By Peter Wolchak

IN THE OLD-WORLD ECONOMY, BUSINESS ACUMEN WAS OFTEN DEFINED BY THE MOTTO: “IF YOU BUILD A BETTER mousetrap, the world will beat a path to your door.” Fastforward to today and the expression is: “If you build a better ecommerce model….” And perhaps no one has proved this as convincingly as eBay.

The model is intriguingly simple: build a solid infrastructure to facilitate the online buying and selling of almost anything, invite people from all over the world to join this community, and then stay out of the way as much as possible.

To participate on eBay, an individual or business follows a fill-in-the-blanks process to post an item for sale. They must enter a description, as well as shipping and price information, before clicking the Submit button and making the item available for auction on a stage that spans the world. eBay’s interface is designed so that an Internet novice can get up and running in a short time.

eBay makes its money by collecting a posting fee and taking a small percentage of the final sale. And the numbers prove this model works.The online auction service just posted a Q4 profit of US$25.9 million and has been profitable every quarter since its launch in 1995. It boasts 42.4 million registered users; Jupiter Media Metrix recently named ebay.ca thenumber one shopping-related domain in Canada; globally eBay had more than US$9 billion in gross merchandise sales in 2001; and each day eBay hosts more than nine million auctions worldwide with one million new items posted every 24 hours, ranging from Aunt Ida’s tea cups to computer servers that sell for $400,000.

eBay generates these impressive numbers while sidestepping the two hurdles that bedevil almost all other e-commerce sites: inventory costs (because it only hosts auctions, eBayitself does not incur the costs of holding inventory) and shipping expenses.

None of these advantages have been lost on the individuals and businesses that sell on the site.

“I think eBay’s e-com model is outstanding,” said Paul Canham, program executive for worldwide auction sales at IBM in Markham, Ont., a company that started selling throughauctions at the end of 2000.

“eBay has no sales people, no warehouses, they have very few fixed costs and they are not caught with inventory that is depreciating. At the same time, they continue to grow everyquarter.They have an incredibly vibrant business with essentiallyno carrying costs—it is simply an outstanding financial model and it’s sustainable.”

The very big businesses

At press time, IBM had only 101 items listed on the main ebay.com site and 41 on ebay.ca, comprised mostly of laptop and desktop computers. Canham said IBM is still in “exploratory mode” for auction sales, but the fact the vendor is there at all is surprising. As one of the world’s largest companies, IBM sells its products through retail outlets, a large internal sales force, an army of resellers and on its own Web sites. It also operates 26 IBM Stores in Canada. So why would a company with this built-in reach need eBay?

It turns out eBay’s grasp exceeds even that of IBM. “Traffic and the customer base at eBay are tremendous. It’s an unbelievable buying community,” Canham said.

Perhaps more important than the raw number of potential buyers is the fact that 70 per cent of IBM’s eBay customers have never bought from the vendor before. “Finding new customers, especially in the individual consumer space and in the small- to medium-sized business space, is very challenging for large companies, including us. So [these customers] are a competitive advantage in terms of sales and this gives us new relationships we can leverage over time.”

Despite such impressive results, some within IBM are concerned that auction sales dilute the IBM brand. Canhamdoesn’t buy the argument. “When people actually look at eBay they tend to get a lot of respect for it. Also, when[buyers] see us on eBay, they sometimes have the reaction, ‘Wow, you’re a little more hip than we thought you were,’ and that’s nice for us to hear.”

In addition to selling in Canada and the U.S., IBM currently sells on eBay sites in Germany, the U.K., Japan,Australia and some South American countries. And Canham sees more growth in the future. “We’re going to bring more supply to bear [on eBay] and if demand meets it then our supply will go up.”

The very small businesses

On the other end of the corporate scale are the one- and two-person businesses that sell primarily, or exclusively, through eBay.

John and Sara Duncan are one such example. They owned a used goods store in Toronto and in 1999 they wanted to expand their business. They thought showcase retailing was the way to go. They would sell items for other dealers on consignment, and make more money than they could pull in with only their own stock.

But a look at the market uncovered a peculiar thing: other showcases in Toronto were going out of business. “In trying to find out why, we discovered it was [because of] eBay,” John said.

Collectors were increasingly shopping online and foot traffic in the stores was drying up. Rather than try to fightthe trend, the Duncans jumped on-board.“We thought,‘Why would we have a store that only a limited number of people can come to when we can have a store on eBay that’s open to the world, 24 hours a day?’”

In a little more than two years, the Duncans have made about 11,000 eBay sales, mostly comprised of books, but they will sell anything that’s small enough to ship easily. They operate the business out of their home, reaping the dual reward of tax savings and a 0 km daily commute, and pull inabout $12,000 a month in gross sales.

The only thing John misses about the days they spent at their physical location is regular contact with the people who would cruise the aisles. But as a business model, he has no doubt eBay beats traditional retailing hands down.

“Selling through auctions is exciting. Sometimes we get [a much better price] than we expected to, and that’s thegreat thing about eBay.We’re not experts in everything we sell, so if we put something up for $9.95 it may actually be worth $300. But the beauty of auctions is 99 per cent of the time you’ll get the fair market value for the item.”

“If you put that item in a physical store with $9.95 on it, some dealer is going to walk in, see it and scoop it up. It’s not like you’ve got two people in the store at the same timesaying ‘I’ll pay $11’ and ‘I’ll pay $12.’”

