Meg Whitman: The $40 billion eBay sales story

Two things in this world are true:

People want what they don’t have.

People have what they don’t want.

Well, actually, there’s a third thing. If you can find a way to connect those who have with those who want, you can get very rich in the process. Welcome to the world of eBay.

A combination of e for electronics and Bay for San Francisco Bay, eBay came into this world with an unlikely mission. The founder of eBay, a fellow named Pierre Omidyar, wanted to help his girlfriend locate those kitschy items known as Pez dispensers to add to her collection. So he created a trading site. The site lumbered along unnoticed until 1998 when Meg Whitman came on board as president and CEO. Suddenly, sales were rolling out faster than candy from Snoopy’s mouth, and by 2004, eBay had taken fifth place on Fortune magazine’s list of The 100 Fastest Growing Companies, up from eighth in 2003, due to an astounding 47 percent growth increase. The company is predicted to do $4 billion in sales in 2005 – most of it profit from the fees eBay collects on the $40 billion in merchandise bought and sold in a single year.

In 10 years, eBay has become its own industry, creating thousands of entrepreneurs along the way. That $40 billion wasn’t taken from an existing market – it represents sales that didn’t exist at all until eBay created the format for them. Whether you consider it a global marketplace or merely the world’s largest yard sale, the numbers can’t be disputed – with $950 in deals made every second. (In the time it’s taken you to read this far, eBay has moved $18,050 in merchandise.)

It’s So Simple
What’s in it for eBay buyers? Simplicity, for a start. The people who write income tax forms could learn a lot from eBay’s color-coded three-step method to 1) find, 2) buy and 3) pay.

To determine just how easy it is I solicited my Aunt Sylvia to help. My aunt is bright and vivacious, but she is not, by any stretch of the imagination, computer literate. A child of the depression, she refuses to own a microwave or DVD on the basis that they’re fads and is inherently suspicious of any transaction that requires her to put a credit-card number on the Internet.

But Aunt Sylvia has a problem. She collects Fiestaware, a type of brightly colored dishes – popular in the 1930s – which have risen in status as collectibles. I’ll spare you the details of exactly why Aunt Sylvia lacks a full set, but suffice it to say the saga involves divorce, death, remarriage to women of questionable repute, cross-country rides in a Packard and a flood. The bottom line is, Aunt Sylvia is searching for specific pieces of Fiestaware to complete her collection. Could eBay help her? I sat her at the computer and went out to walk the dog. When I returned eight minutes later, she was giddy with triumph. After years of scouring yard sales and auction houses for a certain teal serving dish, she’d located one and placed her bid before I was halfway around the block.

A lot of scrambling went into creating this user-friendly, so-advanced-it’s-simple format. It’s one thing to bring buyers and sellers together but far trickier to bring their money together. eBay never hesitated, however, to pour time and funding into Web design and transaction support.

Three years ago, at the insistence of Whitman and over objections from most of her board, eBay bought PayPal for a sobering $1.5 billion. eBay had created Billpoint, its own payment-processing service, but customers didn’t like it as well as PayPal. Whitman knew the potentially complex task of getting money from buyer to seller would only work if the customers were comfortable with the mechanics of the transfer, so she scrapped Billpoint for PayPal. For many reasons, profits nearly tripled between 2001 and 2002, but Whitman’s quick response to customer demand is high among them. “This company was built by its users,” is one of her catchphrases – a sentiment that’s easy to say but harder to mean when it costs $1.5 billion to listen to them.

If you keep the buyers happy, their tribe increases, and eBay offers individual sellers and small businesses a bigger consumer market than they could ever hope to get on their own. The idea of a storefront at the mall seems positively quaint when the Internet can expose your products to 125 million registered users at a cost of pennies a day. eBay supports sellers through the steps of listing an item, collecting payment and shipping. Between the site and magazines designed to help sellers, eBay offers tips on how to take a compelling picture of the item you’re selling, as well as how to jazz up the look of your page, deal with deadbeats who bid but don’t pay, do postal tracking and find the best day to start and stop your auctions. They’ll even tell you how to clean out your garage and look for sellable stuff.

