Case Study: eBay”™s Business Model

Founded on 1995 by Pierre Omidyar, eBay was considered a pioneer in the online auction industry whereby people are brought together on a local, national and international basis to serve the purpose of creating a person-to-person community where ever individual could have an equal access through the same medium which is the Internet. eBay offers wide varieties of products and services for bargain hunters, hobbyists and collectors and sellers, changing the way people engage in trading hence eBay had changed the face of e-commerce from its inception. Today, eBay is continuously the brand preference with over 39 market presence and with $60 billion of the total value of sold items on the site’s trading platform.

Basically, eBay introduced several crucial innovations tailor-made for the internet at the business level, a strategy which was conceived to be an improvisation. The online auction business model is where eBay served as the value-added facilitator of trade between a buyer and a seller in a highly individualistic manner. The online auction model developed by eBay marked an important extension of e-commerce, offering millions of individuals a low-cost opportunity to engage in a new type of economic activity.

When Whitman arrived in 1998 as eBay’s second president and CEO, eBay became a public listed company in September of that year, brand building recognition at eBay was prioritized. eBay’s registered users had grown six-fold, to over 2 million. Under Whitman’s leadership the company grew to over 200 million users globally and over $7 billion in revenue. During her tenure, Whitman helped eBay enter China, integrated globally recognized brands like PayPal and Skype into eBay portfolio and successfully steered the company through the dot-com bust by staying focused on its core users and core competency-online auctions. eBay made acquisitions in order to support its growth as a supplement to word-of-mouth and public relations advertising into tapping opportunities through national magazines and online alliances. These acquisitions aid in the expansion and improvement of the company’s services.

eBay is currently the first ranked online auction company within its industry, with nearly one-third of U.S. internet users registered on its site.   The company is a substantial threat internationally as well, competing in the Asian, European, and Latin American markets.   The online auction industry commands significant revenues that continue to increase to the projected amount of $229.9 billion by 2008.   The outlook for both eBay and the online auction industry holds great promise, as is evidenced through the study of SWOT analysis, the driving forces of the industry, key success factors, eBay’s financial status, and eBay’s positioning in the market.   eBay must also keep in mind the key strategic issues facing the company.

eBay’s Business Model

eBay’s business model was based on creating and maintaining a person-to-person trading community. After implementing their business model, eBay has been able to build strategic partnerships, continue to make innovative changes and improvements, and monitor its internal and external environments for possible future opportunities.   This has given them the prestige of being the world’s largest online auction company.

Target Market:

Sellers and buyers who transact online

Largest Online Auction:

From its beginning in the mid-1990s, eBay has been growing in leaps and bounds.   They now have over 94.9 million registered users in more than 150 different countries.   eBay’s founder Pierre Omidyar did not even see the tremendous possibilities that eBay had when it was first developed over ten years ago.   eBay now holds the top spot in the online auction industry.   In the United States alone one-third of the population is already registered with the site and with increasing use of the internet that number is sure to grow.

Over 27,000 Different Categories:

The wide variety of products offered on eBay gives them a competitive advantage above all other online auction sites.   They are like the Wal-Mart of the Internet!   They say that anything you want you can find on eBay.

Partnerships with International Companies:

Partnerships abroad can be crucial to a company succeeding in foreign markets.   By partnering with established foreign companies, like Alando in Germany, iBazar in France, Tradera in Sweden, Internet Auction in South Korea and Bazee in India, eBay is able to easily transition into that countries culture with the help of citizens who work with the partnering company.  eBay also immediately acquires ties with companies in the foreign market, which makes it simple for them to make more partnerships and alliances. In 2007, eBay established a partnership with a Beijing-based Internet company, Tom Online Inc., taking 49 percent stake in the company and possessing administration rights. This allows ebay to have strong local management that understands the culture and consumer desires. Tom eBay has done much to win the trust of Chinese consumers such as using escrow service to hold payments until buyer confirms satisfactions with the product.

Over 250 Alliances:

eBay aligned with Yahoo! In 2006 in a marketing alliance to promote revenue growth for both companies. Under this alliance, Yahoo! Became the exclusive advertising provider on eBay and PayPal became Yahoo!’s preferred provider. Google also aligned with eBay in 2006, making Google the primary advertiser on eBay’s websites outside of the United States. Google sought to integrate Skype into the alliance as a method to further sales from Web advertising. eBay also holds alliances with some of the largest companies in the world.   They include Northwest and Southwest Airlines to enable PayPal as a method of payment option, and with Wal-Mart and My-Space.com to promote growth of Skype, and Buy.com in 2008, a middle-of-the market tool that links retailers with buyers and immediately added five million fixed-priced listings to the eBay marketplace.   These alliances create more opportunities for eBay to advertise and reach potential customers.

