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Pricing in a Profitable Market

Over the last two years, eBay has raised its prices to improve its financial performance. Not that its financial performance has been bad. In fact, it has been good. But management believes it can be better with a price rise. The price increases eBay has provided the market have impaired eBay’s long-term future, even while improving its short-term profits.

When a leader raises prices in a marketplace, it has to consider whether it is setting a price umbrella over its competitors. This umbrella provides the competitors with enough margin to improve their products and offer tougher competition to the industry leader. Sometimes, these higher prices will also make customers mad. EBay seems to have both set an umbrella and made its customers mad.

The company is now losing market share to other competitors, especially Amazon. These other competitors have improved their offerings in the market place to make them, for some customer segments, more attractive than eBay’s product.

What alternative might eBay have had to a price increase in order to improve its margins? Perhaps the best alternative for eBay would have been to develop its economies of scale. Economies of scale don’t develop on their own. They have to be managed by the largest competitors in an industry. However, with an aggressive stance on economies of scale and with limits on price increases, eBay would put significant pressure on its competition. The competitors would not be able to compete as effectively because of the lower margins in the industry.

(For more insight, see the Perspectives, “Building on Customer Volatility”, “Failure Shifts More Share than Success” and “How Price Kills Profits” on StrategyStreet.com.)

Posted 9/15/08

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