Episode IIIB - Amazon and the CEF

Posted on 22nd February 2009 by in Uncategorized - Tags: , , , , , , , , , , , , , , , , , ,
This is Episode 3B in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) (link)
Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)
Episode III - eBay, Amazon and the CEF (you are here - I have split into to parts A (ebay) and B (amazon) )
Episode IV - How to fix eBay (coming soon)

The CEF looks at ecommerce across five strategic pillars:
1. Selection
2. Value
3. Ease of use
4. Trust
5. Merchandising

Amazon and the CEF
Here is a chart that shows the growth of amazon vs. ecommerce (more detail on this in ep1).  You can clearly see that in mid-06, a big change occurred.  Before that point, Amazon was growing 2-4% slower y/y than ecommerce and then from mid-06 forward, their growth materially accelerated to 20% faster than ecommerce and has kept up that pace for the last two years.  This is a really important point in the recent history to dig into for a second to understand what Amazon did and why it's working.

Episode3b_graphic1
In 2006, Amazon really started to execute on two major initiatives that I believe are what has driven their acceleration since that time.
  1. Amazon Prime (launched in 05, but really started consumer adoption in 06) - this is a 'free/discounted shipping subscription' where you pay $79 and you get free 2 day shipping on everything or can upgrade to overnight for $3.99
  2. Amazon's seller business (sometimes called 3P or third-party) - Prior to 2006, Amazon's seller business was primarily focused on heavier, top internet retailer relationships like their current Target relationship - Amazon provided not only ecommerce, but also fulfillment, call-center, etc.  
The push into the seller business is counter intuitive.  Why would you as a retailer, not only allow, but encourage competitors to essentially I'm told this diagram is how Jeff Bezos got everyone at Amazon to get on board with the diagram.  Internally at Amazon it's called the Bezos napkin diagram:
Episode3_img_amzn_napkin
At the center you have the fly-wheel of growth.  Growth goes faster when more consumers (traffic in the diagram) come to the site.  Consumers come to the site for three things - selection, value and customer experience.  By partnering with high-quality sellers, Amazon is able to drive selection at a good level of customer service, increase value, which in turn, drives growth.  Traffic brings sellers, and the wheel goes around faster and faster.  As the wheel turns, Amazon is able to benefit from a lower cost structure which is passed on to consumers in the form of lower prices, and THAT also accelerates the wheel.

To say Amazon 'gets' the CEF concepts is an understatement.  In fact they easily have a three year lead in deep thinking around these aspects of ecommerce.  Many people believe that Amazon is doing well simply because of eBay's mistakes. If you are reading along with our story here, you will recall in the last episode that around February of 06, eBay made a fundamental error that I don't think they have recovered from.  To be sure, eBay has 'helped' Amazon here with their missteps, but I do think most of the credit goes to Amazon and the eBay flubs have just put extra wind in their sails.  Put another way, if I were to guess (you could never know this), eBay is responsible for 2-5% of the 20% growth above ecommerce that Amazon is enjoying.  Amazon is an equal opportunity share-grabber and probably is taking the most from eBay, but others are losing share to Amazon too.

With that bit of foundational background, let's dig into Amazon and how they rank in the five pillars of the CEF.

1. Selection - excellent execution
Amazon clearly understands the importance of selection in driving not only customer acquisition, but  Amazon has an interesting three pronged strategy that has significantly increased their selection since 2006:

  • Retail business - Some call it the Amazon 'first party business', or 1P.  Amazon is first and foremost a retailer. They have teams of people that are organized by category that know the category well and focus on buying products, working with vendors and expanding their selection.
  • Seller business - Amazon's retail business if of a scale that it makes sense for them to focus on the 'hits' - top sellers of products that are in the 'head' of the long-tail curve.  The seller business is where third parties, 3P's, help amazon by filling out the long-tail.  Amazon has category managers that work with the retail buyers and understand where they plan to be retail and where they want sellers in the category. They then actively recruit sellers that can fill strategic selection 'holes'.
  • Product ads - In certain categories when Amazon wants to further augment the selection, they have offsite product advertising with what they call ProductAds.  You'll frequently see these in categories where there are complex items that are hard to ship.  Furniture is a good category to explore if you want to see ProductAds as seen here:

Episode3b_graphic2
These three systems give Amazon unprecedented selection in a wide variety of categories.  But it's important to note there are still many categories that Amazon doesn't participate in that are multi-billion dollar categories  that amazon doesn't participate in at all such as:
  • collectibles
  • tickets
  • travel
  • autos
  • real estate 
2. Value - driven by scale and seller business
In 2007, Amazon started experimenting with a novel concept.  Prior to then, seller products were listed down a link from the product page in a link called 'X available new and used'.  The seller listings are ordered from least to most expensive, thus creating a strong incentive for sellers to list their products at the best value possible.

In 2007, Amazon started to experiment with bringing the seller listings up, first listing the top three in a box under the buy button called 'more buying choices'.  Then in late 2007, Amazon took it two steps further.  The first step was that instead of the buy box 'disappearing' leaving the 'more buying choices', when Amazon's retail stock was gone, Amazon would keep the buy box, and the top seller offer (lowest price) would then 'own the buy box'. 

