How Does eBay Make Money? An In-Depth Look at Its Business Model

eBay began 25 years ago as a humble auction site for Pez dispensers and Beanie Babies. Today, it has grown into a global ecommerce giant, connecting over 147 million buyers with millions of sellers worldwide.

In 2021 alone, over $87 billion in merchandise traded hands on eBay from everything to new iPhones to vintage Levi‘s jeans. This volume makes eBay one of the top 10 ecommerce companies globally.

But in the fast-moving world of online retail, eBay faces stronger competition than ever from giants like Amazon and Walmart. So how has this original online marketplace succeeded in evolving its business model to continue driving immense value?

Let’s analyze the data and dig into the dollars and cents behind exactly how eBay makes money.

eBay by the Numbers

Before examining the specifics of eBay’s business model, it’s useful to understand the sheer scale of its marketplace. Some key stats:

• 147 million active buyers in 2021, up from 139 million in 2020
• Over 1.5 billion live listings offered at any given time
• Total gross merchandise volume (GMV) of $87.5 billion in 2021, up 42% from 2017
• Facilitates the sale of a collectible item every 1.3 seconds
• 4th most popular shopping site in the U.S.

To put eBay’s GMV into perspective, it surpasses Target’s annual revenue and is over 3X more than Best Buy. With Scale comes substantial revenue.

Financial Performance Overview

eBay generates significant revenue from all the buying and selling activity happening across its platform. But how do the financials actually breakdown?

Total Revenue

After a period of declining revenue from 2015-2017, eBay has bounced back with steady growth over the past 5 years. From 2018-2021, net revenue grew at a compound rate of 9% per year, reaching $10.4 billion.

This turnaround demonstrates eBay’s resilience despite rising competition from Amazon, Walmart, Target, and others diversifying into ecommerce. eBay still carves out a unique market positioning.

Profit Margins

In addition to healthy revenue, eBay also earns strong profits:

• Gross Margin: 74%
• Operating Margin: 29%
• Net Profit Margin: 40%

These margins eclipse most big box retailers, resulting in nearly $4 billion in net income in 2021. eBay’s asset-light, marketplace business model enables such strong profitability.

Now let’s analyze what’s driving financial performance under the hood…

How eBay Actually Makes Money

eBay belongs to a specific business model subset known as online marketplaces. Rather than purchasing inventory like traditional retailers, marketplaces simply facilitate exchange between buyers and sellers.

The Basics

Online marketplaces make money by charging fees to sellers and taking a small commission from each transaction made on their platform. This allows revenue to scale in-step with GMV without bearing the risks of handling inventory.

Over 80% of eBay’s revenue comes from these transaction fees charged to sellers whenever an item sells on eBay. This includes listing fees to initially post an item and final value fees on the total sale amount.

Let‘s use selling an iPhone on eBay as an example:

• eBay charges the seller a $0.35 insertion fee to list the iPhone
• The phone sells for $400
• eBay collects a 12.55% final value fee on electronics: $50.20
• Total fees = $50.55

In this case, eBay just made over 12% revenue on one sale. Apply that across billions in GMV and those fees add up.

The remainder of revenue primarily comes from shipping services, advertising, and eBay‘s classifieds business. But transaction fees remain the bread and butter.

Segment Performance Breakdown

To fully grasp eBay’s money-making model, it’s useful to break performance down across business units:

eBay Marketplace

This represents the core transactional platform facilitating consumer-to-consumer (C2C) and business-to-consumer sales (B2C).

2021 Revenue: $7.4B

Take Rate: 11%

Take rate equals the percentage of GMV eBay pulls in revenue, so just over 10% in this case. While take rates have declined slightly over the years amidst pricing pressure, Marketplace still delivered 16% revenue growth in 2021.

Advertising

eBay invests heavily in advertising to attract both buyers and sellers to its platform. But the company has also grown advertising into a notable second business line.

Advertising includes promoted listings, display ads sold programmatically across eBay’s sites, and external networks through partnerships.

2021 Revenue: $913M

YoY Growth: 123%

Launching its first in-house advertising platform in 2018, eBay has quickly scaled ads into a high-growth engine now contributing close to 10% of total revenue.

Classifieds

In addition to its transaction platform, eBay also owns several classifieds sites internationally like Gumtree and Kijiji. While smaller than Marketplace, Classifieds serves an important strategic role.

2021 Revenue: $417M

YoY Decline: – 12%

Classifieds faced pressure during the pandemic but remains a valuable asset for eBay with opportunity to potentially integrate more with its core marketplace via transactions down the road.

Key Operating Metrics

Given eBay’s platform business model, the company tracks a suite of marketplace-specific metrics to measure engagement across buyers and sellers to inform strategy.

Active Buyers

The number of unique buyers who purchase items on eBay in the past 12 months. Growing active buyers allows more revenue potential.

2021: 147 Million
5 Year CAGR: 2%

Active Sellers

The count of sellers who list an item in the past 12 months. Like any marketplace, liquidity depends on strong supply and demand.

2021: 17 Million
5 Year CAGR: 13%

GMV per Active Buyer

Total GMV divided by total active buyers. This metric indicates the average spend level and purchasing frequency.

2021 GMV per Active Buyer: $595
5 Year CAGR: 10%

While active buyer growth has been modest, eBay has done well maximizing revenue from its existing base through product improvements and buyer incentives.

Meanwhile, active seller growth remains healthy as eBay adds more small business merchants and strategic enterprise partnerships.

Role of Seller Fees and Incentives

Earlier we discussed the majority of eBay’s revenue coming from the various fees charged to sellers for listing items and final sales value. This fee structure directly impacts sellers, so optimizing rates is crucial for eBay.

