School Day on eBay
By Mike Meyers
Star Tribune
May 21, 2006
Star Tribune
May 21, 2006
Business Section, Page 1
MINNEAPOLIS, MINN. -- Forget miracle medicines, advanced aeronautics or
genetically modified crops. When it comes to business research, the biggest
laboratory in the world isn't at Pfizer, General Electric or Monsanto. It's online, at eBay.
com, where everyone from university scholars to conventional retailers are carefully
studying the auctions of baby pajamas, home board games and other items to better
understand consumer behavior.
What makes eBay so fascinating? In part, it's sheer size. In the first three months of
this year, the company had 75.4 million active users, up 25 percent from last year.
Some $12.5 billion changed hands through the site, a gain of 18 percent. This year,
eBay is poised to surpass $50 billion in sales.
Even more important, though, is transparency. Target, Best Buy, Wal-Mart and other
retailers guard the details of their pricing and transactions like state secrets. But
eBay, while protecting its users' personal privacy, sells facts about its auctions to
companies that use the information to try to make sense of consumer behavior and
tastes, marketing strategies and why one color iPod or a certain style of walking shoe
outsells its rivals.
"The sky is the limit for the applications of eBay's data," said Anthony Sukow, CEO of
Advanced Economic Research Systems Inc., a Canadian company based in
Vancouver.
Sukow's company is part of a cottage industry parsing all manner of information on
eBay transactions to academics, big-box retailers, online merchants and an array of
others interested in unlocking the secrets of the world's largest auction site.
While consultants are reluctant to share the names of their customers, they offer
many examples of how information from eBay has spurred business decisions at
other firms.
• A golf equipment chain gathered eBay prices on used golf gear to create a trade-in
program.
• A "big box" electronics retailer uses eBay statistics to manage inventories, ordering
fewer slow-selling MP3 players or past-their-peak video games after seeing how
many hundreds were being unloaded in eBay auctions.
• Even charities are using eBay data to estimate the market value of donated goods.
"We interact with hundreds and hundreds of clients who want to build businesses
based on eBay's data set," Sukow said.
Some academics are building careers using the same numbers, generating
research articles with arcane titles: "Consumer Surplus in Online Auctions,"Price
Formation and its Dynamics in Online Auctions,"Do Consumers Know Their
Willingness to Pay? Evidence from eBay Auctions."
Motivation testing ground
For economists, statisticians and psychologists, eBay is a testing ground for
examining all manner of questions about human motivation and behavior.
Do people always go for the lowest price they can find? No, more than half the time
they pay more.
"We find that buyers neglect cheaper prices once they have started bidding," Ulrike
Malmendier and Hanh Ahlee, two Stanford University researchers say in a recent
paper. In 51 percent of the auctions for Cashflow 101, a game that, paradoxically,
offers lessons in financial management, buyers paid more than the "Buy it Now" price.
Explanation: People often value "winning" more than snaring the lowest price.
"It's about the thrill of the hunt and immersing yourself in the experience," said Wendy
Liebmann, president of WSL Strategic Retail, a New York City consulting firm.
"Look at Apple, the iPod, Apple Stores or Starbucks," she said. "People are willing to
pay a premium where there's a sense of an emotional connection and club
atmosphere. The discount is not essential in a very discount-oriented world."
Abercrombie & Fitch has learned how to give customers a sense of belonging to a
club, even though all they have to do to join is walk into the store, said Stan Pohmer, a
retail consultant based in Minnetonka.
"It's the hip thing to do," Pohmer said of going to an Abercrombie. "If [young shoppers]
go into a Target, they look at the price tag. Price is the last thing they look at when they
go into an Abercrombie & Fitch."
Searching for perfect price
Researchers also believe eBay can teach them how better to determine the highest
price most people will pay for a product.
"An average price at Best Buy ... doesn't tell you what the consumer is willing to pay,"
Jank said. Watching eBay can answer that question, offering retailers the prospect of
squeezing out more profit when they set prices.
Love Goel, chairman and CEO of Growth Ventures Group, a Minneapolis-based retail
investment firm, tells the story of a friend who bought two "overstock" lamps for $50 at
a furniture store. When she got home, the woman decided the lamps weren't what
she wanted. But the retailer was a 40-minute drive -- each way -- from her Princeton,
N.J., home.