The second step brings us up to where things are today.  Now the lowest price offer from highly rated sellers, even if Amazon offers the product, wins the buy box.  Why am I mentioning this in value?  Well when a product owns the buy box, the seller moves 10-100X from when you don't own the buy box.  This creates a VERY strong volume incentive for sellers to drive their lowest price possible.  For buyers, this means they don't have to go to anywhere but one site to find everything they are looking for at the best possible price.

For Amazon this is genius because:
  • It keeps them honest - by allowing 'competitors' to compete, Amazon must itself drive the hardest bargains and pass them on to consumers.
  • Amazon is able to manage unit margin - If Amazon's margin on a product would be too low to be the best price on the internet, they can hold steady and let a seller sell the product.  Once sold out, Amazon can then own the buy box and maintain margin. 
  • Buyers feel like they don't have to shop anywhere else - amazon has already found the best price for them and has even given them a competitor's best price.  This is a lot like the progressive insurance model and I don't think a lot of industry folks understand just how powerful this is.  The number one reason for shopping cart abandonment and lack of conversions is price checking.  Buyers don't feel like they need to price check amazon, because amazon has done it for them.
  • Last but not least, while amazon states they are neutral on the margin between retail and seller businesses, the seller business has got to be extremely lucrative for them.  They don't have to buy, store, ship the product, just deliver some bits.  Bits are cheap, warehouses aren't.
Some analysts speculate that while 33% of Amazon's unit volume is from sellers, a much larger part of their profit is from this line of business.  The seller business allows Amazon to drive value, increase conversions and improves their margins.  It's a very powerful triple-win for them, but was very risky and counter-intuitive in the beginning.  Most big ideas are.

3. Ease of use - ecommerce leader, always room to improve though
Every aspect of amazon is easy to use.  One-click allows you to checkout, well, with one click.  Amazon stores all of your credit card information and remembers all of your addresses.  The cart is very intuitive and powerful.  Wishlists help you remember things you are interested in to save for later.  The returns center makes returning products a breeze.  Amazon's help system is very comprehensive.

There are only two negatives on ease of use I can think of with Amazon:
  1. Front page - The amazon front page has gotten too busy for my tastes.  Above the fold is good, but one scroll below and you have some weird ads and irrelevant recommendations/content (I have something right now about Easter egg baskets through the ages - wha!?)
  2. Search Engine - The Amazon search engine is powerful, but occasionally, I have to help it help me.  Usually when I'm searching for a non-book item, it can get off track and show too many books or dump me in there.  Also with my Kindle, I sometimes have a hard time forcing it to show me Kindle only items.  Some categories don't have a category-centric search that would be helpful like shoes for example.
4. Trust - a-to-z - they brand it AND make it easy to find and use.
This is an easy one, Amazon backs you up 100%.  They call it the a-to-z guarantee and it really works.  You can call and get a human on the phone easily.  They help you.  If it's a seller business, they steer you through the seller's process and if that doesn't work. They still make you whole.

There are never any shenanigans with Amazon.  Their emails are useful so I don't opt-out.  If I do opt-out, they don't email me.  They ship stuff when they are say they will.  It arrives well packaged with a smile on it. 

You can trust Amazon - period.

5. Merchandising - they set the bar that all others try to reach
Wow, I could go on and on here.  Amazon's merchandising is spectacular.  The recommendation engine is wonderful and I personally purchase 2-3 things a month off of recos alone.  There are some great social merchandising elements that Amazon has too.  The reviews, the lists, the 'frequently bought with X' upsells, product tags, tell a friend, submit a video, phew the list is too long to detail here.

If you want to learn more about Amazon and social, here's a cool screen shot and blog post on the topic that goes into more detail than I have room for here.

Is Amazon beatable?

I realize that reading this you might be left with the thought that Amazon is unbeatable.  They have that flywheel spinning faster and faster.  eBay's in a death spiral.  Walmart.com and others aren't at near the scale Amazon is.  So, yes, Amazon does have a considerable advantage.  However, they are 'beatable'.  If you recall in episode II when I introduced the CEF, I showed Zappos and how they have really grabbed the shoe category and out customer serviced' and 'selectioned' (yes I just made that word up) Amazon and have done well.  There are plenty of other companies out there doing this such as:
  • Newegg - Over 1B in GMV from the computer/ce category - focusing on the enthusiast/hobbiest as a core, and branching out from there.
  • social/customized sites - CustomInk, Zazzle,  BustedTees are making major growth in the areas of customization and social ecommerce.  Amazon does very little in this category.
  • sporting goods vertical - The GSI family of sporting goods sites (fogdog, sportsauthority, dicks) are all doing very well by leveraging a common infrastructure across three brands - two of which tie to 
  • B+M - bestbuy - Bestbuy.com is a major force in ecommerce thanks to their tightly integrated on and offline presences.
  • B+M - JCpenney - Believe it or not, JCP is doing very well online. They've managed to bring their demographic from the offline world to the online world and keep them loyal to the brand.
That's a short list.  If you are an Amazon fan, the good news is that while Amazon is beatable, it's only by a select few that have some interesting angles (brick and mortar) and vertical focus (zappos/newegg).  As far as being the best 'ecommerce department store' with the broadest offering across 20 macro categories, yes I do think right now Amazon has a near insurmountable lead.

They aren't perfect though. This holiday I was shopping for some Dora items and noticed this glitch. 

