Editor’s Note: Matt Rogers, one of our semi-regular contributors, has a new post on his blog about eBay. It’s filled with insightful data and Matt’s conclusions about what has gone wrong at the online auction giant. We’re ewposting his piece here, not necessarily because we think the specific data in this case study are relevant to all Found|READers, but because we know that Matt’s method IS.

He’s constructed this research–some of which is independently his–to better understand what he should do with his own startup, Aroxo. We all spend plenty of time critiquing existing businesss from our armchairs. But too few of us actually take the practical–and more difficult–step of applying the lessons of other companies to your own businesses. This is a very important thing for founders to do: save time, effort and money by applying the lessons-learned by those who’ve come before us. Read his original post “here”:http://www.aroxo.com/blog/mattr/index.php/2007/08/21/has-ebay-stopped-bidding-on-auctions/, but our adaption begins below.

*Has eBay stopped bidding on auctions?*

August 21st, 2007
Techcrunch recently reported that eBay lost $1bn of market cap. Combining this with reports from some sellers that “eBay is broken“, it is clear that it’s time to take a closer look at just what is happening with eBay.

Firstly, some facts sourced from eBay’s quarterly reports:

eBay’s subscriber activity rate has declined from 41% in Q1 2005 to 35% in Q2 2007
after a few quarters of fast decelerating growth, the number of listings it carries has actually fallen 6% in Q2 2007 (compared to Q2 2006) the average cost of a listing has risen from $1.72 in Q2 2006 to $2.31 Q2 2007 – a 35% rise eBay has announced it is launching a range of user-generated content services (such as blogs and wikis) as well as filling a few proposition gaps by launching services such as Gumtree and “kijiji” in the US market.

Before I go on, an *important disclosure*
I am a co-founder of “Aroxo”:http://www.aroxo.com/ which will be a major eBay competitor when we launch in October 2007. I’ve sourced all the data above directly from eBay, although I have performed some calculations on these data myself. You can see what I’ve done here.

With that in mind, what follows are my opinions based on what I see happening in the market. So what’s happening with eBay?

*I believe that that eBay’s management thinks that online auctions have reached the limit of their natural growth.*

*The first clue* came when it raised its prices. It only makes sense for a company to do this if it believes the increment in price will offset the reduction in demand, in short it’ll come out earning more money. eBay raised prices because it believed that the drop in listings would be offset by the increase in revenues. Pushing up prices is the way to grow revenue in a flat market. A company which still expects growing demand, doesn’t raise its prices.

*The second piece of evidence* comes from its eclectic strategy, starting with the expensive and hard to understand Skype acquisition, eBay has embarked on a range of new initiatives including blogs and wikis, launching kijiji in the US and continuing to roll-out Gumtree.
Finally the seemlingly knee-jerk “freeish” listings day which it recently ran and eBay UK’s upcoming half-price listing promotion seem to be an effort to push up listing numbers in response to analyst concerns that its growth is stalling. These initiatives come at a cost to its revenue.

All of this activity leads me to the believe that eBay is attempting to persuade Wall Street that it still has some growth potential. It appears to be trying to build some “strategic uncertainty” into its business, otherwise Wall Street will value it on lower multiples as it becomes clear that its business has matured.

*What does this mean for sellers?*
eBay’s rising fees make it more important than ever to optimise listings.

There are a few simple steps which can help sellers. Firstly calculate the total cost of each sales channel in use (this spreadsheet will help you do that), then manage these costs downwards.

*The following techniques should prove helpful:*
*1) Use “A/B testing” to improve final values.* This involves trying different listing wording, closing times, listing configuration and starting price (etc) on the same (or similar) products to see which achieves the best final values.

*2) Use relevant blogs and forums to drive traffic to your store.* Note that spam has the opposite impact, so make only relevant and beneficial posts and comments and include your store in your signature, people will find their way there. Use Technorati to find blogs that are relevant to your business.

*3) Experiment with alternative sales channels* such as Amazon, Google AdWords and for some products types Gumtree and Craigslist, to see if they can help lower costs
Use sites such as AuctionBytes and PowerSellersUnite to find alternative sales channels and to keep up-to-date with new launches

*4) And finally, the plug.* If you sign up for the Aroxo alpha trial and use the sign-up code “alpha”, we’ll give you $20 (£10) of free Aroxo credit when the site goes live. Also, if you’re an active seller on eBay we’d like to invite to the Aroxo Seller Board.
eBay has critical mass in the online auction space, which is why those sellers who’ve tried to either implement a boycott of eBay, or find alternative auction site have run into problems. Without a decent supply of buyers, the lower listing and final value fees still result in a higher average cost for that sales channel (as more items go without bids or without achieving their reserves). Aroxo’s unique business model has been designed so that these problems don’t arise for sellers.

*Closing thoughts*
It seems clear to me that eBay’s current strategy suggests that they’ve run out of ideas to innovate and drive online commerce. Online retailing continues to grow its share of overall retail sales, and yet eBay’s growth has stalled. They’re losing idea leadership in online person-2-person trading.

eBay is still a good place to trade for many buyers and sellers, but their strength comes from the network effects that are a natural part of the auction process. However, Aroxo’s new sales model will give buyers and sellers a viable alternative which benefits all.
*What do you think is happening with eBay? Your comments and thoughts are more than welcome.*