48-Pricing in a Profitable Market

At one time this inventive and disruptive company led its entire industry. However, industry evolution overtook it as much larger and more aggressive competition displaced it. While it is profitable and growing, every year takes away more of its market share and potential economies of scale. Today, it is in a comfortable niche. Without significant Price competition, it should be able to hold its preeminent position in its niches. The story explains how this all happened.

Posted 9/15/08

Over the last two years, eBay has raised its prices to improve its financial performance. Not that its financial performance has been bad. In fact, it has been good. But management believes it can be better with a price rise. The price increases eBay has provided the market have impaired eBay’s long-term future, even while improving its short-term profits.

When a leader raises prices in a marketplace, it has to consider whether it is setting a price umbrella over its competitors. This umbrella provides the competitors with enough margin to improve their products and offer tougher competition to the industry leader. Sometimes, these higher prices will also make customers mad. EBay seems to have both set an umbrella and made its customers mad.

The company is now losing market share to other competitors, especially Amazon. These other competitors have improved their offerings in the market place to make them, for some customer segments, more attractive than eBay’s product.

What alternative might eBay have had to a price increase in order to improve its margins? Perhaps the best alternative for eBay would have been to develop its economies of scale. Economies of scale don’t develop on their own. They have to be managed by the largest competitors in an industry. However, with an aggressive stance on economies of scale and with limits on price increases, eBay would put significant pressure on its competition. The competitors would not be able to compete as effectively because of the lower margins in the industry.

(For more insight, see the Perspectives, “Building on Customer Volatility”, “Failure Shifts More Share than Success” and “How Price Kills Profits” on StrategyStreet.com.)

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Update 2002:

A 2022 website evaluated four online websites for sellers: eBay, Amazon, Bonanza and Etsy.  The site ranked the four websites according to sellers’ ratings.  Bonanza was rated the best overall.  Amazon was rated 2^nd and very good because of the size of its audience.  Etsy ranked 3^rd, with only a fair ranking, because of its higher fees and indifferent customer service.  Fourth and last was eBay.  Sellers ranked eBay as poor due to its erratic pricing and poor customer service.

Despite charging lower prices than Amazon today, eBay continues to lose users and market share.  By the end of 2021, eBay’s market share among all online retailers was 4.7% compared to Amazon’s 38.7% and Walmart’s 5.3%.  eBay’s future is bleak.

Ebay has given away its low-cost position. See HERE for an explanation.  The company needs an analysis LIKE THIS to understand and correct the negative volatility it has experienced.

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Update 12/25

The online retail business has been a great place to be a seller over the last 10 years. Today’s seller seeking to bring a product online has both generalist and specialist seller platforms from which to choose. The platform market is, as yet, an immature market, with a great deal of Positive Volatility (market share gained from other competitors or from new customers, usually by offering something other competitors do not or will not offer), attractive profits and clear emerging winners as the industry consolidates.

The market remains immature today because it is growing so quickly. Both the global and the US online retail market has grown at nearly 15% per annum for the last 10 years. The wide adoption of mobile telephones and computers has elevated this growth. Today, 80% of the US population makes online retail purchases. This high growth has also supported attractive returns on investment for the industry’s top players. There is still much growth ahead as online retail commands only 20% of the total retail market.

The industry’s positive volatility has begun to produce clear winners and some losers. Over the last 10 years Amazon, Walmart and eBay seller platforms have led the market. Amazon has always been the clear leader and it continues to grow market share. EBay was once number two but has begun to fade. Walmart, though considerably smaller than Amazon, is growing share quickly. In 2015, Amazon (30.5% share), Walmart (1.5% share) and eBay (6.5% share) controlled 38.5% of the industry’s total market share. Today, Amazon (37.6%), Walmart (6.4%) and eBay (3%) remain the industry’s leaders with 47% of the industry’s market share. However, Amazon and Walmart are surging ahead as eBay has bled half of its share.

Each of the industry seller platform leaders reside in a comfortable price environment. Each of them enjoys pricing that supports high returns on investment. Price competition has been limited in the market. However, the entrance of Temu and Shein with their very low prices may be the early shots across the bow of this very comfortable market. Time will tell. This development certainly argues for careful vigilance by the industry leaders.

Let’s compare the strategic status of the three top seller platform competitors. First, Amazon versus Walmart. Amazon remains the clear leader, though Walmart is beginning to close its Price gap with Amazon. Amazon dominates on Function by carrying far more product categories and products than does Walmart. Amazon leads on Reliability by having a stunning reputation for quality customer service and the largest, and growing, number of customers. Convenience leadership falls to Amazon due to its immense online and delivery infrastructure, far ahead of Walmart. Finally, Amazon tends to be the Price leader. Pricing comparison studies tend to find that Amazon leads Walmart in virtually all product categories with the possible exception of every day consumer essentials. Amazon has raised its prices in those categories over the last few years while Walmart has reduced them. Amazon is the clear overall winner and is unlikely to be overtaken by Walmart unless Amazon makes unfortunate Value (Performance for Price) decisions damaging to its superb customer relationships.

Amazon’s competition with eBay is really no contest. Amazon offers far more products, much better customer reputation, security and safety, faster delivery and prices 6 to 9% below those of eBay on new products the two companies share in common. EBay shines in refurbished and used products and collectibles where it enjoys leadership positions in these market niches. As the total online retail market continues to grow, it is likely that eBay’s share will continue to decline because its niche markets are not growing as quickly as those in the new product categories.

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