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How Does eBay Make Money?


In the world of e-commerce, if there is one name that has become synonymous with success and innovation is undeniably eBay.

Founded in the mid 90s, it has played a crucial role in connecting buyers and sellers from across the world and helped them make money.

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It is known both for the variety and the depth of products that is on offer on eBay.

Perhaps in this context, one of the most interesting stories is the fact that one of the first products that sold was broken laser pointer.

When Iranian founder and chairman, Pierre Omidyar, pointed it out, the seller specified that he collected and sold ‘broken’ laser points and that surely highlights the market and range of esoteric products that are on offer across the world and that which you could make money by selling or buying on eBay.

It won’t be wrong to say, eBay managed to bring about the marriage of technological advance and retail success just about the right time.

eBayIt did not just bring retail spending out of brick and mortar stores and into your bedroom, it also managed to make the physical store an option for the buyers and sellers alike.

You can well understand the depth of the eBay market when I put some basic statistics in place:

  1. eBay has over 150 million users in all, this 3000x the total users of the next biggest online marketplace, Bonanza.
  2. Though Bonanza has a pretty low listing fee of 3%, eBay managed to maintain its supremacy over others
  3. The entire market operations undertaken by eBay needs 52,533 servers
  4. The eBay servers need a total of 20 megawatts power to run efficiently
  5. From Sweden to Hong Kong, the eBay brand has a localized version in almost every corner of the world

Perhaps the point that I was trying to make with broken laser points is the also a unique element of the eBay model.

The pithiness and the esotericism overshadow almost every e-commerce site that you have ever heard or thought about.

You have everything on sale from really old cell phones to collector’s items like porcelain dolls.

Apart from a few forbidden items like guns or ivory, pretty much everything else that you might think about is simply a click away and gives you an option to make money from it as well.

But in all of it, one basic question comes across and that is how does eBay make money?

It is rather interesting to understand this key fact because often this question also holds the key to the answer, how you can make money with eBay.

This revenue model is just so successful that despite being in business for 20 years, they have never felt the need to alter or re-calibrate it.

It, therefore, highlights the sound business sense in it as well.

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The eBay Business Model

On the face of it, if you analyze how does eBay make money, it is a pretty simple proceeding.

The seller lists the product, and the buyer buys it, and because both are operating a neutral platform, eBay, they earn a pre-determined sum as commission based on the pre-tax value of the product.

Pretty straight forward you would say.

But I believe that it is only the tip of the iceberg.

If you really want to get to the bottom of how does eBay make money, it almost becomes mandatory to chart the growth path that eBay followed.

Quite early on during its operation, eBay received funding of over $6 million from Benchmark venture capital and from there on followed a mix of organic and inorganic growth channels.

In fact, the number of companies that it has bought is astounding.

Pretty much every three months, this e-commerce innovator bought companies and sold some as well.

For example, Skype was first bought by eBay and then sold to Microsoft.

Not just Skype, but there are many other interesting buys as well by eBay.

It becomes extremely important to understand these various acquisitions because in many ways they tell you how does eBay make money.

Revenue Channels

The revenue channels or fund flows decide the extent of money that eBay has at its disposal to fund future growth.

In this context, one of the most noteworthy acquisitions by eBay is undeniably PayPal.

They acquired the company in 2002 for $1.5 billion and hived it eventually into a standalone entity in 2015.

This is a rather interesting development as PayPal was a major revenue driver for the e-commerce giant.

As far as 2014 results, PayPal was responsible for 40% of revenue inflow.

The reason why eBay and PayPal made the perfect pair is that though both these market players did not have an absolute monopoly, they achieved success pretty close to it.

While on the one hand, eBay is one of the most striking virtual markets for consumer goods, PayPal is also the uncrowned king of online payment.

That allows them to operate in a symbiotic and profitable manner.

But the question that comes to play now is how the split with PayPal has materially impacted eBay’s performance and the way it plans to make money.

While its success trail surely floundered for a while post the separation from its long, associates, eBay did not lose time in rebranding its image and looking for drivers that channelize the next level of growth.

It is also in the process of undergoing a complete makeover.

It has roped in supermodel Karlie Kloss as one of the brand ambassadors and reworking on its entire gamut of growth drivers.

