reflected this unequivocal definition. The second part of her strategy was to segment and analyse the eBay community. Serious collectors and small dealers were identified as the heaviest site users, accounting for 80% of the total eBay revenues even though they only represented 20% of the registered users. Based on this knowledge, the company decided to concentrate its brand building resources.
With tens of thousands of sites appearing on the Web each year, eBay's challenge was to stand out above the clutter. A number of different aspects contribute to an effective brand identity as detailed in figure 1. eBay used a combination of these to effectively develop their brand in the world of e-commerce.
Figure 1
2.2 Brand name and positioning
When eBay entered the online auction market it was the only real player, thus the competition it suffered was from other generic forms of purchasing 2nd hand goods. The main forms of competition as detailed in the case study were newspaper ads, auctions, and garage sales/ flea markets. eBay needed to position itself favourably against these competitors. When the firm and indeed the concept was first established it was seen to have extremely high risk attached (see perceptual map below - figure 2). Over the 5 years of the case study eBay's strategy was to reposition their brand as more trustworthy. This was an extremely successful strategy and was achieved through use of other elements in figure 1
Figure 2
2.3 Marketing Communications
The marketing communications mix has a number of elements, and eBay used a combination of these to effectively build their brand in an e-commerce environment
2.3.1 Personal Communications
eBay used personal communications including word-of-mouth and customer service to help build their brand.
By 1997 the number of auctions being held on eBay had risen to 150,000 a day and eBay were finding difficult to provide adequate customer service. The solution that they developed was a two-stranded strategy. Including self-service instructional material and specific topic related bulletins boards. Other users originally answered questions, which was an ingenious ides as it also helped build the sense of community.
Another aspect of personal communication that eBay used effectively to their advantage was word-of-mouth. eBay harnessed the willingness of customers to promote the service, and encouraged people to let others know about fantastic experiences by giving them the opportunity to post reviews of eBay on the discussion boards at the eBay café. A more in-depth analysis of the personal communications used by eBay can be found in appendix 1.
2.3.2 Advertising
Initially eBay conducted limited marketing, then entered into cross-promotional agreements with a number of other web based companies (see appendix 2 for list).
"eBay's boldest and most costly effort of gaining greater name recognition began in August 1998, when it entered into a three year marketing deal with America Online"
David Bunnell - The eBay Phonomenon
Cross-promotional agreements were a particularly effective solution because at that point Internet usage was not as wide spread as it is today. If eBay had advertised in national media such as newspapers then the ...
This is a preview of the whole essay
2.3.2 Advertising
Initially eBay conducted limited marketing, then entered into cross-promotional agreements with a number of other web based companies (see appendix 2 for list).
"eBay's boldest and most costly effort of gaining greater name recognition began in August 1998, when it entered into a three year marketing deal with America Online"
David Bunnell - The eBay Phonomenon
Cross-promotional agreements were a particularly effective solution because at that point Internet usage was not as wide spread as it is today. If eBay had advertised in national media such as newspapers then the message would have been irrelevant to a large percentage of readers.
The next stage of brand building was targeted at specifically identified segments of the customer base. eBay wanted to establish itself as a site for trading collectables, and this was done by advertising in 70 specialist collectors' publications and exhibiting at collectors trade shows. They used these adverts to create awareness about their service offering, as collectors were often unaware that people sold their relevant collectable on eBay. eBay were extremely good at harnessing the latest consumer collectables craze early on and milking it for all it was worth. The Furby craze in 1999 is a perfect example of this (more details of this campaign can be found in appendix 3).
Advertising plays an important role in providing prospects with factual information about the service and educating customers about the features and capabilities of the service. eBay sort to get wider recognition of, and build their brand by launching a national radio and press campaign in the USA. Building the recognition of the eBay brand was extremely important for building trust in the brand. According to a University of buffalo study web users still look for the names of "socially entrenched" institutions. The risk perceived by customers is reduced considerably if the transaction is guaranteed by a familiar and trusted name.
2.3.3 Servicescape Design and Corporate Design Elements
eBay has quite a distinctive logo and style of layout which features on all of its sites and pages including the different national and local sites
The website has a user friendly design It has specific product categories and a search facility so can narrow down the search for your desired product. The site allows you to select a good, look at the details of the good, the current bidding situation and the feedback for the seller. The site also allows eBay sellers to design their product display pages.