Acquisition:

To increase its geographic reach and to move into related businesses such as online payments, to obtain technology that will strengthen its product differentiation, eBay has completed many acquisitions such as Half.com in 2000 to enter the fixed price market price for products like used books, CD’s, games and DVD’s; Paypal to enable sellers to receive online payments from buyers’ credit cards or checking account; Shopping.com that allows people to search for products and compare prices, and Rent.com that joins landlords and tenants online, charging property owners for each lease produced. eBay then acquired 28 percent of Craiglist in 2004 and Skype in 2005, an internet phone provider to allow buyers and sellers to communicate prior to transactions. Other acquisitions would include Stubhub.com in 2007, a secondary ticket place marketplace that integrates guaranteed fulfillment and shipment using FedEx. And Fraud Science Ltd in 2008 to detect fraudulent purchases and provide eBay with the technology that it needs, to improve the level of trust that it provides.

Positioning of eBay

eBay positions itself in the online auction industry using a broad differentiation strategy.   By choosing this strategy eBay determined that the best way to achieve a sustainable competitive advantage over its rivals was to differentiate their service.   The way in which eBay has set their online auction site apart from its competitors has lead customers to prefer their site over other online auctioneers and retailers

eBay’s Broad Differentiation Strategy

eBay has created a one-stop-shopping experience that is appealing to large corporations, independent entrepreneurs, and individual buyers and sellers.   They have created value through many facets of their business that appeal to their customers and differentiate them from the competition.   The main ways that eBay differentiates themselves is through:

  • Variety of products offered
  • When customers visit eBay they can search for virtually any product.   eBay boasts a category variety not matched by any competitor with over 27,000.
  • The eBay Community
  • eBay wants their customers to feel like they are a part of a community.   This community feel gives customers the sense that they are branch of something and cared about.   By showing the customers that their feedback, opinions, and feelings are important eBay has gained tremendous ground with their customers.
  • The eBay Website
  • eBay has created an auction and retail website that is unique and interesting.   This creative site sets them apart from their competitors.   The site is set up with many facets that reach a broad span of visiting buyers and sellers.   The site is also entertaining and easy to use making it very appealing for online shopping and trading.
  • The eBay Brand Name
  • eBay was the creator of the online auction industry.   When customers think of online buying the immediately think of eBay.   This has given them a competitive advantage that sets them apart from other online auctions.
  • eBay’s Global Reach
  • The global reach of eBay is not achieved by any other online auction site.   For large corporations international selling and buying is done everyday.   Even for an individual buyer or seller, having the option of searching throughout 150 countries with a span of 94.9 million users is very appealing.

Why the Differentiation Strategy Works Best for eBay

The users of eBay have many different preferences and needs depending on why and how they use the service.   eBay has determined a way to satisfy their customers whether they are large businesses or individuals.   By offering a wide variety of products, globally expanding, and creating a community for all customers to join eBay has created a distinctive value unmatched by its rivals.

Analysis of eBay’s Business Model

eBay’s business model was based on creating and maintaining a person-to-person trading community.   This allows buyers to easily search for what they want to purchase.   It also allows sellers to post their items minutes after they have registered.   There are a few specific elements of eBay’s business model that they recognized as key to its success they are:

  • Being the largest online trading forum with a critical mass of buyers, sellers, and items listed for sale
  • Its compelling and entertaining environment, which had strong values, established rules and procedures that facilitated communication between buyers and sellers
  • Establishing programs such as Safeharbor to aid in disputes and to punish users who violate eBay
  • Cost effective and convenient trading
  • Strong community affinity
  • An intuitive user interface that was easy to understand, arranged by topics, and fully automated

By implementing their business model, eBay employed three main tactics.   First, they looked to build strategic partnerships.   Second, they looked for customer feedback to constantly make changes and improvements.   Finally, they monitored its internal and external environments for possible opportunities.   By doing all of these things, eBay was able to adapt to the changing ways and keep their customers satisfied.

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