If fees are too high, sellers can choose rival marketplaces like Amazon, Etsy, or even their own independent stores. If fees are too low, eBay leaves money on the table.

Historical Fee Changes

In 2015, eBay actually lowered its final value fees between 2-6% across categories to stay competitive. This contributed to falling revenue for several years.

However in 2020, eBay introduced a new fee structure called “seller standards,” which charges sellers different rates based on performance indicators like service level, review score, shipping time and more.

Top-rated sellers now benefit from 4-8% lower fees, while laggards see fees increased up to 5% higher.

Impact

This revamped incentive model has proven positive for eBay. Not only has it reaccelerated revenue growth, but it’s also boosted key marketplace metrics:

• Items with 1-day handling time doubled since 2017
• Items shipped on time increased 5 percentage points
• 90-day active listings jumped 60M year-over-year

The seller standards strategy demonstrates how optimizing fee structure can balance eBay’s revenue generation with marketplace quality.

Buyer Acquisition Cost Trends

In addition to managing millions of sellers, aggregating massive demand is obviously essential for any successful marketplace. Buyer acquisition lays the groundwork for long-term revenue.

To drive more buyers, eBay invests enormous sums into advertising and marketing annually. In 2021 alone, sales & marketing expense totaled $2.25 billion.

That rivals the combined advertising spend of giants like Coca Cola and Geico!

Return on Ad Spend

Tracking sales & marketing expense against key buyer metrics reveals an interesting trend:

Despite relatively flat buyer growth, marketing costs have swelled over 30% in the past 5 years. Resulting in higher customer acquisition costs (CAC).

This indicates eBay may be reaching saturation acquiring new buyers in core Western markets. And that shifting demographics and competitor encroachment are applying pressure.

In response, eBay has prioritized markets including Latin America, Japan, Korea, and Southeast Asia for international expansion moving forward. The company likely needs to rein in rising CAC to justify further buyer growth.

Competitive Landscape

Consumer shift to ecommerce is undoubtedly a positive tailwind benefiting eBay. However, competition remains fierce with both long-time rivals and relative newcomers.

Amazon Marketplace

eBay’s #1 competitor is Amazon Marketplace. Launched back in 2000, Amazon now accounts for an estimated 44% of U.S. ecommerce GMV according to eMarketer.

However, the sites attract different seller and buyer profiles:

• eBay: dominated by mom & pop small businesses, vintage goods
• Amazon: appeals more to large brands with new, mass-produced inventory

This differentiation provides eBay a niche despite much smaller scale overall.

Walmart

Retail behemoth Walmart has made major ecommerce investments in recent years through acquisitions of Bonobos, Moosejaw, Hayneedle and others.

Walmart Marketplace launched in 2009 and the company is leveraging its brand dominance with consumers to quickly gain share. U.S. ecommerce revenue hit $64 billion in 2021.

However, thus far, Walmart has focused Marketplace more heavily on consumables than eBay’s specialty in rare, discontinued merchandise. Differentiation remains.

Etsy

As a platform tailored specifically towards vintage, handmade, and craft items by small merchants, Etsy offers perhaps the most direct rivalry to eBay‘s unique positioning.

Etsy has ridden a wave of interest in bespoke goods from younger demographics to scale impressively:

• 2021 Revenue: $2.3 billion (up over 130% since 2017)
• 96 million buyers (up 123% since 2017)

This emerging competitor has certainly put pressure on eBay in categories like jewelry, art, collectibles. Etsy‘s strategy and community building also serves as a case study for where eBay needs to improve.

Facebook Marketplace

It may come as a surprise, but eBay executives have called out Facebook Marketplace as potentially its fastest growing competitive threat looking ahead.

Launching first internationally in 2016 then the U.S. in 2018, Facebook Marketplace has quickly gained adoption thanks to the platform‘s immense user base. eMarketer already estimates Facebook Marketplace will surpass eBay in U.S. C2C ecommerce GMV in 2024.

Its convenience, zero seller fees, and built-in audience endow huge potential. eBay will need to closely monitor monetization developments as Meta experiments integrating more social functionality and payments to Marketplace over time.

Future Outlook and Growth Drivers

Despite no shortage of competition, eBay retains differentiated positioning catering to niche enthusiasts valuing choice, value, and treasures they can’t find elsewhere. Lean into this vintage advantage.

As eBay looks ahead, enhancing personalization and expanding authentication services for higher-value categories seem like smart plays to improve experience and trust for buyers.

There also remains untapped opportunity to grow advertising revenue closer to peers like Etsy (13% take rate) and Pinterest (23%). Curating shoppable ad experiences could help eBay continue modernizing its platform.

International continues offering the largest addressable opportunity, especially in markets like Japan where eBay badly trails. Joint ventures with leading local marketplaces could also accelerate expansion abroad.

Finally, augmenting services like fulfillment, payments, and financing would help eBay better compete as consumers increasingly expect end-to-end frictionless ecommerce.

If eBay makes the right moves strengthening its core seller relationships while broadening accessibility and trust signals to buyers, the original online marketplace can keep commerce vibrant for years to come.

Key Takeaways

Here are the key points distilling how eBay makes money as a global ecommerce leader:

• eBay connects millions of buyers and sellers as an online marketplace facilitator rather than traditional retailer
• Over 80% of eBay’s $10B+ in annual revenue comes from final value and listing fees charged to sellers
• eBay’s business model has high profit margins thanks to low overhead transacting third party inventory
• Increasing take rate and accelerating advertising are growth priorities moving forward
• Despite rising competition, eBay retains strong positioning catering to collectors and enthusiasts

Understanding the marketplace dynamics and incentive structures underpinning eBay’s business model provides helpful context not just to use the platform as a buyer and seller, but also to appreciate the company’s enduring success bridging ecommerce’s earliest days to the innovations still unfolding today.