Episode3b_graphic3

Amazon was recommending this $95 item with $12 shipping over their own $20+free product.  See, here you have real proof that Amazon isn't perfect.  But this is probably the first in thousands of products I've looked at on Amazon to have any kind of error.  So in a way, it's darn impressive.  Think about how many weird things you've seen on eBay for comparison.  The Amazon Dora glitch was fixed the next day.

Conclusion
Amazon's relentless focus on value and selection along with their innovations around shipping and handling cost reductions, ease of use and merchandising built on the foundation of trust from the a-to-z guarantee have given them the most enviable position in ecommerce. 

In fact, I think eBay's current strategy to 'amazonize' eBay is a deathtrap - but we'll get to that in the next and final episode shortly.  Thanks for coming along on the journey so far and keep those comments coming, I'll follow-up episode 4 with a post that addresses some frequently asked questions I'm seeing.
SeekingAlpha disclosure - I am long google and amazon

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Episode IIIB - Amazon and the CEF

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Episode IIIA - eBay and the CEF

Posted on 18th February 2009 by in Uncategorized - Tags: , , , , , , , , , , , , , , , , , ,
This is Episode 3A in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) (link)
Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)
Episode III - eBay, Amazon and the CEF (you are here - I have split it into to parts A (ebay) and B (amazon) )
Episode IV - How to fix eBay (coming soon)

It is strongly encouraged that you read them in order as they assume the reader has been following along as they build on each other.

In the last episode we took a break from anything specifically dealing with eBay and Amazon to look at a general framework for evaluating any ecommerce site.  We looked at a couple of interesting examples - Zappos that focuses on selection and ease of use and Ideeli which focuses on value at the exclusion of selection.  In this episode, we'll use that framework to evaluate what's going on at eBay and Amazon to cause the near 50% growth rate benefit Amazon is enjoying over eBay.  Finally, in the next and final episode, we'll look at some suggestions for eBay to get back into the fight.

The CEF looks at ecommerce through five pillars:

1. Selection
2. Value
3. Ease of use
4. Trust
5. Merchandising

eBay and the CEF
One of eBay's biggest challenges to this day is that they do not think like a retailer.  In other words, they don't look at elements like the CEF as a retailer would.  In the early days when competition was slow to move, this didn't matter, but today it clearly does as the challenges the company faces illustrate.  That being said, in eBay's Q408 presentation to shareholders, they offered the following slide that shows they are starting to catch on, but as we'll illustrate later that they are substantially missing the mark on each of these.

Episode3_img1

We'll reference this graphic a good bit in the CEF review of eBay and it shows a very interesting window into how eBay is thinking and the challenges they will continue to face with that mindset.

1. Selection - Declining since 2006.

In February 2006, eBay made the fateful decision, seemingly without any forethought, analysis or testing to introduce what is commonly known as SIF in core. What they did is took Store Inventory Format (SIF or store listings as we call them) and put them right into the core search engine.  Thus, a seller paying $2 for an auction listing had the same exposure as a seller that paid back in that time .05 or less for a store listing.  You can imagine what happened - sellers left the auction format and bulked up on store listings.  By March, eBay turned this off, but they had started in motion a severe debalancing of the marketplace that their subsequent actions to rectify actually amplified to the downside as far as selection is involved.

It's my belief that the SIF in core event, even today, has dramatically lowered the selection on eBay to the point that the site is no longer competitive.  As we'll explore in the next episode, subsequent policies (such as the DSR system) rolled out in 2008 have accelerated the decline as an unintended consequence.

Prior to 2/06, the eBay marketplace was 'working' pretty well.  Prices on auctions were a little on the high side, but manageable and the balance between auction listings (high insertion, lower fvf and store/fp listings - low insertion, higher fvf) was beneficial to buyers.  If you were looking for something commonly available (ipod), you found a LOT of options to buy at different value/service points.  If you were looking for something 'long-tail' (a back to the future II DVD), you found that too as sellers were able to list literally millions of items in the $.02 

Media sellers are a group I'm very familiar with and I believe they are eBay's canary in the coal mine primarily for selection, but also for value and other elements.  Most media sellers operate in a long-tail world where selection is king to drive margins and repeat business.  Since 2006 and the subsequent hikes in the store listing format, media sellers have been leaving the platform at an alarming rate and thus taking millions of items with them.

Where did they go?  Many have a happy new home at Amazon, but just as many have setup shop online and are doing very well with their own websites, leveraged with smart SEO, comparison shopping and search.

Here you have a category that with a < $20 ASP should be a slam-dunk for eBay, that is in shambles.  This category is essential because it is the single best way to activate a new buyer on a 'safe' transaction.  After dabbling in media, buyer s then move on to higher ticket items once they get the feel of eBay.

If sellers can't survive and thrive in that category, then sellers in categories like shoes, auto parts, etc. will go down the same path, not far behind media sellers.

On last concerning trend I've noticed on selection is due to the unintended impact on cross border trade (CBT in eBay-speak) that the DSR (detailed seller rating) system has caused.  The short version of the story is that in order for sellers to maintain their DSRs, many sellers have stopped selling internationally.  Personally, I've always found interesting hard to find items from international sellers.  That inventory is now noticeably gone from the US site and folks in the UK report the same.  The DSR impact on CBT is another contributor to the decline in selection.

Since 2006, I have been saying that eBay has chopped off their long tail, and I believe that is still the case, and if anything, it is worsening.