Not only that, the San Jose based eCommerce giant also managed to deliver online results with revenue reaching $9 billion.

For 2017, they aim to better it to $9.5 levels.

What was even more striking was that eBay managed to deliver strong operating cash flow and that exactly brings to our old question- just mere commission, does that earn adequate revenue for eBay or do they make money by some other means?

How Does eBay Make Money?

  1. The Revenue Structure of eBay
  2. Exploring eBay Market Place as Way to Make Money
  3. Enterprise Helps eBay?
  4. eBay Makes Money via Auctions?
  5. eBay Makes Money via Dropshipping?

1. The Revenue Structure of eBay

Well if you have delved into the entire topic of how eBay makes money long enough, you would know that the listing fee is not the only source of eBay’s revenue flow.

You must remember that it comprises a significant chunk of their revenue at 10% listing fee.

Given the wide and deep market presence they command, the company does make money and a huge sum at it.

Therefore, while the listing fee is not everything, it surely makes some key contribution to the revenue outlook.

So how else does eBay make money?

– International Revenue

eBay today is a global entity.

This San Jose company is not just limited to the jurisdiction of United States.

In fact 2011 onwards, its international revenues have clearly outshined the domestic ones.

Compared to the domestic sales, international revenues now account for near 62-63% of the total money that eBay makes.

For market services and other revenues, the percentage or the international contribution is now close to 68-69%.

What is particularly interesting is 2015-2016 numbers take into account the planned separation between eBay and PayPal.

But despite that, the share of the international revenue has remained quite steady and highlights their intrinsic importance.

Some of the most important markets for eBay where they make significant money includes

  1. UK: This is the second largest for eBay just after the United States, and sales here are north of $2.6 billion
  2. Germany: This follows UK in terms of the money that eBay makes. The revenue collection from that market is above $2 billion
  3. The sales from the rest of the markets globally are pretty much what eBay makes from each of these markets individually.

– Advertising Revenue

Think about it- how does eBay make money from advertisements? You will be surprised that eBay sells ads worth nearly $3 billion.

On a standalone basis, if they were just an ad agency they would have been counted amongst the biggest names in United States.

Therefore, it would not be wrong to deduce that this advertising revenue too forms a major contributor to the overall kitty for eBay.

Online advertisements form the most important chunk of revenue generation for eBay in this segment.

The time period for these advertising contracts can range anywhere between 1 week to even as long as 5 years.

The normal action plan through which this advertising revenue is derived is by way of impressions that are received on the website.

The impression in simple language indicates the total number of instances when this ad appears to a specific page on eBay.

Every time a user clicks on these ads and reach the advertiser’s site, eBay can make money on a per click basis.

Normally these contracts with the advertiser firm are held on a monthly or quarterly basis.

The fee and the other details for these advertisement contracts are fixed on a set term basis that accounts for revenue rotatably.

eBay understands the potential

Increasingly eBay understands the potential and ways to make money with these advertising revenues.

As a result, eBay even expanded the list of products where the advertising feature can be used.

This new initiative has been rebranded as ‘promoted listings’ and was launched a year or so back.

This particular feature highlights a completely new approach by eBay in terms of attracting revenue and increasing the overall visibility.

The sellers get an opportunity to feature their products rather prominently through the website.

This helps them to make money and also becomes a convenient alternative for eBay to make money.

The e-commerce giant adapts fair trade practices by charging the seller only if a sale is made after users clicked the specific ad.

If you are a seller who has eBay store application, you can take advantage of this feature.

Not only does it bring about a convenient solution to how does eBay make money, this feature has a dual benefit.

It helps increase this e-commerce behemoth’s transaction as well as advertisement revenues simultaneously.

It drives significant traffic, and this transaction revenue often works up to even 70% of the total worldwide revenue collection by eBay, hence a key link in the chain that enables eBay to make money.

Key Advantage of the Dual Benefit

Another key advantage of the dual benefit is that earlier on just advertisement basis, eBay’s revenue follows a per sale approach.

This is a rather limiting opportunity but with this new feature, the chances of increasing the average user spend on the network is significantly higher adding to both transaction and ad revenues.

