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Amazon vs. eBay: No Contest

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By swapusa
August 26, 2008

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Amazon is the clear winner, at least in the eyes of this online merchant.

A little history first: I have been selling merchandise online since 1993, before browsers existed and before either of Amazon or eBay were founded. Heck, that was even before Al Gore invented the internet. My online retail venture started with the introduction of the 3DO video game system in the U.S. at $700. I still vividly remember our 4 other online competitors in the world of video games that sold stuff on Usenet Marketplace newsgroups back then. Only 4 competitors! Remember those days?

I started selling on eBay in 1998 just before it went public. Amazing days. Selling and making money on eBay was easy back then and it was the only game in town. Huge community of enthusiastic buyers and sellers. We sold mostly excess video games from our retail stores on eBay and grew the eBay business from the back of one store and the store employee to a small 3-office building with small a storage space and 3 employees that quickly grew to over 100 sales a day and had to move to a bigger warehouse and even more employees.

Things were going great and eBay was cruising along with no competition. Then, in summer of 2003 I read an article in Businessweek magazine about how a successful eBay seller of action figures was getting even better results from having his own web site and driving traffic to it by advertising on, then little known, Google. I had to try it and figure out if it would work for us.

We already had a web site for video games but with little traffic and no ecommerce capability on it. Being on eBay day and night, I noticed that Poker and poker chips were getting very hot so, to test this new Google PPC advertising, I quickly made up a retail site on Yahoo Shopping and took some images of poker chips and sets off of eBay and populated this web site without having any inventory. I just wanted to test and see if this new Google thing would work. I think it took me about 30 minutes to set up a Google Adwords account back then and put up some poker chip related ads up on Google and within minutes my ads were being served on Google. (Try doing that on Yahoo's Overture even today.)

It was amazing: Within 5 short days, I had lots of orders that totaled over $1,500 with a Google cost of well under 5% of sales. And all this with only a few items on the site. I was paying eBay as much as 20% of sales and here was this newcomer who was enabling me to sell at 1/4 the cost. Not having any poker chip inventory or even a source to get them domestically, I quickly closed the Yahoo shop and emailed all buyers that the merchandise was not available and cancelled their orders. And off to China I went to source the hot new poker chips.

3 months later the merchandise arrived with our new web site ready to go. And by then Google PPC was getting traction and smaller merchants had started to warm up to it and get in on the Action. In the beginning, I used to pay a maximum of 10 cents per click for the keyword "Poker Chips" so our marketing cost was very low. So, now we had our own site to sell stuff on and eBay. Ebay with much higher costs but large sales, and our own site with very low cost but smaller sales. But how quickly things changed. Our site sales kept growing and eBay sales did not. Then our eBay sales started shrinking and, frankly, we were not that enthusiastic to keep paying high commissions to eBay when we could get better results with Google and our own sites. So, Google PPC was basically the first nail in eBay's coffin.

Then in summer of 2004, I got a call from an Amazon marketing/sales guy who was asking us to list our poker merchandise on Amazon. He mentioned that since poker was hot and Amazon was lacking poker merchandise on its site, they were trying to sign up a few online sites that were in poker chip business to offer their wares on Amazon. Having unsuccessfully tried Amazon's zShops a few years prior, I was kind of hesitant to try Amazon again and tried to get out of it. ZShops was hard to work with and sales on it were far and few in between. But the Amazon salesman explained to me that this was totally different than zShops and that we would become an Amazon Merchant Partner. Kind of like what Amazon was doing for Toys R Us and Target back then but on a much smaller scale. SO, our products would come up on Amazon search results just like any other Amazon serviced item. Intrigued by the opportunity, I agreed to give it another try. We started with Amazon in July of 2004 and listed our 20 or so poker chip items on it. Things started slowly and even slowed down by September. Although we were ready to pull the plug on it, I though we should wait for the Holidays and see what happens. Then, much to my amazement, sales exploded after Thanksgiving. From 1 or 2 orders a day to 10, then to 20, and then a sharp rise to 50 to 60 orders a day. Then, in early December, we started getting over 100 orders a day from Amazon. I had to hire an extra employee and bring everyone in on the weekends to catch up with the unexpected volume. Our eBay business, on the other hand, was nowhere even close.

