Amazon and eBay: E-Business Models, Strategies, and Competition

This paper will explore the e-business models and strategies of Amazon.com and eBay. Then their revenue models and financial performance will also be analyzed. Lastly, the paper provides recommendations to the management of eBay on other strategies it may pursue.

Businesses of Amazon and eBay

The dot-com companies have evolved since the Internet came into existence. These companies have developed their own strategies and business models, which have been implemented in different ways.

Business of Amazon.com

Amazon.com is mainly an e-tailer, and it is also a virtual marketplace. It offers a large variety of products to its customers to purchase online and claims to have the lowest prices. Other sellers can also sell through Amazon.com, and the company charges these sellers transaction fees and setup charges. New, used, renewed items such as books, DVDs, footwear, accessories, necklaces, and electronics are available on Amazon. Although it is a retailing merchant, no physical retail stores exist; it works only on the web (Rappa, 2008).

Business of eBay

eBay is an online platform for buyers and sellers; these are the buyers who are looking for some items, and sellers are looking for these buyers. The website performs auctions for sellers; therefore, eBay acts as an auction broker (Rappa, 2008). It charges the sellers for their listings and also charges commission which is in proportion to the transaction value. Items offered by businesses and individuals on eBay can be very diverse, from motor cars to a used pen (Ebay, 2008).

Amazon and eBay are direct competitors in the business of auction brokerage and e-tailing. The core business of eBay is auction brokerage, but Amazon.com was only an online retailer and entered the brokerage industry afterward. Recently eBay has entered the e-tailing business through the new site Half.com (Whitman, 2001). The biggest rivalry in the brokerage industry has been labeled by eBay and its simple website auctions. Thus it does not allow competition to enter the market easily. eBay always maintained its listing price, cost of shipping, and sales fees even when Amazon.com came into the business with free auctions. Therefore, rivalry in the form of price competition is not present much in the industry. Instead, companies find other ways to attract new customers and retain the existing ones (Porter, 2001).

E-business and Revenue Models

Amazon.com and eBay come under the level three e-business models (Featherstone & Ellis, 2005). E-business models that Amazon.com follows are the Merchant model, Affiliate model, and Brokerage model, whereas eBay’s e-business models are the Brokerage model and Merchant model (Rappa, 2008). Although Amazon.com and eBay now follow quite similar e-business models, but their fees structure and list prices differ.

Revenue Models

EBay’s revenues come from charging the seller’s fee for listing the items and charging sales commission associated with the auction of the items sold. eBay does not absorb the shipping cost as the customer has to pay it (Porter, 2001).

Amazon’s revenues mainly come from e-tailing, and it charges the online merchants for monthly listing and transaction fees (Rappa, 2008). It offers low cost or free shipping to its customers. Amazon also uses affiliate models through which it has links on other affiliated websites from which the customers can make purchases. Through this also revenue is generated and shared with the affiliate sites (Rappa, 2008).

E-Business Strategy

eBay has a system where buyers and sellers can purchase and sell items of any category. eBay has positioned itself as the first company to sell products through online auction although other companies have also entered into the business. Customers who are looking for second hand, used, unique items are their customers. Starting from a small variety of items of collectibles and unique characteristics, eBay now offers a wide variety of items for auction. Amazon.com and Yahoo! Have also entered the online auction business, but they are not as successful as eBay. eBay has been able to lead the industry because of its competitive edge in the industry. eBay was the first to put the idea of online auction to business and hence through addressing its customers as “community” (Rappa, 2008), easy to use website and through heavy advertising, they have been able to retain millions of loyal customers. eBay has plans to grow further in 2-3 years; it has already bought Half.com for e-tailing business. It is now an outsized company so it can leverage its fixed cost over new businesses (Whitman, 2001); therefore, I believe that eBay will maintain its competitive advantage over its competitors.

Amazon.com promises a smooth sales process, low cost and speed and reliability of its online orders. Through the years it has developed its core competency in order fulfillment and sales activities (Amit and Zott, 2001). Amazon has also taken control over its suppliers and distribution network, thus setting up barriers for new entrants in the e-tailing business and lowering its costs. I believe that Amazon.com will also sustain its competitive advantage in the e-tailing business.

Financial Performance

Over the last three years, Amazon’s revenues and profits are increasing at about 30% per year; therefore, the financial performance of Amazon.com has been attractive. Amazon’s e-business strategy and superior financial performance do show a correlation between each other. Their strategy of affiliation with other websites has provided the customers with more purchase opportunities and has attracted more customers, thereby augmenting the company’s revenues and rising profits. Hence the progressing financial performance is surely related to its e-business strategy.

EBay’s revenues and profits are rising at a rate of about 18% per year for the last 2-3 years. Although the e-business strategy of eBay is better and more complex, but its revenue and profit growth is lower than that of Amazon.com. This shows that a positive correlation between eBay’s financial performance and e-business strategy is present but is weaker than that of Amazon. eBay has also entered the e-tailing business, and this might be the strategy which is increasing the profits. The financial performance does not show a strong correlation with the e-business strategy because the strategy eBay is following, it should make eBay’s revenues boost but it is not.

Recommendations

eBay is an internet “pure-play” (Rappa, 2008); it only operates on the web, without any sales force, warehouse and customer services. Therefore I recommend the management of eBay to combine traditional competitive advantages with their e-business strategies (Porter, 2001). eBay is not considering the fact that personal relationships of the staff with the customers can bring about a large rise in sales and hence the revenue too will increase. Customer service, physical distribution and sales force for the company also provides valuable services to the customers, this helps in retaining the customers, making them loyal, up-selling and also cross-selling. EBay’s revenues and profits could increase three to four folds if these strategies are also pursued in combination to their e-business model. eBay can attract and gain more customers if it gives them more value instead of just products or items on its auctions listings. It should let customers create their own profiles and should do customer segmenting according to their profiles. It should also recommend each person items that he is most likely to buy through analyzing the previous purchases. eBay should pamper its best customers, and should not waste time on the customers who are hindering the company’s growth.

Conclusion

The e-businesses who have developed their own distinct strategies are the ones still dominating the market and making millions of dollars every day. Rather than imitating the existing companies’ strategies and e-business models, these companies have developed their own models. The businesses that have given birth to their models, they have an edge over their competitors even though there are fewer barriers to entry in dot-com businesses. Correctly defined and established model always helps the company to perform well financially. Strategies and business models should be revised, and their performance should be evaluated if the company wants to stay in the business. Combining different strategies work for some companies, but some companies move away from their core competencies.

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