Listings are not selection
Before putting eBay through the rest of the CEF framework, I wanted to make an important distinction.  If you look back at the Q408 graphic, you will see that counter to what I'm saying here, eBay believes selection is dramatically increasing (first chart on the left - 'new listings in millions'.  In the chart you see the listings on eBay go from 550m to over 750m.  eBay is totally off on this metric as each popular or relatively common product on eBay has been flooded with listings since the 2008 price changes, yet the long tail is not flushing out as it was prior to 2006.  Here's a great example - as I write this there are 4506 Nintendo Wii systems available on eBay.  so that is a 5000:1 listing:sku ratio.  This is an extreme example, but if you take the 750m listings, if they all had that ratio, you would be 150,000 actual products.  Also, on eBay there is no facility for listing products with size and color differences together.  Thus a shoe or shirt SKU on any other ecommerce site that would be 1 sku mushrooms into as many as 50-75 'listings'.

Why doesn't eBay report on the number of products or SKUs available?  Well  I don't think they a) think that way and b) even know.  I can guarantee you Amazon knows exactly how many SKUs are available on any given day, in every category.

2. Value - declining

Since 2006, eBay has considerably raised fees, sellers have reflected the fees in their product prices and thus value on eBay has declined as item prices have increased.  Also as other channels have opened for sellers, sellers have realized that eBay is one of their most expensive channels and have started to raise prices accordingly.

In 2008, this has gotten even worse as eBay has become obsessed with free shipping.  Certainly free shipping seems like it would decrease the price of goods and thus increase the value of goods on the site, right?  Here's where unintended consequences have hit eBay again.  Let me illustrate with an example.

Let's say it's 2007 and you have an item that is $50 and your cost on shipping is $5.  You may mark up the shipping for a little margin - maybe it becomes $8 - total price $58.  Your margin is let's say $5 on the core price and $1 on the shipping for a total of $6.  Your eBay fees for this item (assuming 100% sell) is $3.07 for FVF plus $1 for insertion or $4.07.

Now it's 2008.  eBay 'turns' the search engine, DSRs and other 'dials' to 'advantage' you to have free shipping or not sell anything as you are either a) invisible to shoppers or b) kicked off the site or c) both a+b.

So you implement free shipping, but want to keep your margin of $6.  You can't price the item at $58 because now your eBay fees go up as they effectively include S+H. Now your eBay fees are $2 for insertion and $3.35 for FVF or $5.35 vs. the $4.07 you paid before the wonders of free shipping.  At this point, you may be saying, “Scot this doesn't matter, it's $1.28 - so what?” well, this is effectively a 31.4% fee increase to the seller.  Here's where it hits the Value pillar of the CEF. As a seller you want to keep your $6 margin, so you raise your price $1.28 right?  Nope, you can't because everything you add to the price, eBay takes their FVF of at about a 10% clip, so to get to the $6 point, you have to 'gross up' to more like the $60 mark.

Now your eBay fees have gone up 31%, your price has gone up effectively 3.5%, and in today's competitive market that will chop your conversions dramatically.

My point is many of these policies make sense on the surface, but if you scratch just a little bit below you will see that they negatively impact things like value on the site.

The bottom line is that today in early 2009 as eBay faces unprecedented competition, I believe most of eBay's prices are a good 5-10% higher than anywhere on the internet due to their near obsessive push into free shipping (passing the cost to the seller, who passes to the buyer) as well as due to the very high direct and indirect costs for selling on the site.  Several stock analysts have 

If you look back at the first graphic, you'll see that eBay defines value as the '% of listings with free shipping'.  This is really scary as not only does it have little to no relevance to value (prices), the metric has gone from 5% to 25% - or a 5X increase on free shipping, which I believe is actually a negative that implies there is a 5X growth in overpriced products on the site.  A 'real' value metric would be 'SKus we have the lowest price on'. Like selection, this is a metric I don't think eBay understands or tracks appropriately.

3. Ease of use - declining

I could spend pages and pages talking about how eBay continues to be too hard to use.  Many of the changes made of the last year have intended to improve the ease of use, but similar to DSR, free shipping, etc. have actually made things worse.   Anyone who has shopped at eBay is pretty familiar with how hard the site is to use, so here is a brief summary along the different subsystems we introduced with the CEF.

  • On-site search (eBay calls it Finding) - In the last year, eBay has rolled out Finding 2.0 with BestMatch that is pretty universally considered a step back.  BestMatch now mixes auction and fixed price listings into a hodge podge of items that makes it hard to find things.  Additionally, eBay has started putting copious sponsored listings above the search page navigation as shown here. 

Episode3_search1

In the above example, I did a search for golf clubs, and here you see five very large and highly relevant sponsored listings for timeshares, the Thunder Gun, an mp3 player, some foreclosed real estate and last but not least the Cellerciser.  After these value-add advertisements, I can then scroll waaaaay down and figure out how to get to page 2 of my golf clubs.  How many people do you think have the patience to go to page 2?

Finding 2's implementation of featured also 'locks' featured items on the screen, so even if you select 'show me the products from most to least expensive, you get some really messed up results like this:

Episode3_search2

Notice how the prices go down from $5k to $40, and then back up to $100k right after the $40.  Can you imagine using a search engine like google and having it not show you the results in the order you asked for?