Fast forward to now. Our online business in now almost 100% split between Amazon and our own few web sites with little Google PPC advertising. And our ebay business is almost zero. We still have a few items listed on eBay on a regular basis but that will also end soon as I am getting ready to cancel our Marketworks account that we use to manage eBay auctions to save the $45/month minimum service fee. When that is gone, so are our eBay listings.

In my opinion, the following are the reasons Amazon has been and continues to be so successful while eBay struggles to grow its retail business:

1- Arrogance: Ebay executives have been extremely arrogant. They were on top of the hill and it didn't cross their minds for a second that smarter players like Amazon and Google can beat them. They too their eyes off the ball and the opponent scored.

2- Fees: People have argued that Amazon selling fees are higher than fees charged by eBay. I disagree. Let's take a $40 item. Amazon charges us 15% of sales, including shipping costs. But that includes credit card processing with full chargeback & fraud protection. Deduct 3% from that 15% for payment processing and the Amazon fee is down to 12% if and only if the item sells. Ebay, on the other hand, will cost about 10% for the same item in a successfull auction or fixed price listing or 2% less. But, Amazon does not have any listing fees and eBay does. Not all items on eBay sell during the short duration of 7 days that the item is up. If an item does not sell, it has to be relisted with a new listing fee. Some items have to be listed a few times before it finally sells. Add up all the repeat listing fees and the eBay selling cost is suddenly higher than Amazon. On Amazon, I can list all my items with no initial listing fee and the item stays on for ever if I so desire. Additionally, Amazon allows us to create numerous web sites with our own domain names hosted by Amazon at a very small flat monthly fee. Now, whatever we sell on these sites have a 7% commission only (including the payment processing) instead of the regular 15%. Where else can you have 20 additional web sites with full ecommerce capability and chargeback protection for so little. The monthly fee for these numerous web sites: A total of $60/month for all of them combined.

3- Ease of listing on Amazon vs. eBay: As mentioned in 2 above, items on Amazon are listed once and they stay on forever. I can have 1,000 of the same item, but I only have to list it once and just put in a quantity of 1,000 in available inventory field. And in most cases, to create the listing all I have to do is to ut in the UPC barcode of the item and chances are that the item is already on Amazon and I can just join that item as a new seller with very little work. On eBay, on the other hand, if I have 1,000 of an item, I have to list them 1,000 times. Dutch auctions are available, but a 7 or 10 day duration des not work very well for my 1,000 widgets. Lots and lots of unnecessary work. Of course, this repetitive listing process can be made easier by paying for and using a 3rd party auction management software. But that will cost monthly fees plus additional percent sales fees that can be as high as 3% of sales on top of eBay fees.

3- Payment processing: Amazon processes all payments for orders placed with us. And we don't have to deal with invalid credit cards, fraud, chargebacks for non-delivery or other reasons. If a customer claims that merchandise has not been received, all we have to do is to provide electronic proof of shipping with a Fedex or UPS tracking number that we shipped the merchandise to the address that Amazon provided us with. We don't care if the carrier left the package behind the door with no signature and it got lost. Amazon covers us as long as we ship to the address they give us, and this address does not necessarily has to have anything to do with the billing address of the card. Amazon qualifies their customers and pays us. The same level of merchant protection is not available with Paypal.

4- Trust: Simply put, consumers trust buying on Amazon more than they trust shopping on eBay.

5- Ease of finding products on Amazon vs. eBay: This is a biggie. On Amazon, if you want to buy a specific Sony digital camera, you just go the home page, put in a few keywords, and quickly find the item you want with multiple sellers. The key is that you will find just one item but with many sellers piled up on the same item at different prices. There may be a few duplicate items, but not nearly as much as you can find on eBay and Amazon is hard at work to reduce the number of duplicate items by enforcing UPC barcode fields in listings. On eBay, you may find hundreds of the same item, each one from a different seller or a seller on eBay may be listing 20 of the same item in the same time. This makes the site cluttered and hard to navigate. Too many pages of the same item to go through to find and decide on a purchase.

