eBay Basics Tested

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eBay Basics Tested

Wednesday, 26 May 2004

Topic: eBay Basics — How to Determine if eBay is a Good Marketing Channel for Your Products

We recently released the recording of our eBay clinic. You can listen to a recording of this clinic here:

Windows Media Audio

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In previous reports, we have looked at a variety of pay-per-click (PPC) and comparison shopping engines. With a few exceptions, we have found that these two marketing channels can be effective for a number of different product types and price margins.

But what about eBay -- does this undisputed leader in online auctions represent a viable marketing channel for your retail business? Or is it prohibitively expensive for many products? How can you determine if eBay is right for you?

This report will answer these questions and offer a number of insights into running an effective eBay campaign.

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Will eBay Work for You?

To understand the potential effectiveness of eBay as a marketing medium, we should compare it to other popular marketing channels such as PPC engines and comparison shopping sites. Which of these channels provides the most profit potential?

Consider the following campaigns on a PPC Engine (i.e. Google AdWords or Overture) and Comparison Site (i.e. DealTime or PriceGrabber):

CAMPAIGN A - $45 Price Point, 20% Margin
Metric	PPC Engine	Comparison Site
Order Price	$45.00	$45.00
Gross Margin	20%	20%
Gross Profit	$9.00	$9.00
Cost Per Click	$0.20	$0.40
Breakeven Conversion	2.22%	4.44%
Actual Conversion	3.00%	3.00%
Profit after Advertising	$2.33	$-4.33

CAMPAIGN B - $150 Price Point, 20% Margin
Metric	PPC Engine	Comparison Site
Order Price	$150.00	$150.00
Gross Margin	20%	20%
Gross Profit	$30.00	$30.00
Cost Per Click	$0.20	$0.40
Breakeven Conversion	0.67%	1.33%
Actual Conversion	3.00%	3.00%
Profit after Advertising	$23.33	$16.67

CAMPAIGN C - $700 Price Point, 20% Margin
Metric	PPC Engine	Comparison Site
Order Price	$700.00	$700.00
Gross Margin	20%	20%
Gross Profit	$140.00	$140.00
Cost Per Click	$0.20	$0.40
Break-Even Conversion	0.14%	0.29%
Actual Conversion	3.00%	3.00%
Profit after Advertising	$133.33	$126.67

What You Need To UNDERSTAND: In the three hypothetical campaigns above, the gross profit at three price points is weighed against the PPC costs. We have chosen price points of $45, $150, and $700 to compare these channels to eBay, below.

In Campaign A, comparison sites are not profitable because of the higher CPC. We often find this is the case for small average orders or a low gross margin.

These charts were created using a special Excel spreadsheet that we developed for the purpose of calculating the potential effectiveness of pay-per-click and comparison engines.

You can download that spreadsheet here:

http://www.meclabs.com/eBayCampaigns.xls

The spreadsheet allows you to plug in your own "average order price" and "gross margin" and then provides your "break-even conversion rate" and predicts your potential profit based on an actual conversion rate that you can modify.

Keep in mind that the above campaigns are highly idealized in order to provide a clear illustration of potential profit, which we will compare to eBay below. The 3.00% conversion rate remains static throughout the three campaigns. In real campaigns, your actual conversion rate may vary greatly.

KEY POINT: The conversion rate of PPC and Comparison engines will often vary significantly. In general, comparison engines tend to convert at a higher rate for most products. You can plug your actual conversion rate numbers into the spreadsheet above.

Now consider these same three price points (with the same 20% gross margin) on eBay:

EBAY CAMPAIGNS - $45, $150, $700
Item Price	$45.00	$150.00	$700.00
Gross Margin	20%	20%	20%
Gross Profit	$9.00	$30.00	$140.00
Insertion Fee	$1.20	$2.40	$4.80
Final Value Fee *	$1.86	$4.75	$19.86
Cost Per Successful Auction	$3.06	$7.15	$24.66
Cost Per Unsuccessful Auction	$1.20	$2.40	$4.80

What You Need To UNDERSTAND: eBay's pricing structure is much more complicated than PPC and comparison engines, which simply charge a per-click fee. Insertion Fees are charged whether your item sells or not. Final Value Fees are assessed based on the actual selling price. The table above was also created using our eBay pricing guidelines in the spreadsheet above.

The fees involved with eBay listings can eat into profits significantly, especially when auctions close unsuccessfully.

