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What's your business model?

110799

How does eBay make money?

A large part of its revenue comes from transaction fees on PayPal

Innovation series by Steven Loeb
January 18, 2014
Short URL: http://vator.tv/n/346a

We talk a lot about innovation in the tech world, about new ideas and boundary pushing technology. But, sometimes, the best ideas are just updated versions of the same ones that have been around for as long as we can remember.

Take, for example, eBay. The idea is incredibly simple: it's a place for people to resell the stuff they stuff they don't want anymore. When you boil it down, the service is just one big, digital, garage sale.

And yet the company brought in $14.1 billion for the full year 2012, and it currently has a market cap of $69.37 billion.

Analysts estimate that eBay will grow annual revenue to $16.1 billion this year, which means that the company is currently trading at a revenue multiple of 4.3.

So how does eBay make all of this money, exactly?

PayPal

Over a third of eBay's revenue comes from fees generated by PayPal. In the third quarter of last year, eBay reported $3.9 billion in revenue. $1.6 billion, or 41%, of that came from PayPal.

The money that eBay makes through PayPal comes through transaction fees from sellers and people who use it to transer money. Here is how those fees break down.

  • Sellers: For the most part, PayPal takes a 2.9% transaction fee on the total sale amount, plus a $0.30 fee per transaction. Fees can go as low as 2.2% for discounted rates, or as high as 3.9% on international sales. When using a PayPal Here card, the company takes 2.7% for every swipe, or 3.5%, plus $0.15, for every time a card number is typed in.
  • Transfer fees: while sending money inside the United States is free from a person's PayPal balance or bank account, there is a fee of 2.9%, plus $0.30, per transaction for sending from a debit or credit card. When sending money outside of the United States, the fees range from 0.5% to 2%, depending on the destination, when they are funded with a bank account or PayPal balance. There is a 3.4% to 3.9% fee for users who pay with a credit or debit card.

Considering that eBay purchased PayPal for the price of $1.5 billion, and it made more than in just the last quarter alone, it's looking like a pretty wise acquisition right about now. 

Marketplaces

The second biggest moneymaker for eBay is its marketplaces, or where people like you and I go to buy things. And, like it does with PayPal, eBay makes its money from the section on transaction fees, which apply to sellers.

The company lets users list their first 50 items every month for free. Beyond that, eBay charges a set amount, depending on what the item is. For fixed price Books, DVDs & Movies, Music, and Video Games listings, it is 5 cents. For auction-style and fixed price listings in all other categories, it is 30 cents.

In addition, eBay takes 10% of the total amount of the sale for every listing, though its maximum fee is $250.

Users also have the option to pay more for certain services. For example, they can spend an extra 35 cents for larger pictures on auction-style listings or 50 cents to put extra descriptive information. Prices for these fees depend on the style of listing (either auction or price fixed) and the duration of the listing (from three days to a month).

Now, these fees may seem fairly insignificant, but eBay had 124 million active marketplace users in the third quarter, and all of this added up to give the company a total of $2 billion, or 51% of revenue.

Enterprise

The final revenue stream was eBay Enterprise, which is eBay's company that specializes in helping brick and mortar retailers create online shopping sites for their brands

It also provides its clients with services that include help with marketing solutions, as well as consumer engagement, customer care, payment processing, fulfillment, fraud detection, and technology integration services. 

This sector brought in $238 million, or 6% of eBay's total revenue.

(Image source: http://www.sellerexpress.com)


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