I could go on and on here, but you get the picture - eBay's finding system is very very broken right now and is going backwards instead of forewords.  Ok, one more.  Let's say you ask eBay to sort things by “Least to most expensive.” and the 'store discoverability' kicks in where they show you store listings after core.  The store listings flip to be most to least expensive.  Here's an example:

Episode3_search3

In the above undoctored screen shot, as a buyer, I specifically wanted to see lowest to highest, which eBay does for core, then when the store listings come up, it inverts to highest to lowest or maybe it's BestMatch - heck I can't even tell it's so chaotic.

  • Cart - eBay unfortunately doesn't have a cart. eBay Express had a good start on a multi-seller cart that I think was a good direction, but eBay put a bullet in that.
  • Checkout system - One of the downsides of Paypal and its virtual monopoly on eBay is in order to buy anything on eBay, buyers effectively have to double register - once for eBay and once for Paypal.  If you don't remember how challenging and confusing this is, you should try it as a new buyer sometime.  Can you imagine going to retailerX.com and having to register once to buy something and then a second time to pay?

eBay's checkout system is so limited that most large sellers can not grow due to its restrictions and thus third parties such as ChannelAdvisor augment the checkout by an open platform (this is actually smart and eBay needs to do more of this as it allows third parties to innovate around the platform) called checkout redirect.

  • Order tracking - eBay has an exclusive deal with UPS and thus only UPS items can be tracked 'on-site'.  Thus most sellers avoid this system and implement their own order tracking outside of eBay.
  • Returns processing - eBay just asks that seller list a return policy and does not provide any common area or process for buyers to process returns.  Both eBay and Paypal do have various systems for disputing a transaction which are complex for both the buyer and seller.
4. Trust - eBay - declining

In 2008, eBay implemented the much maligned DSR system along with several major changes to the rickety feedback system.  I've been very vocal on the DSR system's numerous flaws, so won't go into it in detail here.  Suffice it to say that the DSR system is driving sellers to free shipping which destroys the value part of the CEF equation on eBay
  • Increasing the customer support costs on eBay which were already higher than anywhere else
  • Driving lots of great sellers out of business
  • Slightly increasing the quality of sellers.
I'll offer an alternative to both DSRs and the trust issue in the next episode, but basically DSRs have caused much more harm than good and eBay still hasn't addressed the basic trust issues.

The first figure shows that eBay has gone from 5% of GMV from 4.8+ sellers to today's 30%.  The bulk of the sellers that achieve that level of DSRs will have had to turn off CBT as well as implement free shipping, thus while eBay may have improved the trust some, they have done it at the expense of two very important pillars of the CEF (value and selection).

Here's a summary of trust problems on eBay:

  • It's hard to understand if you are a buyer, how and how much are you protect.  The protection comes from Paypal, what's that mean when you buy on eBay? 
  • Who do you call if you've been ripped off?
  • Which emails from eBay are valid, which ones are phishing (yellow button)
  • eBay allows anyone to register and re-register - thus bad buyers AND sellers are never really kicked off the site
  • eBay to this day has the worst password authentication, testing and resetting of any site dealing with money that I'm familiar with.  Yes, you can have your userID as your password.  Thus account takeovers on the site are still rampant.
In the CEF episode, we talked about other indirect elements that can erode trust.  I believe that eBay's trust problem is contributed to by irrelevant advertising, too much emailing and shenanigans that sellers employ within the grey areas of the site.

In conclusion, eBay still has a huge trust problem and isn't moving fast enough to fix it. In fact many of the changes they are making in this area have negative unintended consequences.  Buyers are confused about the relationship of eBay/Paypal and how it relates to trust as well.

5. Merchandising - eBay - never has left the starting blocks

eBay knows a lot about its users - what they search, buy, etc., but for some unknown reason, eBay has never been able to leverage that data to do effective merchandising.  eBay's merchandising is so off the mark that it's probably best if it was turned off IMO.

Here are some (painful) examples.  In my personal eBay account, I largely buy star wars collectibles.  Whenever I login, eBay forces me through a 'message from eBay' with their first merchandising, illustrated here:

Episode3_merch1

It's odd enough that they push me through this 1990's style interstitial page, but I've found the items that are recommended here are never, ever relevant to anything I am either looking for or have ever purchased.
Now as I go to the homepage, I am presented with these sections:

  • Cool stuff for you - seemingly random, I have no interest in these items.
  • My ebay at a glance - this is the only thing useful here, but it's stuff I've added to my watch list, so eBay isn't really predicting what I want, I've already told it.
  • Want great buys? - doesn't seem relevant to anything I've ever bought or searched
  • More fun finds - also not relevant or helpful
  • Shop your favorite categories  -  a long list of categories that doesn't seem to be organized for me at all.
  • From our sellers - this is always the best to look at, there is the wackiest, most random stuff you will ever find here.  

Here are examples from the site today of some of these sections:

Episode3_merch5
Episode3_merch4
Bottom line - here's a site where I have 300+ transactions and the best they can do is show me stuff i've added to my watch list that is relevant.  eBay clearly isn't thinking about how to put relevant products in front of me based on my purchase history and based on the advertising, my search terms either.

Conclusion

The CEF has given us a framework for evaluating ecommerce sites and also helps illustrate the areas eBay is losing ground in as the rest of the ecommerce world moves forward.  If eBay is the laggard in the market, then Amazon is the clear leader.  In the next post (3B), we'll see how they do in each of the five categories.
SeekingAlpha disclosure - I am long Google and Amazon.