* Final Value Fees are charged as a variable percentage of the final sale price. This fee for these auctions is based on 5.25% of the first $25 plus 2.75% of the remaining price (up to $1000). eBay's fee structure is covered in detail at: http://pages.ebay.com/help/sell/fees.html

If you think of these campaigns in terms of "unsuccessful sales", then eBay becomes prohibitively expensive much more quickly than PPC or comparison engines. In an unsuccessful PPC or comparison sale, you simply lose the per-click fee; in an unsuccessful eBay auction, you lose the entire insertion fee.

For example, a $45 item selling on eBay would become unprofitable if it failed to sell just five times. If it sold on the sixth attempt, your fees would total $9.06 and would exceed your gross profit.

KEY POINT: Your top priority should be making sure your eBay items actually sell. Pay close attention to the "sell-through rate" of all your eBay listings. In the following section, we have listed eight guidelines for creating successful eBay campaigns.

EIGHT GUIDELINES FOR SUCCESSFUL EBAY CAMPAIGNS

Many of these insights come from our research partner Chris Chenault from:

http://www.sterlingtek.com/

Chris's experience on eBay is a testament to how successful eBay campaigns can be, if they are optimized for the right kinds of products with the right margins.

Limit your eBay listings to products with high margin. As seen in the examples given above, eBay fees can quite quickly eat up a product's gross profit margin.
For products or markets without a significant margin, you may be better off simply spending more money on the PPC or comparison sites.
Product price is essential. Unless you are selling original (or one-of-a-kind) items, you will be competing on price with a number of other sellers. Competitive pricing is the single-most important element that will determine if your listings actually sell.
Before launching a full-scale eBay campaign, make sure your items have the potential to sell. Search for your products on eBay and look at the selling price of "closed" items. This will give you the best indication of your ability to compete in terms of price.

Note that eBay recently added the restriction that only registered users can view closed auctions, so you will need to create an account to do so. Also, you will need to view individual actions to determine which items have actually sold.
Pay close attention to eBay's fee structure. eBay charges "Insertion Fees", fees for extra pictures, "Final Value Fees" (variable percentage of the final sale price), "Listing Upgrade Fees" (for additional exposure), and PayPal fees if you use that payment system.
eBay's rather complex fee structure is outlined here:
http://pages.ebay.com/help/sell/fees.html

FeeFinder is a good tool for helping you calculate what you should charge to cover your eBay fees:
http://www.hammertap.com/FeeFinder.html
Don't overlook maintenance costs of implementing eBay listings. The labor involved in managing lots of item listings can quickly eat into your profits.
In our resource survey below, we have listed several software packages that will help you save time in managing your listings.
After you've tested some auctions, determine your "sell-through rate". One way to determine this is to go into "My eBay" on the eBay site and import all of your closed auctions into an Excel spreadsheet. Then simply sort them by name and count the number of sold and unsold auctions.
You can also use analysis software such as http://www.auctionworks.com/ or http://www.andale.com/ to determine your "sell-through rate". However, like all off-the-shelf solutions, these are not without their limitations.

KEY POINT: Sell-through and final profit calculations are the two basic figures that will determine the success or failure of your eBay campaigns.
Don't overlook shipping price. For lower-priced items especially, shipping price can be used to augment profitability.
Customer service is very important. Feedback is a vital part of the eBay community; it is very easy to give feedback and almost all eBay buyers will do it. Therefore it is essential that you offer top-notch customer service. Most veteran eBay sellers have 99% or more positive feedback.
Real-time feedback changes the way you should think about customer service. Customer service is no longer simply one of the associated costs of running a business; it is actually a marketing cost. On eBay, Yahoo! Shopping, BizRate, and other popular marketing channels, your feedback rating will directly impact your sales.
Don't overlook the possibility of hiring an expert to manage the eBay element of your business. Bring in someone with enough knowledge to get you started and invest in making that person an eBay expert.
If you are a small operation, can barely manage your PPC and comparison listings, and can't afford to hire someone to devote most of his or her time to eBay, then don't bother with eBay. You are probably not ready for it.

Generally, our examples and recommendations above are based on fixed-price eBay listings. The performance of "true auctions" is usually much more difficult to predict, but can be successful for certain rare or unique products.

One positive final note is that eBay continues to grow 50% or more each year. If you can carve a niche for yourself in this market, you can create a significant auxiliary income stream that will grow along with your business.

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