6- Speed of sales on Amazon vs. eBay: Welcome to the land of instant gratification. Waiting for an eBay auction to end was fun a few years ago when it was novel. It was exciting to see how low you can get an item for by waiting and sniping the item at the last minute. But that is not fun these days. There are so many online retailers out there with similar products and at bargain basement prices that shoppers prefer going to a site where they can quickly complete a purchase without waiting 7 days to see if they can get lucky and win the auction.

7- Honest prices: Another biggie. This one is one reason we were driven away from eBay and eBay execs have been so arrogant that they refuse to see the harm done to the buyer and seller experience. By "honest prices" I mean that on Amazon, it is easy to figure out what the final cost of a product is. The retail price and shipping cost is clearly stated next to the buy button and shipping costs by third party sellers are reasonable. Shipping costs are reasonable simply because Amazon charges its sellers the 15% fee on the retail price of the item and on the shipping fees collected. There is no fee-avoidance scheme on Amazon by selling products dirt cheap and charging a gigantic shipping fee. On eBay, sellers are allowed to sell items for 1 penny and charge $20 shipping to avoid eBay final value fees. I have brought this issue up on these Fool boards many, many times and not even once I heard a satisfying explanation of why eBay allows such practice. Ebay could have solved this problem years ago by charging a final value fee to shipping costs but they never understood the concept. Oh, and the reason why we were driven off of eBay was that I used to rely on completed auctions final prices as a research tool to get market intelligence and scout new items to sell on eBay. But with the growth of the fee avoidance scheme explained above, the completed auctions sales prices lost their informational value and are of no use to me.

8- Fulfillment by Amazon: This one is fairly new and we haven't tried it yet, but are in the process of joining as it looks quite attractive. 3rd party merchants can ship palette loads or truckloads of merchandise to an Amazon warehouse and let Amazon handle everything from marketing to sales to order processing and shipping. The merchant takes on the merchandise risk and Amazon does everything else for a fee. One big advantage Fulfillment by Amazon offers merchants is that items fulfilled by Amazon will benefit from Amazon's own extensive promotions and shipping discounts. As a small merchant, I do not have the bargaining power and volume of Amazon to get big UPS or Fedex or USPS discounts but Amazon is giving us that power. Plus, items fulfilled by Amazon frequently take priority over items not fulfilled by Amazon in their search results.

9- Amazon always pays us: Orders received on Amazon are always paid for, guaranteed. I wish I could say that about eBay. This past 2 months, We sold about 50 old but new Sega Dreamcast machines on eBay that were left over from our video game days for around $80 each. But over 20 days after the last auction ended, we are still waiting for payment on 12 of them. That is over 20% that are unpaid. Of course, we still have to pay eBay listing fees and that is additional cost that should be added to eBay's overall cost of doing business.

10: Arrogance. Did I mention that already? Well, it's worth repeating. Ebay executives need to open their mind and get out of their cubicles and get out and see what is going on in the online retail world.

There is more in Amazon's arsenal and they are gradually but surely implementing their retail world domination strategy. One of their newest things is that they are asking their top sellers or so called Gold Merchants in any category of product to open up their own customizable storefront within Amazon. Now, this is different from the web sites I mentioned in number 2 above. Items listed on those sites do not come up on Amazon's searches and the marketing of items is left to the site owners. But the items on the storefront within Amazon do come up in Amazon's searches. A consumer will find a product in a regular Amazon home page search, and then if the customer clicks on the seller's storefront link, he/she will end up on the merchant's dedicated store within Amazon with no other merchant's items showing. This store within store is fully customizable. A good example of one such store is Golfsmith.

Now, one condition of opening such store within Amazon is that the merchant will have to list all products offered on its own web site (golfsmith.com in this case) in this Amazon storefront and the same or lower prices than what's offered on their main site. And any and all promotions available to buyers at the merchant's own web site must also be available on Amazon.

If you think about it, Amazon is basically trying to dominate the ecommerce world by implementing such strategies. And their latest assault on eBay Paypal is just another salvo in their gradual but calculated world domination plan. General Bezos is definitely in charge!!!

cheers,

Mehran