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Episode IIIA - eBay and the CEF

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Episode IIIA - eBay and the CEF **Updated

Posted on 18th February 2009 by in Uncategorized - Tags: , , , , , , , , , , , , , , , , , , ,
***I updated this to reflect some comments where readers pointed out some typos and a paragraph I didn't quite end.  Also, I neglected to mention the FVF discounts that eBay gives on free shipping and wanted to make sure I wasn't being unfair on the free shipping topic (that section is in italics under value).

This is Episode 3A in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) (link)
Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)
Episode III - eBay, Amazon and the CEF (you are here - I have split it into to parts A (ebay) and B (amazon) )
Episode IV - How to fix eBay (coming soon)

It is strongly encouraged that you read them in order as they assume the reader has been following along as they build on each other.

In the last episode we took a break from anything specifically dealing with eBay and Amazon to look at a general framework for evaluating any ecommerce site.  We looked at a couple of interesting examples - Zappos that focuses on selection and ease of use and Ideeli which focuses on value at the exclusion of selection.  In this episode, we'll use that framework to evaluate what's going on at eBay and Amazon to cause the near 50% growth rate benefit Amazon is enjoying over eBay.  Finally, in the next and final episode, we'll look at some suggestions for eBay to get back into the fight.

The CEF looks at ecommerce through five pillars:

1. Selection
2. Value
3. Ease of use
4. Trust
5. Merchandising

eBay and the CEF
One of eBay's biggest challenges to this day is that they do not think like a retailer.  In other words, they don't look at elements like the CEF as a retailer would.  In the early days when competition was slow to move, this didn't matter, but today it clearly does as the challenges the company faces illustrate.  That being said, in eBay's Q408 presentation to shareholders, they offered the following slide that shows they are starting to catch on, but as we'll illustrate later that they are substantially missing the mark on each of these.

Episode3_img1

We'll reference this graphic a good bit in the CEF review of eBay and it shows a very interesting window into how eBay is thinking and the challenges they will continue to face with that mindset.

1. Selection - Declining since 2006.

In February 2006, eBay made the fateful decision, seemingly without any forethought, analysis or testing to introduce what is commonly known as SIF in core. What they did is took Store Inventory Format (SIF or store listings as we call them) and put them right into the core search engine.  Thus, a seller paying $2 for an auction listing had the same exposure as a seller that paid back in that time .05 or less for a store listing.  You can imagine what happened - sellers left the auction format and bulked up on store listings.  By March, eBay turned this off, but they had started in motion a severe debalancing of the marketplace that their subsequent actions to rectify actually amplified to the downside as far as selection is involved.

It's my belief that the SIF in core event, even today, has dramatically lowered the selection on eBay to the point that the site is no longer competitive.  As we'll explore in the next episode, subsequent policies (such as the DSR system) rolled out in 2008 have accelerated the decline as an unintended consequence.

Prior to 2/06, the eBay marketplace was 'working' pretty well.  Prices on auctions were a little on the high side, but manageable and the balance between auction listings (high insertion, lower fvf and store/fp listings - low insertion, higher fvf) was beneficial to buyers.  If you were looking for something commonly available (ipod), you found a LOT of options to buy at different value/service points.  If you were looking for something 'long-tail' (a back to the future II DVD), you found that too as sellers were able to list literally millions of items in the $.02 

Media sellers are a group I'm very familiar with and I believe they are eBay's canary in the coal mine primarily for selection, but also for value and other elements.  Most media sellers operate in a long-tail world where selection is king to drive margins and repeat business.  Since 2006 and the subsequent hikes in the store listing format, media sellers have been leaving the platform at an alarming rate and thus taking millions of items with them.

Where did they go?  Many have a happy new home at Amazon, but just as many have setup shop online and are doing very well with their own websites, leveraged with smart SEO, comparison shopping and search.

Here you have a category that with a < $20 ASP should be a slam-dunk for eBay, that is in shambles.  This category is essential because it is the single best way to activate a new buyer on a 'safe' transaction.  After dabbling in media, buyer s then move on to higher ticket items once they get the feel of eBay.

If sellers can't survive and thrive in that category, then sellers in categories like shoes, auto parts, etc. will go down the same path, not far behind media sellers.

On last concerning trend I've noticed on selection is due to the unintended impact on cross border trade (CBT in eBay-speak) that the DSR (detailed seller rating) system has caused.  The short version of the story is that in order for sellers to maintain their DSRs, many sellers have stopped selling internationally.  Personally, I've always found interesting hard to find items from international sellers.  That inventory is now noticeably gone from the US site and folks in the UK report the same.  The DSR impact on CBT is another contributor to the decline in selection.

Since 2006, I have been saying that eBay has chopped off their long tail, and I believe that is still the case, and if anything, it is worsening.

Listings are not selection
Before putting eBay through the rest of the CEF framework, I wanted to make an important distinction.  If you look back at the Q408 graphic, you will see that counter to what I'm saying here, eBay believes selection is dramatically increasing (first chart on the left - 'new listings in millions'.  In the chart you see the listings on eBay go from 550m to over 750m.  eBay is totally off on this metric as each popular or relatively common product on eBay has been flooded with listings since the 2008 price changes, yet the long tail is not flushing out as it was prior to 2006.  Here's a great example - as I write this there are 4506 Nintendo Wii systems available on eBay.  so that is a 5000:1 listing:sku ratio.  This is an extreme example, but if you take the 750m listings, if they all had that ratio, you would be 150,000 actual products.  Also, on eBay there is no facility for listing products with size and color differences together.  Thus a shoe or shirt SKU on any other ecommerce site that would be 1 sku mushrooms into as many as 50-75 'listings'.

