Strategies Frank Ross on 20 Oct 2006 06:08 pm
eBay Case Study - Competing on Price
Vitamix has a blender called the TurboBlend 4500; it’s been around for a few years and is well known. Let’s look at who’s selling this on eBay and ‘blow the lid off it’ shall we? An eBay seller - we’ll call them ‘BlendersUnlimited’ - is selling the TurboBlend 4500 for $279.99 at BuyItNow with $22.95 fixed price shipping. The seller has 30 of these for sale at the current time. This case study is based on a real seller, by the way but to keep myself out of hot water, I’m not naming them and I’ve adjusted the figures slightly for illustration (you could probably do a little detective work to figure out who I’m studying here).
The TurboBlend 4500 has 3 dealer cost levels with a minimum order of 3. If you order between 3 and 9, your cost per-unit is $280. If you order between 10 and 49, your cost drops to $262. If you order 50 or more, your cost drops even further to $251. Since the seller has 30 for sale, we know they must be buying at least in the 10-49 level, if not in the 50+ level. Given the fixed sale price, how much is this seller making on these?
To answer that, we need to look at the seller’s transaction costs. You might look at the shipping price and think that’s excessive so you might be tempted to think the seller is doing the ’shipping jack up’. But the TurboBlend 4500 weighs in at 15 pounds and comes in a fairly large box, so it’s probably about right as an average. For the sake of keeping it simpler, let’s just say shipping is break-even and leave it out of the picture (although in practice, I would usually never try flat rate shipping on a heavy oversized item like this).
Based on the BuyItNow, this seller’s transaction cost will be about $22.00. This takes into account listing fees, final value fee, and assumes a PayPal payment. So what happens when we add $22 to the cost? We know now that the seller is probably buying the product at the 50+ level or else they would be loosing money ($262 + $22 = $284). But even at the 50+ level, the seller is only making about $7 per unit ($251 + $22 = $273). That translates into a profit margin of only about 2.5%.
Yikes - that’s narrow! We don’t know what kinds of other costs the seller has, but at $7 per unit, BlendersUnlimited had better be selling loads of these every day or they WILL be losing money. You might wonder if there would be another price level that I don’t know about. There probably is - if you’re Wal-Mart! But for regular businesses that want to sell this product, that’s what there is to work with.
This illustrates the problem created by Competing on Price. This seller has attempted to lock everyone else out of the market by making it difficult for others to get attention to their listings at higher prices. In the big picture, eBay enables this — especially with Ebay Express where you see the listings side by side and not much else to guide the buyer. And BlendersUnlimited is doing this by accepting a less than adequate profit margin. What happens when you have someone else that comes along and is willing to take a 2.4% margin, 2.3% margin and so on?
In the end, the low one wins - or do they lose?
– Frank Ross