Tuesday, April 12, 2011

Analyzing eBay's Controversial Fee Changes for the Spring Release

From ChannelAdvisor Blog:

Earlier this year eBay announced their first big release of 2011 (internally SR11.1 - externally the Spring release). There's a ton of changes in here and we'll be hosting a webinar that digs into the impact for our customers (but anyone is welcome to join) - watch for an announcement on that, we're still scheduling it.

There's a ton of information and discussion available on the Spring release such as:

  • eBay details are here
  • A handy checklist from eBay is here
  • There's a set of lively discussions (warning time sink) on eBay discussion boards here.
  • AuctionBytes has great coverage here with an interesting look at what looks to have been a very contentious Town Hall meeting (I missed it unfortunately).

As I've talked to sellers about the changes, the overwhelming topic is the Fee changes announced in the Spring release, so I wanted to focus on those here as there is a ton of angst, misinformation, fear, and uncertainty around the changes.

There are five overall topics to cover the fee changes:

  • What are the fee changes? Sometimes it feels like you need a PHD in Calculus to understand the eBay fees - this is our attempt to simplify the changes for you.
  • What are they thinking?! A brief look at why eBay would do this.Who is impacted? Here we break down those overall types of sellers are impacted (both positively and negatively)
  • What should I do? if you are negatively impacted, here we go through some of the options you have to counteract what is effectively a price increase for you.
  • Top Frequently Asked Questions (FAQs) - Here I'll go over some shorter topics that we're getting a bunch of questions that also have a lot of misinformation out there.

Before jumping in, let me state that I've been thinking eBay should do this for a long time (2006 looks like my earliest mention). The reasoning back then was that eBay has always struggled with high S+H costs on the site. Before 2006 you used to see the extremes of items for a penny with $100 S+H - total fee avoidance and a terrible consumer solution. eBay caught on and implemented caps, but they have their own challenges (highlighted in that 06 post, so won't go into that again).

I still believe that charging FVF on item price as well as shipping is the single best way to stop excessive shipping amounts and it's good to see eBay finally addressing this. However, I do wish they had thought through the negative impact to a lot of types of sellers that we'll get into later.

Let's look at the fee changes and then jump into the why and who is impacted aspects.

What are the fee changes?

Historically, Amazon, PayPal and many other e-commerce vendors have charged a % of sales on both the item price and the shipping price. eBay announced that they are moving to this model with the Spring release. To help with the economic impact they are lowering the Final Value Fee (FVF in eBay-speak) across the board.

I've been working on simplifying things and here's my best attempt: (click to enlarge)

Note: FP is Fixed Price, CE is Consumer Electronics, CSA is Clothing Shoes and accessories, P+A is Parts and accessories (eBay Motors) and of course these FVFs now apply to item AND ship price!

FVFs have tranches at < $50 and then at $1000, eBay's changes are all to the $50 tier except CSA/P+A which also knocks a percent off the second tranche. So if you are in those categories and your average selling price (ASP) is > $50, you may have additional savings.

Here's an example to show the impact.

I'm a CE seller. My ASP is $50 and I charge $8 in S+H

Before: FVF is 8% * $50 = $4

After: FVF is 7% * ($50+$8) = $4.06

(this one ends up to be effectively neutral)

What are they thinking?! (The 'why')

eBay spends a lot of time thinking through fee changes so in my experience it's usually interesting to approach changes from the 'why' standpoint first vs. the 'what'. It's clear that eBay is trying to dramatically change the shipping picture on eBay. While the caps have helped, there's still only about 30% of items sold that have free shipping. I imagine Amazon Prime and SuperSaver programs are behind this. eBay also has stated many times that in buyer surveys the number one concern with eBay is excessive shipping charges.

In fact you can back into what eBay must feel is not excessive by multiplying the decrease for your category times your ASP. For example, you have a $50 ASP in the CSA category. At a 17% decrease, you are looking at $50*.17 = $8.33 shipping that would keep your economics neutral.

Also based on comments, it looks like eBay is trying to underprice Amazon with these efforts as well.

Finally, this fee change hits low ASP items, larger auction sellers and heavy item sellers pretty hard, so eBay is sending a pretty clear signal to these sellers.

With that in mind, let's look at who is impacted.

Who is impacted?

If you refer to the table at the top of the post, it was designed to help you think through the 'am I seeing an increase or decrease'. Simply look at your eBay ASP and your average shipping. if the ratio of your shipping is higher than the FVF fee decrease you are seeing a net increase. If your ratio is lower, you are seeing a net decrease. To keep it simple, we've calculated the 'break even point' for four categories and five different ASP bands illustrated here:


Note: This table is not 100% exact, but very close as it does not go through all the multi-tranche math.