Why doesn't eBay report on the number of products or SKUs available?  Well  I don't think they a) think that way and b) even know.  I can guarantee you Amazon knows exactly how many SKUs are available on any given day, in every category.

2. Value - declining

Since 2006, eBay has considerably raised fees, sellers have reflected the fees in their product prices and thus value on eBay has declined as item prices have increased.  Also as other channels have opened for sellers, sellers have realized that eBay is one of their most expensive channels and have started to raise prices accordingly.

In 2008, this has gotten even worse as eBay has become obsessed with free shipping.  Certainly free shipping seems like it would decrease the price of goods and thus increase the value of goods on the site, right?  Here's where unintended consequences have hit eBay again.  Let me illustrate with an example.

Let's say it's 2007 and you have an item that is $50 and your cost on shipping is $5.  You may mark up the shipping for a little margin - maybe it becomes $8 - total price $58.  Your margin is let's say $5 on the core price and $1 on the shipping for a total of $6.  Your eBay fees for this item (assuming 100% sell) is $3.07 for FVF plus $1 for insertion or $4.07.

Now it's 2008.  eBay 'turns' the search engine, DSRs and other 'dials' to 'advantage' you to have free shipping or not sell anything as you are either a) invisible to shoppers or b) kicked off the site or c) both a+b.

So you implement free shipping, but want to keep your margin of $6.  You can't price the item at $58 because now your eBay fees go up as they effectively include S+H. Now your eBay fees are $2 for insertion and $3.35 for FVF or $5.35 vs. the $4.07 you paid before the wonders of free shipping.  At this point, you may be saying, “Scot this doesn't matter, it's $1.28 - so what?” well, this is effectively a 31.4% fee increase to the seller.  Here's where it hits the Value pillar of the CEF. As a seller you want to keep your $6 margin, so you raise your price $1.28 right?  Nope, you can't because everything you add to the price, eBay takes their FVF of at about a 10% clip, so to get to the $6 point, you have to 'gross up' to more like the $60 mark.

Now your eBay fees have gone up 31%, your price has gone up effectively 3.5%, and in today's competitive market that will chop your conversions dramatically.

***Updated after original post.  To help sellers with free shipping and to encourage investment in DSRs, eBay does offer FVF discounts for powersellers.  If a seller has 4.8 or higher, they receive at least 15% off their FVF fee component.  When offering free shipping, the number doubles to 30%.  So in the example above, much of the effective fee increase would be covered for those sellers that receive the discounts.

My point is many of these policies make sense on the surface, but if you scratch just a little bit below you will see that they negatively impact things like value on the site.

The bottom line is that today in early 2009 as eBay faces unprecedented competition, I believe most of eBay's prices are a good 5-10% higher than anywhere on the internet due to their near obsessive push into free shipping (passing the cost to the seller, who passes to the buyer) as well as due to the very high direct and indirect costs for selling on the site.  Several stock analysts have done studies (citigroup and Merrill that I'm aware of) that have also shown this price discrepancy.

If you look back at the first graphic, you'll see that eBay defines value as the '% of listings with free shipping'.  This is really scary as not only does it have little to no relevance to value (prices), the metric has gone from 5% to 25% - or a 5X increase on free shipping, which I believe is actually a negative that implies there is a 5X growth in overpriced products on the site.  A 'real' value metric would be 'SKus we have the lowest price on'. Like selection, this is a metric I don't think eBay understands or tracks appropriately.

3. Ease of use - declining

I could spend pages and pages talking about how eBay continues to be too hard to use.  Many of the changes made of the last year have intended to improve the ease of use, but similar to DSR, free shipping, etc. have actually made things worse.   Anyone who has shopped at eBay is pretty familiar with how hard the site is to use, so here is a brief summary along the different subsystems we introduced with the CEF.

  • On-site search (eBay calls it Finding) - In the last year, eBay has rolled out Finding 2.0 with BestMatch that is pretty universally considered a step back.  BestMatch now mixes auction and fixed price listings into a hodge podge of items that makes it hard to find things.  Additionally, eBay has started putting copious sponsored listings above the search page navigation as shown here. 

Episode3_search1

In the above example, I did a search for golf clubs, and here you see five very large and highly relevant sponsored listings for timeshares, the Thunder Gun, an mp3 player, some foreclosed real estate and last but not least the Cellerciser.  After these value-add advertisements, I can then scroll waaaaay down and figure out how to get to page 2 of my golf clubs.  How many people do you think have the patience to go to page 2?

Finding 2's implementation of featured also 'locks' featured items on the screen, so even if you select 'show me the products from most to least expensive, you get some really messed up results like this:

Episode3_search2

Notice how the prices go down from $5k to $40, and then back up to $100k right after the $40.  Can you imagine using a search engine like google and having it not show you the results in the order you asked for?