She posted the lamps on eBay and ended up selling them for more than twice what
she paid. That led her to call the retailer to ask whether the furniture chain had any
more of the lamps. She bought 10 more. All sold on eBay at a steep premium to the
store price.
"She cleaned out the retailer's East Coast inventory," Goel said. "The retailer should
have done the same, testing the price points."
For some retailers, eBay has become an early warning system that lowers the risks
in ordering inventories, said Dean Jutilla, an eBay spokesman. What's in fashion and
what's not can be easier to spot in thousands of auctions online than at a store that
sells less in a year than eBay sells in a week.
"Is pink selling better than blue or white?" Jutilla said. The answer might prompt
merchants to order more of one color than another in an effort to avoid stocks of
unsold purses or shoes, he said.
Leibmann at WSL Strategic Retail knows of retailers who look for a second life for
products in their stores based on sales patterns on eBay.
A shoe merchant might note eBay demand for a hard-to-get sneaker that most
retailers have forsaken as last year's fashion. "If you're a smart retailer, you say,
'Maybe we should find some to sell,' " Leibmann said.
What Bloomberg did for buyers and sellers of stocks and bonds -- offer up-to-the-
minute price and sales-volume information -- eBay is doing for savvy retailers, she
said.
"EBay has become a wonderful strategic information resource," she said. "You can
see where there are leftovers and see the things that go really fast."
EBay's flaws also can spell niche opportunities for rivals.
Goel's Growth Venture Group recently invested in Barterbee.com. That site seeks to
exploit a weakness in eBay -- the fuss of setting up a Web sales page and paying
listing fees, commission and shipping charges for CDs, DVDs and games that might
sell for less than the transaction costs.
By Goel's estimate, 90 percent of used media -- a mountain of CDs, DVDs and
games worth $50 billion -- sits idle on shelves in American homes because they're
too hard to sell. The idea of Barterbee.com is to match buyers and sellers who swap
their goods for a fee of $1.
Goel, a onetime executive at Fingerhut, has invested in a dozen companies with
Internet links, and an eye for opportunities informed by carefully studying eBay.
"I have no doubt that, for CDs, DVDs and games, Barterbee will absolutely eat their
lunch."
MINNEAPOLIS, MINN. -- Forget miracle medicines, advanced aeronautics or
genetically modified crops. When it comes to business research, the biggest
laboratory in the world isn't at Pfizer, General Electric or Monsanto. It's online, at eBay.
com, where everyone from university scholars to conventional retailers are carefully
studying the auctions of baby pajamas, home board games and other items to better
understand consumer behavior.
What makes eBay so fascinating? In part, it's sheer size. In the first three months of
this year, the company had 75.4 million active users, up 25 percent from last year.
Some $12.5 billion changed hands through the site, a gain of 18 percent. This year,
eBay is poised to surpass $50 billion in sales.
Even more important, though, is transparency. Target, Best Buy, Wal-Mart and other
retailers guard the details of their pricing and transactions like state secrets. But
eBay, while protecting its users' personal privacy, sells facts about its auctions to
companies that use the information to try to make sense of consumer behavior and
tastes, marketing strategies and why one color iPod or a certain style of walking shoe
outsells its rivals.
"The sky is the limit for the applications of eBay's data," said Anthony Sukow, CEO of
Advanced Economic Research Systems Inc., a Canadian company based in
Vancouver.
Sukow's company is part of a cottage industry parsing all manner of information on
eBay transactions to academics, big-box retailers, online merchants and an array of
others interested in unlocking the secrets of the world's largest auction site.
While consultants are reluctant to share the names of their customers, they offer
many examples of how information from eBay has spurred business decisions at
other firms.
• A golf equipment chain gathered eBay prices on used golf gear to create a trade-in
program.
• A "big box" electronics retailer uses eBay statistics to manage inventories, ordering
fewer slow-selling MP3 players or past-their-peak video games after seeing how
many hundreds were being unloaded in eBay auctions.
• Even charities are using eBay data to estimate the market value of donated goods.
"We interact with hundreds and hundreds of clients who want to build businesses
based on eBay's data set," Sukow said.
Some academics are building careers using the same numbers, generating
research articles with arcane titles: "Consumer Surplus in Online Auctions,"Price
Formation and its Dynamics in Online Auctions,"Do Consumers Know Their
Willingness to Pay? Evidence from eBay Auctions."