Therefore, in many ways, this acts as the double-edged weapon to push revenue for eBay in a constructive manner and a sustainable business model.

We could follow the company’s 2017 financial results more closely to better gauge how this step helps eBay make money.

In fact, if you closely follow the eBay 2016 full year performance, you would notice that the transaction revenue has increased significantly.

This means that eBay is using this tool to make money quite profitably.

This key data is particularly of relevance after they split with PayPal as it brings in the entire revenue structure of eBay in the new light.

Paypal

This is because after eBay had parted ways with Paypal, its marketplace business became the most important growth driver apart from the revenue inflow channels that we already discussed and analyzed the broad ramifications.

Apart from the marketplaces, in your tryst to understand how does eBay make money, StubHub, the sports and concert ticket platform, would find a prominent mention in their platform for sports and concert tickets.

As per industry watchers and retail industry veteran, StubHub is undoubtedly a major player and most investors would keep an eye on its progress to better assess how does eBay make money.

In this context, it will be worthwhile to keep a tab on the transaction revenue recorded post the PayPal split.

Numbers do not lie, and often they provide the most dependable and trustworthy analysis.

For just the fourth quarter of 2016, eBay clocked transaction revenue of $274 m Vs $232 m on year on year basis.

Perhaps more than anything, this is a major pat on the back of the eBay management in assessing the most impactful growth drivers going forward, in the absence of PayPal.

The healthy transaction revenue is also indicative of the fact that eBay continues to make money with its 2-decade old policy, though the sheen might have been lost a bit tackling the struggles and competition in the e-commerce environment globally.

2. Exploring eBay Marketplace as a Way to Make Money

We already mentioned that in the absence of PayPal, the marketplaces on eBay globally are one of the most influential and important revenue generators for the e-commerce giant.

As we had seen for advertising revenue, eBay depends heavily on the transaction revenue from the marketplaces.

This transaction fee is usually levied on the seller when people approach the marketplaces to buy products internationally.

The company puts a cap on free items that users can list every month at 50.

Beyond that, eBay uses the listings as a vehicle to make money.

It charges sellers a specific transaction fee based on the product variety and keeps the revenue meters jingling without a break.

Generally, there is a fixed price that is levied by eBay depending on the product profile.

  1. It charges 5 cents for Movies, Music, Video Games, Books and DVDs
  2. The amount reduces to 30 cents for auction-style alternatives and products from the fixed price segment.
  3. They can click addition 35 cents for larger images or a strong auction style promotion

Readers must understand this amount is over and above the 10% listing fee that it charges the moment the company kicks off its association with eBay in a meaningful manner.

However the maximum amount of fees that eBay us $250. But the prices of these fees are not uniform and similar across the board.

They have different billing rates of different kind of products.

Additionally, I must mention that when you are exploring how does eBay make money.

With eBay clocking close to 150 million active users, the transaction fee even at this rather insignificant rate adds up to account for well over 50% of the overall revenue collected.

It is in general upward of $3 billion in all.

So it won’t be wrong to infer that when you are analyzing how does eBay make money, the transaction revenues comes across as one of the most serious game-changers.

It goes on to highlight how sheer volume can completely change the revenue landscape even with an insignificant base number.

3. How Enterprise Helps eBay?

In your quest about how does eBay make money, one of the biggest answers would be no doubt the role of the Enterprise.

Often in common parlance, the Enterprise, is known as the final revenue stream for the e-commerce giant.

So the question that comes into the limelight now is how pronounced is the contribution of the Enterprise and how exactly does it help eBay to make money?

Essentially for this, we must understand what Enterprise is all about in the eBay parlance.

This is that crucial branch of eBay that facilitates and often convinces brick and mortar retailers to join the internet bandwagon and experience the convenience of the online shopping sites.

The biggest challenge, in this context, is to explain the revenue inflow retailers and how it can materially improve through your liaison with an online retail portal.

Like I already mentioned, Enterprise is a comprehensive tool.

Its work is not just about convincing retailers for a transition.

They are also the one-stop destination for helping clients with every kind of market solution that they might be in need of.

