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Ebay Corp. is one of the leading players in the world of e-commerce industry. The competition is fierce and the legal problems with PayPal and the discussions on the sales tax imposition undermine the market position of the company. Statistics shows that among the 18 major competitors in the industry, Ebay Corp. takes the 13th position in the long-term growth indicator rating. The lower indicator represents a warning signal for the investors as the company can lose its market share.
Ebay Corp. should increase sales by changing the terms of the commission on sales charging. I recommend reducing the commission on sales from 2% to 1% for the merchandisers collecting more than $6 000 weekly. As a result, the merchandisers will be encouraged to increase their inventory and the sales volume in order to achieve the economies of scale.
This means that the commission payable to Ebay will increase leading to the revenues increase and providing the long-term growth for the company. It is also suggested borrowing additional funds for investing in the long-term growth. The platform and mobile application development is one of the possible areas for investment.
Bases for Recommendation
The long-term growth implies the increase of the corporate profits. Profit is a difference between revenues and costs. So, we can show this relationship by the following equation: P=R-C. It will be reasonable to use the following formula: E(P=R-C)M where E represents the macroeconomic factors and M represents the market factors.
If we take a look at the current economic situation, we can characterize it by the low inflation rate (1.5% according to the recent data), the environment of the extremely low interest rates with the Fed rate at the level of 0.25%, and the unemployment rate lower than in the last years but yet substantially higher than in the period before crisis.
The macroeconomic factors put additional pressure on the profit level, thus slowing down the growth of the company. The macroeconomic instability decreases the amount of the personal disposable income putting downward pressure on the consumer demand. Thus, the maintenance of the competitive position requires the active marketing strategy.
Let’s analyze the potential benefits of the current situation. In the current economic environment, the borrowing seems to be beneficial. That is why the company can borrow additional funds at low rates without the rise of its finance costs. Taking into account the favorable borrowing conditions, it is reasonable to increase leverage and to invest additional funds in the platform development and the development of the mobile application, in particular. Besides, the advertising should be financed.
Turning to the market factors, we can mark out the following major determinants in the industry: high growth of the e-commerce, strong competition, and relatively low barriers to entry. The market factors indicate to the potential for growth of the company as well as to the threats of revenue decrease due to the competitors’ activity.
In order to achieve the long-term growth improvement, I suggest increasing sales. This can be achieved in three ways: by increasing volume, by increasing the amount of the unit of sale, or by rising prices.
Taking into account that the sales of Ebay represent the fee for putting the lot and the commission from the sale, the increase in the fee or the commission will affect the performance of the merchandisers trading at the Ebay platform. Obviously, the performance of the sellers will decrease leading to the exit of some sellers and the decrease in Ebay revenues.
The second alternative we should consider is the increase in volume. The increase in volume can be achieved by the reduction of the fee and the commission attracting the merchandisers selling on the platforms of the competitors. However, many of Ebay major competitors have their own competitive advantages. For example, Amazon.com supports price competition among merchandisers attracting more buyers and supporting the demand.
In general, the change of the trading platform implies to the sellers the loss of the part of their customers who used to buy from certain e-commerce platforms. It is highly probable that the majority of the sellers would prefer to stay with the same platform provider. Thus, the enticement of the merchandisers seems to be ineffective for the increase in sales taking into account the cost and benefits of this strategy.
The last of the suggested alternatives is the increase in the amount of each sale. The increase in the amount of each sale can be achieved by providing the reduction in the commission on sales for the high volume merchandisers encouraging them to increase their own sales. The main advantage of this option is the relatively less time needed to gain the benefits from this strategy. According to the statistical data, “users trade about $1 700 worth of goods on site every second” (“Interesting Facts” n.pag.).
The high volume merchandisers who are able to acquire additional inventory will achieve the economies of scale by selling more with the lower cost of sales. The commission payable to Ebay will increase due to the increase in the amount of each sale of the merchandiser. Let’s say, the commission is decreased from 2% to 1% on the sales amount from $6 000 to $8 000 weekly. This means that the merchandiser collecting $2 000 pays the $40 in commission whereas the seller who has increased his volume to $6 000 will pay $60 to Ebay.
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In effect, the increase in the sales volume results in the increase of the revenue amount per each dollar of commission paid from $50 to $100. In this case, Ebay will earn twice more on commission from sales if the merchandisers increase their volume of sales. Therefore, the last alternative of increasing the volume of each sale seems to be the most attractive for Ebay.
In summary, the suggested strategy will result in the increase of sales of Ebay, the gain of the competitive advantage on price, the maintenance of the market share and, ultimately, the long-term growth of the company.
Assumptions, Risks, and Uncertainties
The following assumptions underlie the suggested strategy: the market is growing; the economy is at the stage of recovery; the significant rise of inflation will not occur in the nearest future; the severe economic downturn will not happen in the nearest future; the competition is strong and the substantial monopolization of the industry will not occur in the foreseeable future; the merchandisers are responsive to the commission changes.
The major risks and uncertainties are as follows: the general macroeconomic situation worsening and the industry growth stagnation. Besides, such factors as the implementation of the stricter regulation and control over the e-commerce business and the increase in the tax burden represent significant risks to Ebay.
Furthermore, the competitors may respond by cutting their fees and commissions. The number of mergers and acquisitions may increase leading to the appearance of the stronger players representing one more risk factor to the business. And last but not least, the interest rates may increase or the inflation may soar leading to the merchandiser’s inventory devaluation.
The analysis of the current problem of Ebay Corp. and the comparison of the strengths and weaknesses of the alternative strategies for the problem-solving allow concluding that it is advisable for the company to reduce the commission on large sales volumes in order to motivate the merchandisers to sell more.
“Interesting Facts about Ebay Website” 1 November 2006. Blogspot.com. Web. https://labnol.blogspot.com/2006/11/interesting-facts-about-ebay-website.html