2.3.4 Interactive Marketing
Being an e-commerce firm interactive marketing was a natural choice for eBay. Interactive marketing used by eBay takes a number of forms, many of which can be demonstrated in relation to the Furby case mentioned earlier (for a more detailed analysis please see appendix 4), including:
* Onsite promotions
* Cross-promotional agreements
eBay also use e-mail marketing to target existing customers. This lets users know what is going on at eBay and encourages them to visit the site.
Overall I feel that the brand building strategy was effected as it targeted the people most likely to use their site and without spending too much money on mass advertising which would have reaped little return.
3 Importance of Relationship Marketing in Developing the eBay Community
It has been argued that relationship building is the key to modern marketing. A relationship is the enduring link between a brand and the consumers, which entails repeat purchases and perhaps even loyalty. It is more profitable to build and maintain relationships than it is to continuously search for new customers. It costs 7 times as much to acquire a new customer than to retain an existing one.
According to Brondo and Moore (2000) in order to successfully build relationships with consumers, websites should follow four principles.
3.1 Identify
As mentioned previously segmentation of the eBay consumer base was one of the cornerstones of Meg Whitmans brand building strategy. This was also an extremely important aspect of the relationship marketing that eBay undertake. eBay users were assessed in terms of their site usage and purchasing and selling behaviour.
3.2 Differentiate
Different types of eBay users were established and it was discovered that 80% of the sites revenue was being derived from 20% of the users.
3.3 Interact
According to Brondo and Moore (2000) the most effective websites engage the potential purchaser in a dialogue and add value by being seen to interact with the user. EBay have done this extremely effectively. By providing users with a forum for discussion in the form of the eBay cafe they have established a two-way dialogue. The Cafe chat room is one of the cornerstones of eBay's community-building effort. This was a very clever form of relationship marketing as people are never very willing to form a relationship with a database or a brand. Here people were forming a relationship with the other people within the community and with the sense of belonging that this brought.
eBay have also showed that they listen to customers by responding to their concerns and worries. An example of this is when eBay wanted to increase the prices, but didn't because users posted objections on the discussion boards. EBay have also received some of their most inspired ideas from message board posting left by users of the site. It was a user that suggested that eBay set up one of its most successful aspect- the peer-review feedback forum that allows buyers and sellers to rate each other.
3.4 Customize
The final aspect of a web-based relationship marketing strategy was customisation. EBay operated a mass customisation strategy. They customised the site so that it could separately meet the needs of a number of different segments of the customer base. Two ways in which they did this was the' power sellers program' and the 'about me pages' (for more detail see appendix 5).
Relationship marketing was absolutely critical to the successful building of the eBay community. Without the individual knowledge that eBay developed about their customers they would not have been able to target effectively. It is the feeling of being special and included that gives the community strength.
4 How eBay has created a profitable high revenue business model.
There are a number of reasons why eBay has been successful in an e-commerce environment whilst others have failed. Porters Five Forces model below (figure 3) can give grounding to an evaluation of why and how eBay has performed so well.
Figure 3
A full analysis using Porters Five Forces can be found in appendix 6 and the main points are detailed below.
eBay was a pioneer in the online auction industry and this put them at a huge advantage as they had time to firmly establish themselves as the market leader before new entrants arrived. Over time a few competitors have entered the market, but a number of factors have meant that they have not really made a dent on eBay's monopolisation of the market.
A major factor in eBays competitive advantage is the extent of product differentiation that they have managed to establish. There is not much differentiation in the basic service offered by online auctions, but eBay has positioned itself as providing extra value to its customers (see figure 4).
Figure 4
The core circle contains the core service that eBay offer. The surrounding circle contains supplementary services that eBay offer, but many of these are services offered by competitors and are in most cases needed to facilitate the use of the core service. The outer ring contains a number of additional supplementary services that eBay offer. It is these services that have added value to the service and given eBay a competitive advantage.
The phenomenal success of eBay and the low start-up costs have made the online auction market very attractive. All that was required to setup an online auction was the computer software. David Bunnell author of 'The eBay Phenomenon' stated that
"like an aggressive army, eBay's strategy is to move quickly to capture territory and key positions in the new world of online auctions before opposing forces can do so, the costs be dammed"
eBay made full use of their advantage over potential new entrants by using the fact that they were the first firm in the industry to firmly establish and build their brand and capturing as much of the market as possible.
Other barriers to entry that faced potential entrants were that eBay were the most well known online auction they had the most product postings and they were seen as the most trustworthy. Ellen Reid Smith author of 'e-loyalty' stated that
"the feature that holds eBay's e-loyalty strategy together is that it is the most trustworthy auction site on the web and this is why it has successfully held its leadership against new competitors".