This arm has come into being about half a decade ago and takes on the main responsibilities in

  1. Customer care
  2. Processing payment
  3. Detecting potential fraud
  4. Engaging consumers in a meaningful way

The impact and importance of this arm can be gauged from the fact that this alone accounted for close $300 million or almost 6% of the total revenue that eBay collected over an extended period.

What is even more worthwhile to note is that the role of the Enterprise is continuous.

At no point in time, can you wash your hands off saying that the company does not need any of the above-mentioned services?

Therefore, in your overall journey in exploring how eBay does make money, you must remember that though Enterprise is a small segment, it is a major contributor to the overall eBay wealth and therefore, takes up a strategically important position in the revenue inflow chain.

The extent of scalability that this enterprise division promises is also seen as a major positive.

4. eBay Makes Money via Auctions?

Another key revenue contributor for eBay is undoubtedly the auction division.

But the question here is how does eBay make money through this channel.

Well in very simple terms, the revenue that is collected is a happy mix of listing fees and the commission that eBay levies on every transaction of the cost.

First of all, the collector or seller in this case makes a listing of the rare items that they are interested in auctioning.

Next, the bidder or the buyer put in their bids.

Once there is a happy match achieved, the deal is finalized in totality.

Given the fact the eBay is one of the most active hunting grounds for curios and collectibles outside the regular and conventional auction houses, it remains a fundamentally strong source to make money for eBay.

In fact, with the introduction of promoted listing, creating traffic for these types of products have become even simpler and thereby, the number of users exploring this avenue has also increased.

In short, it means better sales and more listings and therefore added commission for eBay.

5. How Does eBay Make Money via Dropshipping?

This is another crucial arena to explore in understanding how does eBay make money?

You must understand that the entire eBay model is very closely linked to the delivery competence.

Not just for eBay but most e-commerce alternatives cannot make money if they do not have appropriate delivery channels in place.

Perhaps this is exactly why understanding the eBay revenue flow via drop shipping becomes so interesting.

Dropshipping is that unique arrangement in which sellers do not have to stock the product.

Once they get the order, it can be directly shipped to the buyer.

In this case, it is the logistics company or the shipping firm that handles the entire responsibility of collecting the product from the manufacturer and then taking it to the final buyer.

Apart from the listing and commission that eBay charges from the seller and makes money, there is an additional revenue source.

The shipping company pays a fixed transaction fee to eBay.

This is, of course, dependent on the type of product and the place that it needs to be shipped, and there are no uniform shipping charges.

But given the crucial role that shipping plays in the entire success of the overall e-commerce module, it becomes a key contributor to revenue for eBay.

It is, therefore, needless to mention that this revenue percentage might be rather minuscule in the entire gameplan.

However, it is undeniably one of the most crucial foundations that eBay business model is based upon.

The company is also in the constant process of improving the quality of service extended to customers.

That said, we can conclude that the answer to how does eBay make money is rather complex and multi-layered.

There are many aspects to this entire business model.

When you are trying to understand how eBay makes money, it is also extremely important to gauge the impact of seasonal forces.

For most e-commerce entities, competition becomes even more intense, and in the absence of a strong revenue model, their sales would plummet significantly.

For example, the eBay CEO mentioned that the holiday season is one of the biggest revenue earners for eBay.

It becomes one of the hottest destinations to shop online and in fact ranks as second in the list of most visited websites during holidays for shopping.

No wonder that eBay wants to put this progress in top gear and make money at an even better pace than before.

The company’s business strategy is geared to rake in revenue through this channel and improve the fund flow in a pronounced manner.

The structure data initiative, in this context, is one of the primary catalysts driving revenue for eBay going forward.

It aims to make money is a rather constructive manner by taking advantage of the ‘keyword tag’ feature provided by Google.

It is expected to ramp up transaction fees further through increased traffic.

Another initiative undertaken by eBay to help make money faster and on a much larger scale is expanding the scope of the fixed-price products.

This is also seen as a direct strategy to tackle competition from players like Amazon, who might have denied the money they make significantly.

The overall growth of the company has been slow and the 2017 guidance relatively muted.

It also signals that the company’s effort into revamping the way eBay makes money is bearing slow but a steady fruit.

Revenue might be expected to see a quiet 5% jump.

But it means they still can make money a lot better than many other new players.

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