Motivation testing ground
For economists, statisticians and psychologists, eBay is a testing ground for
examining all manner of questions about human motivation and behavior.
Do people always go for the lowest price they can find? No, more than half the time
they pay more.
"We find that buyers neglect cheaper prices once they have started bidding," Ulrike
Malmendier and Hanh Ahlee, two Stanford University researchers say in a recent
paper. In 51 percent of the auctions for Cashflow 101, a game that, paradoxically,
offers lessons in financial management, buyers paid more than the "Buy it Now" price.
Explanation: People often value "winning" more than snaring the lowest price.
"It's about the thrill of the hunt and immersing yourself in the experience," said Wendy
Liebmann, president of WSL Strategic Retail, a New York City consulting firm.
"Look at Apple, the iPod, Apple Stores or Starbucks," she said. "People are willing to
pay a premium where there's a sense of an emotional connection and club
atmosphere. The discount is not essential in a very discount-oriented world."
Abercrombie & Fitch has learned how to give customers a sense of belonging to a
club, even though all they have to do to join is walk into the store, said Stan Pohmer, a
retail consultant based in Minnetonka.
"It's the hip thing to do," Pohmer said of going to an Abercrombie. "If [young shoppers]
go into a Target, they look at the price tag. Price is the last thing they look at when they
go into an Abercrombie & Fitch."
Searching for perfect price
Researchers also believe eBay can teach them how better to determine the highest
price most people will pay for a product.
"An average price at Best Buy ... doesn't tell you what the consumer is willing to pay,"
Jank said. Watching eBay can answer that question, offering retailers the prospect of
squeezing out more profit when they set prices.
Love Goel, chairman and CEO of Growth Ventures Group, a Minneapolis-based retail
investment firm, tells the story of a friend who bought two "overstock" lamps for $50 at
a furniture store. When she got home, the woman decided the lamps weren't what
she wanted. But the retailer was a 40-minute drive -- each way -- from her Princeton,
N.J., home.
She posted the lamps on eBay and ended up selling them for more than twice what
she paid. That led her to call the retailer to ask whether the furniture chain had any
more of the lamps. She bought 10 more. All sold on eBay at a steep premium to the
store price.
"She cleaned out the retailer's East Coast inventory," Goel said. "The retailer should
have done the same, testing the price points."
For some retailers, eBay has become an early warning system that lowers the risks
in ordering inventories, said Dean Jutilla, an eBay spokesman. What's in fashion and
what's not can be easier to spot in thousands of auctions online than at a store that
sells less in a year than eBay sells in a week.
"Is pink selling better than blue or white?" Jutilla said. The answer might prompt
merchants to order more of one color than another in an effort to avoid stocks of
unsold purses or shoes, he said.
Leibmann at WSL Strategic Retail knows of retailers who look for a second life for
products in their stores based on sales patterns on eBay.
A shoe merchant might note eBay demand for a hard-to-get sneaker that most
retailers have forsaken as last year's fashion. "If you're a smart retailer, you say,
'Maybe we should find some to sell,' " Leibmann said.
What Bloomberg did for buyers and sellers of stocks and bonds -- offer up-to-the-
minute price and sales-volume information -- eBay is doing for savvy retailers, she
said.
"EBay has become a wonderful strategic information resource," she said. "You can
see where there are leftovers and see the things that go really fast."
EBay's flaws also can spell niche opportunities for rivals.
Goel's Growth Venture Group recently invested in Barterbee.com. That site seeks to
exploit a weakness in eBay -- the fuss of setting up a Web sales page and paying
listing fees, commission and shipping charges for CDs, DVDs and games that might
sell for less than the transaction costs.
By Goel's estimate, 90 percent of used media -- a mountain of CDs, DVDs and
games worth $50 billion -- sits idle on shelves in American homes because they're
too hard to sell. The idea of Barterbee.com is to match buyers and sellers who swap
their goods for a fee of $1.
Goel, a onetime executive at Fingerhut, has invested in a dozen companies with
Internet links, and an eye for opportunities informed by carefully studying eBay.
"I have no doubt that, for CDs, DVDs and games, Barterbee will absolutely eat their
lunch."