Jane Pearson never operated a physical store, but when she decided to start selling collectibles full-time, she didcheck out rental prices in her hometown of Trenton, Ont.

“I really wanted an antique shop with a computer set up in it. I would still sell on eBay but also sell items to people walking in off the street.”

However, Pearson estimated the overhead costs would be at least $1,000 per month. Online, her eBay store costs $14.95 per month, and she gets tax benefits for operating a home-based business.

And her business is doing well. From a dead start in June 2001 she now sells about 60 items a month and the sales are always growing.

Selling online doesn’t really have a downside, Pearson said, not even the isolation her more traditional contemporaries imagine she suffers. “A lot of people have asked me if I find it lonely being in my office all day and not really talking to anyone. But I have met a lot of nice people on eBay and we tend to e-mail back and forth—how are you, Merry Christmas, that kind of thing. This was especially true after Sept. 11. I had quite a few conversations about that—people trying to support each other through e-mail.”

Over in Collingwood, Ont., Sharon Allan doesn’t feel lonely either. Her online business—selling “anything youcan’t go out and buy on a shelf today”—keeps her busy travelling to auctions and local sales in search of merchandise. A good month for her nets about $1,200.

She also points to eBay’s huge community of buyers as her business edge. An item sitting on a shelf in Collingwood may not attract any local buyers, but “on eBay I access 40 million people and one of them might just be looking for this item.” The buyers Many of those who buy through eBay are collectors, looking for that last piece to complete a set. For example, run a search for “Star Trek” at ebay.ca and 11,000 listings comeback. “Royal Doulton” will net more than 3,000 items and “DVD” a whopping 41,000 open auctions.

Morgannis Graham had never made an eBay purchase until June 2000. She was about to get married and was starting to panic because she couldn’t find a wedding dress she liked. “I was about to quit and just wear a plain blacksuit, which would have been awful.”

Almost as a joke she checked out eBay. Although she hated most of the dresses she saw, one seemed perfect. Shepurchased it and then checked her mailbox every day for two weeks until the dress arrived.

When it did, she discovered it was beautiful and fit perfectly. The wedding went ahead and the experience“hooked me on eBay.”

She now uses the site for anything that’s hard to find in the local mall: tabi socks for her husband’s martial arts courses, a rare set of books forher brother, wartime ads featuring Scottish terriers for her mother. “eBay is a huge database ofstuff you can’t find anywhere else.”

The money

Graham paid for her dress by mailing a money order to the seller in the U.S. That process took time—a scarce commodity for her in those pre-ceremony days—and there’s always the chance an envelope could get lost. Plus, it’s simply a hassle to go to the bank for a money order and to the post office to mail it.

When Graham buys something oneBay now, she pays online, either through Billpoint or Paypal. These U.S.-based services charge the buyer’s credit card and transfer the money directly to the seller’s bank account. A fee is charged at both ends of the transaction but the convenience keeps Graham and many others coming back.

A third service, Bidpay, mails a moneyorder to the seller and charges the buyer the auction total plus a US$5 fee.With each service, neither the seller nor buyer has access to the financial information of the other party.

Duncan, the Toronto bookseller, has seen the use of online payments increase in the last six months, a trend he applauds. He used to go to the bank every day to deposit thecheques and money orders that arrived by mail—now he makes the trek only twice a week.

“Online payments are secure and I have not had one problem with Paypal, Billpoint or Bidpay,” he said.

The advice

If all this sounds attractive, experienced eBayers are quick to warn that an online business is still a business, and it can fail.

“As much fun as eBay is, we can’t guarantee that if you jump in you’ll be successful,” said Jim Griffith, eBay’s manager of customer support. “The easiest way to get started is to emulate the successful sellers, and then do it better than they are.”

It’s also important to understand that buyers make purchasing decisions based on the way an item is presented online, so it helps to learn to use a camera effectively and write descriptions carefully.

“I take a lot of time describing my items, because that reflects on me as a seller. The more information you givecustomers the more likely they are to make a purchase,” Pearson said. “I’ve put things on [and they haven’t sold] and then I’ve changed the wording and gotten bids right away.

You learn which words tend to draw people’s attention, which is important because they’re not actually seeing thething they’re buying.”

The other element of success, according to Allan, is to learn about your merchandise. “Royal Doulton,” she offered as an example. “I knew nothing about that, but after I finished listing some I knew about the marks on the back, what to look for, that some has been discontinued and a whole lot of other stuff.”

Despite the cold, hard business reality of eBay, there is an element of fun to it all—the thrill of the chase, of finding that one item you really want out of the nine million onoffer. Buyers tend to get addicted and sellers enjoy the buzz of watching bids mount as shoppers fight it out online.

And back to the community: 42 million is a huge number, but experienced users often point to a certain groupdynamic as a fundamental element of the eBay experience.

“eBay is a lifestyle,” Duncan said. “You get a feeling of being part of this community.This Internet business is really just a group of people who enjoy the same thing.”

Web auctioneers

To buy or sell on eBay, participants must select a user ID. It may be a formal business name, e-mail address orhumourous nickname. To check out the sellers in this story, go to http://www.ebay.ca, click on Search and then on the By Seller tab. Enter the following for each seller:

Sharon Allan sharon.allan@sympatico.ca
John Duncan scareyoldguy
Jane Pearson antique-mystery-solver
The IBM Canada store is at http://www.ebaystores.ca/ibmcanada