Rock Star
Fifty-year-old Whitman tops every survey of powerful corporate women. In 2004 and 2005, Time magazine listed her as one of the 100 most influential people. The youngest of three children, Whitman grew up on Long Island and attended Princeton, then the Harvard Business School. Her resume reads as a salute to American industry – Proctor and Gamble, Disney, Stride Rite, and Hasbro, where she – thus creating the fodder for endless jokes – marketed the Mr. Potato Head line. Whitman is married to neurosurgeon Griff Harsh, and they have two teenage sons.

How did this quintessentially American girl become the stuff e-commerce dreams are made of? eBay had only 30 employees when Whitman arrived in 1998 and what she describes as “teeny profits.” As a fee-based company, however, it had the potential to rake in cash from day one, so Whitman found a wealth of investors when she took eBay public. (Anyone who bought a share at $0.75 (split adjusted price) on the first day eBay traded will, as of Nov. 1, 2005, find that share worth $40.20.)

Whitman is a rock star to the 10,000 eBay users who appear each year at the sales meeting/lovefest/town forum known as eBay Live! At the last eBay Live! – held June 25 in San Jose, California – Whitman was greeted by a frenzy of users who chanted her name. They lined up for hours to shake her hand, and she worked the crowd as a pro, repeatedly asking each new admirer, “Where are you from? What do you sell?” while gospel choirs sang, and fans held up signs that read “eBay Love.”

Whitman has told Smart Money magazine that eBay is a “partnership where we are building something together,” and she frequently uses the word community in place of business. The theme for the 2005 conference was “The Power of All of Us.” It sounds hokey – and it is hokey – but it’s also the way she operates. Her style is notably sympathetic and nonthreatening, acting more like a mom than a captain of industry, and there are numerous stories of her willingness to share the power behind the scenes. Her pleasantness is key to her success, because one of the reasons she has been able to help eBay grow so fast is that she’s adept at straddling two worlds. On one hand, she has expanded the company globally and brought in major retailers as partners. On the other hand, she keeps eBay relevant to the Aunt Sylvias of the world.

For all the talk of a democratic community, eBay sellers fall into three tiers. The first tier consists of the mom-and-pop operations that in essence run online yard sales. Just above this group are the 10,000 PowerSellers. Although named by eBay as their most profitable sellers, entry into the PowerSeller circle is relatively easy. You can become a Bronze member with as little as $1,000 in sales for three months in a row, assuming that you’ve also gotten positive feedback from your customers through eBay’s rating system.

George Borowski, who’s been with eBay eight years, is a typical PowerSeller. Like many eBay entrepreneurs, he originally came on as a buyer. “After buying a few things, I thought, ‘I can do this and probably do it better,’” says Borowski, whose site specializes in such game room supplies as popcorn machines, jukeboxes and home bars.

While there are some rather fuzzy benefits, such as priority customer support, the main benefit of being a PowerSeller is the right to display the logo on your Web page, a symbol Borowski compares with a virtual handshake. “You have to remember you’re doing business with people who have never met you,” he says. “And customers have to pay before they get or even see the item they’ve bid on. That takes trust. I wanted to achieve PowerSeller status not because it has any real spectacular benefit attached to it, but because it’s the symbol of someone who has been on eBay for a while, someone who is experienced, knowledgeable and who does this as a business and not a hobby.”

Almost a half-million people make a full-time living off eBay, and these entrepreneurs are divided equally between men and women. Getting on might be a piece of cake, but once you make eBay your whole career, the sophistication of the system kicks in. eBay is right there, telling you how to collect foreign payments if you sell internationally, how to sell your home on eBay Real Estate and how to handle the logistics of multiple auctions. The most successful of the PowerSellers might run as many as 5,000 auctions in a typical week.