The major benefit that eBay had over its possible substitutes was the convenience that it could offer to both the seller and the purchaser. Both could operate the process from the comfort of their own home at any time of day convenient to them. eBay also offered it customers community, which was an element of service that none of the substitutes could provide.
Sellers are extremely important to eBay because without them there would be no customers and thus no business. eBay have done a number of things to try and ensue that customers stay with them. The first was that they created an opportunity cost for deflection as detailed in a quote from Ellen Reid Smith below.
"Under e-bays safe harbour program, customers have their service rated. Traders who value the service record they have built up on eBay are reluctant to defect to other auction sites because the opportunity cost would mean starting with no service record, thus lower bids. This makes eBay customers loyal - the fact that the value builds with each transaction means that it's hard for other sites to compete."
eBay also set about developing the community mentioned in section 2, encouraging site users to air their views and actually taking notice of them.
Another strategy of eBay's was to differentiate themselves from the competition (see figure 4) and build their brand effectively. eBay cannot control the service that people receive when they purchase things, but they can provide the easiest usable site, put in place systems to enable the buyers to choose the best possible seller and provide community minded things such as the eBay cafe.
Although eBay obviously had an excellent strategic plan there also a lot of luck involved in their success. If there was a magic formula that guaranteed success then there would be more successful companies. A lot of it is about making the right decisions when opportunities came up. The combination of a powerful business design tailored to the Internet and a company philosophy of openness and community came together in the most effective way to form the success we now know as eBay.
5 Challenges facing eBay
There are a number of different challenges that eBay will face in the future.
Rapid growth
Between 1996 to 1999 the number of registered eBay users increased dramatically from 41,000 to 10 million, an annual compound growth rate of 535 percent. Very few companies have ever experienced such rapid growth. This however has been a mixed blessing and brings a number of challenges for eBay. eBay's high stock price is supported by expectations of continued supergrowth. Any slackening of growth would damage confidence in the company, and its market value would drop dramatically. In order to achieve the expected growth eBay must retain their current customers whilst recruit large amounts of new ones. Meg Whitman told interviewers
"It's all about the battle for new consumers. That's why we have to grow faster than our competitors."
The newly acquired customers must then be inculcated with the community spirit on which the company and its success is built. The challenge that eBay face will be to do this whilst the company, its employee base, its auction infrastructure, and its customer service capabilities are all growing at speed.
Expanding the user base
eBay have in the past few years expanded their user base dramatically, but they will face the challenge of expanding it even more if they are to keep up with the growth expected of them. There are a number of ways that they might do this;
* Continued penetration of the North American market.
* Bringing in the rest of the world.
* Bringing in different user groups.
* Strengthening the Brand
eBay has often failed to consider the consequences of not monitoring what is sold on the site. As they grow larger and more popular one challenge they will face is greater pressure from buyers, consumer groups and others to take greater responsibility for transactions on its site. Millions of annual transactions on the eBay site currently produce a remarkably small amount of complaints from users. However, as the number of auctions increases, problem transactions are bound to increase. The company's stated goal is to reduce the absolute number of problem transactions by working with law enforcement and its content owners to identify and ferret out illegal and infringing items and fraud and they need to make sure that they do this.
As the size of the user base increases another challenge that eBay will face is providing adequate customer service, which will have to be in a number of different languages. As the competition increase things such as level of user support offered will become imperative to the consumer choice of which site to use. A centralized site encompassing customer service advisors who could communicate in the required languages would probably be the best solution, as this would allow eBay to monitor and manage its users problems.
Increasing product categories and promoting new ones
During the duration of the case study eBay moved from a fully focused position to a market focused position (see appendix 6 for full details)
Figure 5
eBay have in recent years managed brand extensions extremely well and have experienced significant growth through the management of acquisitions and alliances. They do however need to be extremely careful that they do not become unfocused. Their current clarity of mission and strategic focus make them an effective operation, but this could all change if they become unfocused.
Fostering community affinity
One of the main challenges that eBay will face is maintaining its sense of community among users as the number of participants grows and expands across national boundaries. John Perry Barlow, cofounder of the Electronic Frontier Foundation, believes this is quite possible, citing his own neighborhood in New York City, a vibrant community within a huge metropolitan area.
"Like New York, eBay has lots of neighborhoods. You've got the neighborhood of stamp collectors, the neighborhood of Pokemon collectors, glass elephant collectors, and so forth. If you look at those little enclaves, they seem very much like communities."