I could go on and on here, but you get the picture - eBay's finding system is very very broken right now and is going backwards instead of forewords.  Ok, one more.  Let's say you ask eBay to sort things by “Least to most expensive.” and the 'store discoverability' kicks in where they show you store listings after core.  The store listings flip to be most to least expensive.  Here's an example:

Episode3_search3

In the above undoctored screen shot, as a buyer, I specifically wanted to see lowest to highest, which eBay does for core, then when the store listings come up, it inverts to highest to lowest or maybe it's BestMatch - heck I can't even tell it's so chaotic.

  • Cart - eBay unfortunately doesn't have a cart. eBay Express had a good start on a multi-seller cart that I think was a good direction, but eBay put a bullet in that.
  • Checkout system - One of the downsides of Paypal and its virtual monopoly on eBay is in order to buy anything on eBay, buyers effectively have to double register - once for eBay and once for Paypal.  If you don't remember how challenging and confusing this is, you should try it as a new buyer sometime.  Can you imagine going to retailerX.com and having to register once to buy something and then a second time to pay?

eBay's checkout system is so limited that most large sellers can not grow due to its restrictions and thus third parties such as ChannelAdvisor augment the checkout by an open platform (this is actually smart and eBay needs to do more of this as it allows third parties to innovate around the platform) called checkout redirect.

  • Order tracking - eBay has an exclusive deal with UPS and thus only UPS items can be tracked 'on-site'.  Thus most sellers avoid this system and implement their own order tracking outside of eBay.
  • Returns processing - eBay just asks that seller list a return policy and does not provide any common area or process for buyers to process returns.  Both eBay and Paypal do have various systems for disputing a transaction which are complex for both the buyer and seller.
4. Trust - eBay - declining

In 2008, eBay implemented the much maligned DSR system along with several major changes to the rickety feedback system.  I've been very vocal on the DSR system's numerous flaws, so won't go into it in detail here.  Suffice it to say that the DSR system is driving sellers to free shipping which destroys the value part of the CEF equation on eBay
  • Increasing the customer support costs on eBay which were already higher than anywhere else
  • Driving lots of great sellers out of business
  • Slightly increasing the quality of sellers.
I'll offer an alternative to both DSRs and the trust issue in the next episode, but basically DSRs have caused much more harm than good and eBay still hasn't addressed the basic trust issues.

The first figure shows that eBay has gone from 5% of GMV from 4.8+ sellers to today's 30%.  The bulk of the sellers that achieve that level of DSRs will have had to turn off CBT as well as implement free shipping, thus while eBay may have improved the trust some, they have done it at the expense of two very important pillars of the CEF (value and selection).

Here's a summary of trust problems on eBay:

  • It's hard to understand if you are a buyer, how and how much are you protected.  The protection comes from Paypal, what's that mean when you buy on eBay? 
  • Who do you call if you've been ripped off?
  • Which emails from eBay are valid, which ones are phishing (yellow button)
  • eBay allows anyone to register and re-register - thus bad buyers AND sellers are never really kicked off the site
  • eBay to this day has the worst password authentication, testing and resetting of any site dealing with money that I'm familiar with.  Yes, you can have your userID as your password.  Thus account takeovers on the site are still rampant.
In the CEF episode, we talked about other indirect elements that can erode trust.  I believe that eBay's trust problem is contributed to by irrelevant advertising, too much emailing and shenanigans that sellers employ within the grey areas of the site.

In conclusion, eBay still has a huge trust problem and isn't moving fast enough to fix it. In fact many of the changes they are making in this area have negative unintended consequences.  Buyers are confused about the relationship of eBay/Paypal and how it relates to trust as well.

5. Merchandising - eBay - never has left the starting blocks

eBay knows a lot about its users - what they search, buy, etc., but for some unknown reason, eBay has never been able to leverage that data to do effective merchandising.  eBay's merchandising is so off the mark that it's probably best if it was turned off IMO.

Here are some (painful) examples.  In my personal eBay account, I largely buy star wars collectibles.  Whenever I login, eBay forces me through a 'message from eBay' with their first merchandising, illustrated here:

Episode3_merch1

It's odd enough that they push me through this 1990's style interstitial page, but I've found the items that are recommended here are never, ever relevant to anything I am either looking for or have ever purchased.
Now as I go to the homepage, I am presented with these sections:

  • Cool stuff for you - seemingly random, I have no interest in these items.
  • My ebay at a glance - this is the only thing useful here, but it's stuff I've added to my watch list, so eBay isn't really predicting what I want, I've already told it.
  • Want great buys? - doesn't seem relevant to anything I've ever bought or searched
  • More fun finds - also not relevant or helpful
  • Shop your favorite categories  -  a long list of categories that doesn't seem to be organized for me at all.
  • From our sellers - this is always the best to look at, there is the wackiest, most random stuff you will ever find here.  

Here are examples from the site today of some of these sections:

Episode3_merch5
Episode3_merch4
Bottom line - here's a site where I have 300+ transactions and the best they can do is show me stuff i've added to my watch list that is relevant.  eBay clearly isn't thinking about how to put relevant products in front of me based on my purchase history and based on the advertising, my search terms either.

Conclusion

The CEF has given us a framework for evaluating ecommerce sites and also helps illustrate the areas eBay is losing ground in as the rest of the ecommerce world moves forward.  If eBay is the laggard in the market, then Amazon is the clear leader.  In the next post (3B), we'll see how they do in each of the five categories.
SeekingAlpha disclosure - I am long Google and Amazon.

Originally posted here:
Episode IIIA - eBay and the CEF **Updated

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