Even that isn’t enough to make them the top tier. Several years ago, eBay began attracting auction houses that found the Internet an easy place to move their wares. Close on their heels came the retailers looking to dump excess inventory. Gradually, the market shifted from collectibles and one-of-a-kind antiques to practical or everyday items you might buy in Target. Smaller stores that have street-front addresses began to sell online to expand their customer base, and many of them did not use the standard eBay auction format but instead offered items for sale at a fixed price.

Enter the eBay Stores – with their buy-it-now items. “Not every customer wants to go the route of the traditional seven-day eBay auction,” says Borowski. “Some buyers want to know what their final price is and close out the sale at once. Plus, if you keep more than 20 items up for sale at any given time, the fee structure works out better if you have a store.” Borowski estimates that about 60 percent of his sales come from auctions and about 40 percent from his eBay Store, which is called Cost-Busters.

Always quick to react if not to instigate, Whitman used her keynote address at the 2005 eBay Live! to announce the launch of ProStores, a Web hosting and e-commerce solution. The new product is clearly geared toward eBay Store owners, who get a 30 percent discount. eBay offers four kinds of e-commerce packages, ranging in cost from $7 to $250 a month, with technology that enables merchants to set up a storefront, shopping carts and payment compatibility with processing companies and shippers.

eBay doesn’t play favorites, at least not in the sense of offering discounted fees to PowerSellers, eBay Stores or even large independent retailers. Much of eBay’s growth in the past three years has been the result of such retailers as Sears, IBM and Dell, who use the site to sell excess inventory, and Whitman has undoubtedly been pressured to cut some deals. In terms of fees, however, she insists on a level playing field.

This doesn’t mean everybody’s happy all the time. Pep rally frenzies aside, eBay users love to bitch about eBay, and the chat rooms are full of complaints. The main beef, not surprisingly, is that fees are too high. (eBay sellers post a small fee when they list an item and a larger fee, beginning at 5.25 percent of the purchase price, when and if they sell that item.) Lately, users have begun to claim that the big guys are getting marketing breaks, such as pop-up ads directing buyers to their sites. The major retailers are also known for abruptly slashing their prices, fire-sale style, and thus undercutting individual sellers.

Whether or not eBay Stores have the power to engulf the small private sellers remains to be seen. Whitman told Michael Grebb of Wired News that she sees the consumer-based aspect of the site and the small-business aspect of the site “coexisting. eBay is an evolution, and the thing you have to know is that we do not sit in a conference room and say, ‘How about we go after small business?’ The entrepreneurs evolve this marketplace to take the best and optimal use of the platform.” eBay may not have intended to go after the small-business market, but they definitely don’t intend to ignore the potential there, and it falls to Whitman to simultaneously court the big guys and reassure the small fry. At eBay Live! when she introduced ProStores, Whitman said, “The eBay marketplace remains the focus of our community, but more opportunities benefit everyone. Our fundamental mission is to make you more successful.”

Besides, even if there’s moaning and groaning in the chat rooms, very few of the disgruntled actually leave the company. People complain about eBay the same way they complain about their mothers – she irritates you to death, but what can you do? Whitman has a point when she claims that even the smallest ships can rise with the ever-mounting eBay tide. No other online auction site has this many sellers…and of course, the sellers draw the buyers…whose presence brings in so many more sellers and then more buyers. It all adds up to so much cash. It all adds up to so much muscle. That’s eBay love.