The community values of openness, equality, empowerment, trust, and mutual responsibility set down by Omidyar are the basis of the community and these might be lost as the community expands. It is vital that eBay exact what influence they can to maintain these.
Enhancing site features and functionality
eBay have a history of problems with thier website performance and this will be a huge challenge for them. Although they claim to have put in systems to overcome this they have experience problems as recently as Novem,ber 4th 2002. They need to put an emphasis on site stability as the livelihoods of the people who run small business on eBay depend on them and they will not put up with poor service forever. eBay recently reported that it experienced 99.9 percent uptime in the third quarter, but these statistics do not include the company's weekly planned outages to update the site. This kind of denial will only anger those affected by this problem that eBay must focus heavily on solving.
Company culture disappearing
When Pierre Omidyar conceived his auction community as one reflecting values of honesty, openness, equality, empowerment, trust, mutual respect, and mutual responsibility, he expected that eBay would be built on the same values. It is imperative that eBay do not loose site of these values as they are one of the cornerstones of the success that it has today. Although it will be a challenge as the workforce expands they should make sure that these values are instilled into every new employee.
Changing marketplace
All marketplaces are constantly evolving and eBay will face the challenge of having to evolve with the market. Long-term it looks like business-to-consumer auctions will take over from person-to-person auctions in terms of transaction numbers, participants, and gross sales. This is because for manufacturers, retailers, and airlines alike, auctions are an efficient way to liquidate unwanted inventory. There is however plenty of room for both types of auctions and because eBay has a flexible business model there is nothing to stop them from expanding further, although they will have to consider that different seller group have their own definitions of a winning site so they will have to adapt accordingly.
Competition
Competition from name-brand merchandisers on FairMarket, Amazon, Online, and other sites is increasing and is bound to upset the balance of market power currently enjoyed by eBay. They will have to address this by maintaining and improving on their competitive advantage.
Auction aggregators
The newest challenge to eBay's position is auction aggregators. These are sites, which collect listings directly from eBay and other auctions and then aggregate them on their own sites, making it possible for bidders to compare prices and monitor many auctions at once. eBay threatened legal action, claiming that they are unlawfully accessing its site and making unauthorized copies of its content, but this threat did little to stop the aggregators. Auction aggregators pose such a danger to eBay because its greatest competitive strength is its transaction volume.
Sellers use eBay because it has the most sellers and buyers. If buyers can monitor auctions from another site, then sellers theoretically have less incentive to list on eBay. Buyers can see products whether they listed on Yahoo, Amazon, or any one of the niche sites, and many of these other sites charge less and have reputations for better seller support. The aggregator sites also pose a huge threat to the sense of community that eBay have worked so hard to foster. As well as pursuing this through legal channels eBay have to work harder to provide their customers with what they want such as good customer service. This way they will not want to go elsewhere.
6 Learning points
EBay offers a number of important learning points that can be equally applied to e-commerce or bricks and mortar retailers. An examination of eBay's strategy shows two extremely important aspects. The first is an unambiguous mission that employees from top to bottom understand. eBay's goal was to be
"the worlds largest P2P online auction company"
The second is a focused strategy for pursuing that mission. eBay's strategy had five distinct elements that they followed (see appendix 7). Having a focused strategy should not however that you are unadaptable. One of the successes of eBay is that its strategy has evolved with the appearance of different market opportunities. eBay has grown form a P2P trading site to an Internet marketplace encompassing B2C, B2B, and B2B2C transaction models. The story of eBay is one of successfully managing brand extensions, alliances, and growth into new markets.
Every business transaction is based on a greater or lesser degree of trust, and online purchases are at the greater end of the spectrum. eBay recognized the critical importance of trust between auction participants and developed programs aimed at building up the natural sense of trustworthiness that it assumes animates its user community. These programs are designed to increase the user's comfort level in dealing with unknown trading partners in cyberspace.
Most businesses understand the importance of creating value for customers through carefully structured and managed relationships. These relationships have always existed, but rarely commanded the importance they do today. eBay's continual focus on user participation and satisfaction has driven the formation of the thriving eBay community. Together with its users eBay has built a unique community from which all benefit. It is clear that the site would never have achieved its current success without that sense of community. This is one of the most important lessons that any business in any industry can take from the success of eBay.
Whether or not eBay can achieve the massive growth predicted and keep the values and sense of community that has made them so successful remains to be seen, but so far they have managed and implemented a good strategy very effectively.
Retail and Services Marketing - 98123501 1
