How does eBay make money: Business Model & Strategy

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Founded in 1995 as a sole proprietorship, eBay is a brand that needs no introduction. eBay is one of the world’s largest and most vibrant marketplaces for discovering great value and unique selections. eBay connects millions of buyers and sellers in more than 190 markets worldwide.

eBay was founded by Pierre Omidyar in 1995 and became a notable success story of the dot-com bubble. eBay manages an online auction and shopping website in which people and businesses buy and sell various goods and services worldwide.

To read eBay’s history, you have Wikipedia. But The Strategy Story is renowned for publishing high-quality insights on business models and strategies of organizations. Therefore, in this story, we decided to analyze eBay’s strategy and business model and learn how eBay makes money.

Business Strategy of eBay

As a global commerce leader and third-party marketplace, the business strategy of eBay is designed to provide buyers with choice and a breadth of relevant inventory from around the globe and to enable sellers’ access to eBay’s 147 million buyers worldwide.

EBay’s business model and pricing are planned and executed so that eBay is successful when the sellers are successful. eBay makes money primarily through fees collected on paid sales, payment processing, and first-party advertising.

eBay’s strategy is to leverage technology to enhance the marketplace experience for its customers to drive growth in Gross Merchandise Volume (“GMV”) while increasing the rate of revenue growth through its managed payments and advertising initiatives and delivering healthy operating margins.

In 2020, eBay embarked on a multi-year journey to build more compelling category experiences for enthusiastic consumers, to become the partner of choice for sellers, and to strengthen trust in relationships with buyers on its platforms. eBay derived most of GMV in 2021 from the following product categories — parts & accessories, consumer electronics, and home & garden.

During 2021, eBay completed the migration of its managed payments in all markets, delivering buyers and sellers a simplified end-to-end payments experience. Through managed payments, eBay can provide a frictionless experience for current and next-generation customers, consistent with today’s retail standards.

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eBay offers buyers more flexibility and choice in how they’d like to pay and offer sellers a more streamlined way to run their businesses. eBay’s advertising business focuses on growing its Promoted Listings offerings (first-party advertising products) while reducing non-strategic, third-party advertising.

In 2021, eBay launched three new products:

Promoted Listings Express (a cost-per-acquisition product for auction listings)
Promoted Listings Advanced (a cost-per-click product)
External Promoted Listings (an off-platform advertising product)

These new products complement its existing first-party advertising offering, Promoted Listings Standard (a cost-per-acquisition product for fixed-priced listings).

Through its portfolio of Promoted Listing’s offerings, eBay is providing sellers with data-driven recommendations to optimize their conversion and drive velocity while testing and building more technology features to drive growth, position eBay as the seller’s platform of choice, and surface relevant inventory to buyers.

As part of its growth strategy, eBay focuses on categories where it is positioned to win, prioritizing non-new-in-season inventory that makes up 90% of eBay’s GMV. At the end of 2021, eBay had 147 million active buyers, 17 million sellers, and approximately 1.5 billion live listings globally.

How does eBay make money? What is the business model of eBay?

In 2021, eBay made $10.4 billion. eBay primarily makes money from fees collected from sellers on paid sales, payment processing, and first-party advertising. eBay makes money from two revenue streams: Net transactions revenue (94%) and Marketing services & others (MS&O) revenue (6%).

Net transaction revenues primarily include final value fees, feature fees, including fees to promote listings, and listing fees from sellers on eBay. The net transaction revenues include store subscriptions and other fees, often from large enterprise sellers. eBay made $9.8 billion in Net transaction revenue in 2021.

eBay makes money from sellers in two phases: pre-sales and post-sales. In Pre-sales, eBay charges an insertion fee. For most casual sellers, it’s free to list on eBay. If sellers list more than 250 items per month, they must pay a $0.35 insertion fee per listing to eBay. In post-sales, eBay keeps a portion of the sale. This final value fee for most categories is 12.9% of the sale price or lower, plus $0.30 per order.

Two key operating metrics impact net transaction revenue: Gross Merchandise Volume (“GMV”) and take rate.

GMV consists of the total value of all paid transactions between users on eBay, including shipping fees and taxes. In 2021, the GMV of eBay was $87 billion.
Take rate, in e-commerce parlance, is the commission fee a marketplace charges for a transaction it facilitates on its platform. Take rate provides a valuable measure of eBay’s ability to monetize volume through marketplace services on its platforms. eBay uses take rate to identify key revenue drivers in its marketplace. In 2021, eBay’s take rate was 11.19%.

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Marketing services and other revenues are derived principally from the sale of advertisements and revenue-sharing arrangements. eBay made $600 Million from this segment in 2021.

Advertising revenue is derived principally from the sale of online advertisements, which are based on “impressions” (i.e., the number of times that an advertisement appears on pages viewed by users of eBay’s platforms) or “clicks” (which are generated each time users on its platforms click through advertisements to an advertiser’s designated website) delivered to advertisers.
eBay’s most significant revenue share arrangements are with shipping service providers. eBay primarily acts as an agent in these arrangements and makes money by connecting the shipping service provider to its customers.

During 2021, eBay completed the migration of its managed payments in all markets, delivering buyers and sellers a simplified end-to-end payments experience. Net revenues increased 17% to $10.4 billion in 2021 compared to 2020, primarily due to the migration of managed payments on a global basis and the associated higher take rate.

Transaction take rate was higher in 2021 (11.19%) compared to 2020 (9.41%) as a result of revenue initiatives such as global payments and Promoted Listings, which along with final value fees, are calculated as a percentage of an item’s sale price and category mix.