Measure Everything
As a manager, Whitman is known for two somewhat paradoxical approaches: on one hand, she employs a hands-off philosophy, often saying, “We have to enable the community, but we can’t direct them.” Whitman told Smart Money magazine that “we partner with our customers and let them take the company where they think it’s best utilized.” She went on to point out that while used cars are now the largest category on eBay in terms of gross merchandise sales, it’s not a market eBay consciously pursued. They simply noticed that, all of a sudden, eBay users were listing their Volvos online. The users “understood there was inefficiency in the used-car market,” she says. “You didn’t know what was available. You didn’t know what your vehicle was worth or what you should pay.” Because you never know what’s going to sell until somebody in Omaha decides to list it, eBay is in many ways one giant R&D lab. eBay doesn’t have to guess what its customers want; they vote over a million times daily, with every click of their mouse.

Just because the company doesn’t direct the market doesn’t mean they don’t analyze it. Here’s the paradox. One of Whitman’s catchphrases is, “We enable but we don’t direct,” and the other is, “Measure everything you can measure.”

Whitman is known as a straight shooter who rarely promises things she can’t deliver. In 2000, she predicted eBay would top $3 billion in revenues by 2005, a figure that sounded outlandish for a company that was then bringing in $431 million. Some industry analysts thought she was just blowing smoke, because during 2000, she was also shopping eBay to AOL and Yahoo. As it turns out, neither deal came through, and eBay made it to $3 billion a year ahead of Whitman’s predicted schedule. Through the years, as many as eight large online companies have tried to grab eBay’s market but ultimately abandoned the fight, leaving eBay the dominant online site in the world and AOL and Yahoo gnashing their teeth.

The Internet world isn’t exactly known for stability or reliability, so how has Whitman managed to deliver so consistently on her promises? Despite the fact that Whitman works in an open cubicle, shares the power, wears khakis and embraces all the other clichés of a dot-com powerhouse, she is also known for being businesslike and running the company as a grownup. The corporate structure looks much like the eBay Website, with category managers over large product divisions such as toys, cars and jewelry. The hodgepodge category of collectibles is the largest and the most eclectic, but the used-car division moves the most cash and is solidly in second place. It is the category manager’s task to know everything about his or her product area, a relatively easy task, since all transactions take place on a computer. What’s selling, where is it selling and why? Which days are the busiest, how long do users stay online at a time, how does the weather in Chicago affect sales?

Whitman has described the company as “metrics driven,” and two-thirds of eBay employees are in either customer support or technology. Measurement is not just an academic attempt to explain what’s happened in the past, it’s also a way of predicting what categories will be hot in the future. Category managers analyze how they can draw in more buyers and what gaps, if any, exist in their available products, so that they can lure those sellers to the site. In an industry that is known for moving so quickly that fortunes can dissipate overnight leaving shell-shocked employees and investors to ask, “What happened?” Whitman has honed the skill of predicting where the market is heading.

You’re Selling What?
Despite Whitman’s vigilance, even eBay has potential problems. First of all, as anyone who’s ever entered the quagmire of online dating knows, the Internet offers lots of opportunity for fraud. Just as the 6’4” doctor who likes boating and fine wines is really a 5’6” busboy sleeping on his mother’s couch, so can that well-priced Lladro figurine turn out to be a fake.

The process is based on mutual trust: sellers post a picture and buyers must believe people have what they say they have and that it is what they say it is. eBay claims only 0.01 percent of transactions are reported as fraudulent, and that their feedback rating system helps to weed out the liars and fakes. More than 1,000 of the 9,000 eBay employees work in the trust and safety area.

Considering the number of items that pass through eBay on any given day, it’s like trying to patrol a border with innumerable points of entry. One man, now in a North Carolina jail, simply posted fake auctions, loading in pictures of cameras and computers he did not own and stealing $120,000 from buyers in the process.

A free market always leads to unpredictable events and stunning lapses in judgment. One woman tried to auction her virginity on eBay. People have sold a ghost, snow, bottles full of air and a grilled-cheese sandwich that allegedly resembled the Virgin Mary. Even the hands-off Whitman has been forced into the fray at times and has banned alcohol, tobacco, firearms, Nazi memorabilia and evidence from crime sites.

