How eBay Makes Money: Seller Transactions and Marketing Services

In the mid-1990s, eBay Inc. (EBAY) began as a way for otherwise unconnected buyers and sellers to meet through the previously unknown method of typing in a URL. According to folklore, founder Pierre Omidyar created the site to help his girlfriend deal in Pez candy dispensers.

The company now officially debunks the legend, which was created to add public relations color to this unfamiliar, revolutionary new way of buying and selling. Today, eBay generates revenue through transactions across its platform and marketing services, including classifieds and advertisements.

Like most of its dotcom boom brethren, particularly the successful ones still doing business today, eBay grew both organically and through acquisitions. eBay’s most noteworthy acquisition was that of PayPal (PYPL) in 2002, which it purchased for $1.5 billion and spun off into its own company in 2015.

According to its 2021 annual report, eBay had 147 million active buyers with more than 1.5 billion live listings on its platform. Gross Merchandise Volume (GMV), accounting for the total value of all completed transactions across the primary Marketplace platform, was $87 billion. This generated net revenues of $10.4 billion, up from $8.8 billion in 2020.

As of Jan. 8, 2023, eBay has a market capitalization of just over $24.6 billion (548 million shares outstanding at a market value of $44.95).

eBay's Business Model

To many, eBay is an idea that came along at the perfect time—the moment that technology had advanced to the point that the ultimate worldwide marketplace became feasible, ushering in an era when spending money on bricks, mortar, or storefronts became more or less optional.

Not that eBay doesn’t have huge capital expenditures, mind you. The company operates dozens of sites, including the eBay brand, localized for different markets from Sweden to Poland to Hong Kong.

Even 20 years after its founding, just the description of eBay is elegant in its pithiness: a marketplace for just about anything, with no cost for buyers. Indeed, individuals can set up eBay accounts in just a few minutes. Once activated, an account allows users to buy, sell, communicate with other eBay account holders, and leave feedback after completing transactions.

Items can be listed for sale in various ways, with two of the most common being an auction-style method—in which interested buyers can bid increasing amounts on the item—and a straightforward purchase method, where buyers can pay a set price to bypass the auction setup. In addition, frequent sellers can set up an eBay Store to consolidate their transactions and gain additional benefits.

Notably, eBay divides its revenue into net transaction revenues and marketing services, and other (MS&O) revenues.

eBay's Transaction Business

Individuals wishing to sell items through eBay's platform benefit from the company's massive user base, with listed items potentially reaching tens of millions of possible customers. However, because of eBay's near-monopoly on the consumer-to-consumer ecommerce marketplace, that access does come with a cost: listing or transaction fees. The company charges sellers fees to list an item for purchase or transaction costs based on the final value of the item at the successful completion of an auction.

However, not all of eBay’s money comes from listing fees. In 2021, eBay earned $648 million in advertising revenue.

Future Plans

In its 2018 annual report, eBay stated that one of its primary focuses going forward was on developing the user experience on its platform. In 2021, the company completed a significant part of this project by simplifying payments across all markets, making its user experience much more streamlined.

Though eBay already has a sizable customer base, it aims to continue expanding into the future, particularly by integrating technology to enhance user experiences. In addition, it is continuously adding new features, such as its authentication and refurbished item services.

Key Challenges

Given dramatic and fast-moving changes to the ecommerce industry since eBay first launched, the company faces a consistent onslaught of challenges to its business model. It must continue adapting to changing customer tastes, new technologies, and growing competition to remain profitable.

Although eBay is a sizable operation, it is dwarfed by other tech giants like Alibaba, Amazon, and Google, all of which have also made ecommerce efforts. As such, it's crucial for eBay to continue developing its corner of the market and cultivating its user base.

Additionally, eBay is an online service subject to ever-evolving and more sophisticated security breaches and cyberattack attempts. Addressing these security issues and ensuring client safety is costly and challenging.

Economic Volatility

As with other ecommerce businesses, changes to the global economy continue to influence customer spending habits, potentially hurting eBay's business. Ongoing trade battles, inflation, and geographic instabilities could also impact eBay, as cross-border trade is a crucial component of its business practice.

Frequently Asked Questions

The Bottom Line

A competitive online sales platform, eBay makes money from advertising, the fees it charges, and the services it provides to its customers. It was one of the first to popularize an online method of matching buyers and sellers. It continues to be popular because of its dedication to customer's experiences, welfare, and safety.