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eBay Tries On the Cheap Suit

When eBay (Nasdaq: EBAY  ) said it was cutting fees on its namesake auction site, it wasn't kidding. Just days after sending the market a heads-up during last week's conference call, eBay is overhauling its pricing strategy.

The good news for sellers is that eBay is slashing listing fees by as much as 50%. The bad news is that it's hoping to offset that by raising the percentage it takes from the final values of successful auctions.

If this was the extent of eBay's pricing strategy, shareholders would have a right to be upset. Lowering listing fees will only lead to more junky listings at unrealistic prices. If you've ever seen the onslaught of useless listings whenever eBay pulls a one-day pricing promotion, you know what I'm talking about. eBay's proudest achievement in recent quarters is that its conversion rates have been strong, despite the slowdown in actual listings growth. The new pricing strategy could reverse that if unchecked.

Thankfully, there's a more exciting part of the new plan. Beyond making photo gallery insertions free -- a logical move that will make listings more visually stimulating -- the real clincher is that eBay will start to penalize poor sellers by burying them in search results.

Spanking the lackluster listings
If you're an eBay seller with a poor feedback rating or you refuse to accept eBay's PayPal or a major credit card as a fulfillment option, your listings will suffer when pitted against PayPal-ready sellers with a past of satisfying buyers.

What eBay is doing here is really channeling the paid search giants like Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) . Two contextual marketing clients on Google's AdWords platform may be paying entirely different prices to appear at the top of queries for certain keywords. Google takes into account the quality of the ad. If it's relevant and likely to be clicked on more often, Google can make more money with a lower-paying bidder.

For example, if someone's $0.10-a-click ad for snowboards gets clicked on twice as much a rival's $0.18-a-click entry, it's in Google's best interest to favor the cheaper ad. eBay's move doesn't appear to be as algorithmically dynamic, but it's the same principle at play.

The only thing that would make this even sweeter -- more Googlesque, if you will -- is if eBay actually factored in conversion rates into its search rankings. Sure, it's great to know that a seller is being rewarded for accepting a fraud deterrent like PayPal or living up to a listing, but what if most of those seller's listings are for undesirable items at unreasonable price points? You need a buyer to provide positive or negative feedback. The search results should account for that in its quality score the way Google would penalize a sponsor who only swings for the fences.

The new pricing won't go into effect until Feb. 20. I'm not sure I agree with announcing the move more than three weeks in advance. Yes, you don't want any active listings to feel cheated, but the typical non-store auction is a week. Sellers may now hold off on new listings until then, and that's the last thing eBay wants.

You can't spell tweak without weak
The sheer number of auction listings has dogged eBay in the United States. Listings actually clocked in lower -- year over year -- during last year's second and third quarters before bouncing back slightly in the fourth quarter.

The company's namesake auction site has been the sandbag, given that PayPal continues to grow in popularity and Skype remains an early-stage speedster. Getting the auction marketplace back on track could work wonders for eBay's stock. The real concern is the viability of reviving eBay.

Even eBay has jumped on the bandwagon of free classifieds. The company's Kijiji site is attracting 3 million visitors a month. It also owns a 25% stake in Craigslist. They threaten eBay, but only to the casual seller. There's too much noise on the free sites.

The real challenge at eBay is to compete against the alternatives for active sellers. It costs just pennies to generate leads through sites like Google, Yahoo!, and Microsoft (Nasdaq: MSFT  ) . Affiliate networks are easy to set up through ValueClick's (Nasdaq: VCLK  ) Commission Junction. (Nasdaq: AMZN  ) and Yahoo! offer attractive virtual storefronts.

Lower listing fees and volume discounts will help, but it's only a start in getting former power sellers back on board. There's too much at stake in ignoring the disgruntled former eBayers. So let's hope that, as eBay grades the quality of its sellers, it never forgets to check on the quality of eBay itself.

If someone has to do, it may as well be eBay.

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