Then there’s the question of the stock price. After years of record-smashing growth, Wall Street spanked eBay in 2005, sending its shares down 37 percent. Analysts point out that with Amazon.com and Overstock.com on the playing field, eBay suddenly has a couple of strong competitors, and thus profit growth has leveled off. Of course, with eBay, leveled off is a relative term – even conservative stock analysts project an annual 25 percent increase in earnings per share.

eBay around the World
So what does the future hold for eBay? Whitman vows to keep growth strong with a three-pronged approach. The first is exploiting the profit potential of PayPal, by selling the electronic-payment technology to other Internet marketers. (In this move, Whitman is using the same strategy of a successful eBay merchant, i.e., buying something from one person and selling it a higher price to another.) The second is continuing to woo those major retailers, such as Sears, who have had such a strong impact on the company’s recent bottom line.

The third prong of Whitman’s attack, and the one with the biggest risk/reward ratio, is aggressive expansion into overseas markets. Whitman has urged eBay to go global ever since she got on board. They moved first into Europe and Australia, which were relatively easy markets to crack in the sense that they worked much like the American markets, and a large percentage of people owned computers. Germany is at present the largest eBay franchise per capita in the world.

Japan was another story. eBay launched there five months after Yahoo, lost a lot of money trying to grab market share and ultimately got out. The company learned a painfully simple lesson – i.e., there’s such a limited window of opportunity in online selling, a five-month head start can allow a competitor to amass an insurmountable lead.

Whitman has vowed not to make the same mistake in India, where eBay is investing heavily, or in China, which she is even more determined to dominate. (With uncharacteristic machismo she calls this massive investment “buying China” – and when Whitman buys China, she ain’t talking Fiestaware.)

Whitman’s mother toured China in 1972 when it was still largely unknown and untraveled and immediately saw the potential in this sleeping giant. Thirty years later she urged her daughter to take eBay into China before Europe – advice Meg passed on at the time but has since taken to heart. China has 100 million people online. Only the US population surfs the Web more vigorously, and Whitman predicts that in 10 years China will be eBay’s largest market.

Whitman seems far too young to quit, but with a billion dollars in eBay stock and a Colorado horse ranch, what’s to keep Whitman from simply galloping off into the sunset? By her own admission, she hasn’t done much mentoring, and there’s no heir apparent waiting in the wings – but maybe that’s not necessary. As a smart-aleck young employee once told her, eBay’s formula for success is so simple that “a monkey can drive this train.”

Far from being offended, Whitman was amused and often quotes the line herself. The implication isn’t that she’s unnecessary, but that eBay is unstoppable. They have indeed created a machine so self-analytical, self-monitoring and self-explanatory that management is freed from the tedium of day-to-day operations and free to contemplate such big-world questions as, should we buy China? But let’s not kid ourselves. Whitman has worked miracles keeping this train on the track, especially when it comes to making a global market accessible to the masses. eBay rules the planet not because a monkey could run it but because a monkey could order off it.
No offense, Aunt Sylvia.

WHITMAN’S SAMPLER
Even if you don’t have 125 million customers, Meg Whitman’s commonsensical approach can help you increase your sales.
• Make it easy for them to pay, pal. eBay has worked to streamline every aspect of the sales transaction, creating a system that’s fast and painless for the buyer.
• If it moves, measure it. Do you know where the bulk of your sales come from, i.e., which accounts, products and regions offer you the biggest return on invested time? It’s often more profitable to exploit your strengths than to correct your weaknesses.
• Don’t tell people what they want to buy. But when they tell you what they want to buy, listen.
• When you’re expanding into a new market, continue to pay attention to your old accounts. Growth is great, but don’t forget those customers who have been your bread and butter.
• Get in first, get in fast or don’t get in at all. When it comes to timing, it’s better to introduce a new product a little too early rather than a little too late. Once your competition has amassed market share, you’re toast.