The winners:

The biggest winners (they see a fee decrease) are:

  • Sellers already doing free shipping. If you were already moved over to free shipping, this is a HUGE win for you.
  • Sellers with a item/ship ratio lower than the decrease. In other words if your shipping is generally lower than these break even points in the chart above - congrats, you WIN.

Examples of winners:

I'm a media seller with an ASP of $12 and free ship:

Before: $12* 15% = $1.8

After: $12 * 13% = $1.56 (#WINNING!)

This amounts to a 13% fee decrease The seller could pocket the winnings, or pass it on to the consumer in the form of lower prices.

The second example is:

I'm a CSA seller with a $50 ASP and I charge $5 for S+H (my item/shipping ratio is 10% which is below the 17% fee difference).

Before: 12% * $50 = $6

After: 10% * ($50+$5) = $5.50

I'm saving $.50 or 8.3% in this scenario.

The losers

The biggest losers in this change can be put into three buckets:

  • Low ASP sellers, not offering free shipping already
  • Heavy/bulky item sellers
  • Traditional auction businesses

Low ASP sellers

If you sell items for < $10 and charge shipping, most likely this is a pretty substantial increase for you.

Example: I'm a cell phone accessory seller with $7 ASP and I charge $5

Before: 8% * $7 = $.56

After: 7% * ($7+$5) = $.84 - a 50% fee increase!

Heavy/bulky item sellers

There a lot of categories on eBay where due to the weight or volume of the items, the shipping costs are just simply high. Off the top of my head these include: Business and industrial, lots of auto parts, lots of sporting goods, lots of home and garden items, many computers and TVs.

Example: I sell baby strollers for $200 and $40 shipping (my cost)

Before: 12% * $200 = $24

After: 11% * ($200 + $40) = $26.4 - a 10% fee increase!

Traditional auction businesses

Unfortunately, this change will hit the traditional auction businesses the hardest. I feel really bad for this group because they've been taking it on the chin for years now and I think this is the final straw for most of them. The problem is these sellers have a business model predicated on low starting points. Endless tests have shown that free shipping doesn't really change the bidding from consumers (which goes 180 degrees against what eBay is telling us that consumers pay more for free shipping, but I digress).

Example: I'm a $.01 no-reserve auction CD seller with ASP of $4 and (capped) shipping of $3.

Before: 9% * $4 = $.36

After: 8% * $7 = $.49 ---> A 36% fee increase

Thirteen cents doesn't seem like much, but a ~40% fee increase essentially puts these guys in a bad spot, even those with higher ASPs.

What should I do?

If you are a winner (which will be the overall majority), you should think about how to spend those extra profits - let them drop to the bottom line, lower prices, invest in other parts of your business?

You should also look at offering free shipping. Now your fees don't matter either way so no harm in trying free shipping. eBay's research seems to show it's the most important thing, so if you have a $50+5 item, why not try $55+0. I have to admit, I'm a little sceptical here and it really all depends on the eBay search engine/BestMatch.

Losers - low ASP sellers and heavy item sellers

If you are in one of these two categories and you are seeing a huge fee increase you have these options:

  • Sell on other channels - we've been telling this story for 10yrs and it still is the single best way to make sure your business isn't disrupted by any changes at a single e-commerce channel.
  • Raise your prices - You're going to need to raise your prices if you can't absorb lower margins.
  • Lower your costs/profits - If you eat the fee increase, you'll have a decrease in profitability which you'll need to either absorb or find a way to fund through costs of goods, automation, better shipping prices from your vendor.

Losers - Traditional auction sellers

Unfortunately the only option of the three above that is open to traditional auction sellers is the 'make less money'. Because most of their shipping is capped and they can't control pricing due to the auction format, they are pretty much going to have to either eat the increase or dramatically switch business models.

Many sellers are saying this is the complete end of the auction format, I don't think so, eBay seems to want consumers to use the format as it is offering 50 auctions/month for free listing while at the same time they are making the format unattractive for larger businesses.

Top FAQs

Q: What if I have multiple shipping rates (free up to next-day/expedited?)

A: eBay will charge the FVF on the lowest domestic rate - another strong encouragement to have free shipping, even if it is very slow.

Q: What happens with my International business?

A: eBay will charge the FVF on the lowest domestic rate, NOT your international rates. So this shouldn't change your CBT strategy

Q: Is Tax included too?!

A: No.

Q: When do these changes roll out?

A: Auctions - 4/19/11 and Fixed-price 7/6/11

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