Steve Woda's blog

The eMarket for Lemons at The Wharton School

I had the opportunity to speak at The Wharton School, University of Pennsylvania last week about an article that Dr. Eric Clemons recently authored for the Journal of Management Information Systems, "An Empirical Investigation of Third-Party Seller Rating Systems in E-Commerce: The Case of buySAFE".  My presentation was focused on marketplace economics and specifically about information asymmetry, signaling, the "Market for Lemons" concept, and buySAFE.  In addition, I was able to share a few thoughts about my entrepreneurial experience with buySAFE.

As always, I had a great time as the guest of Dr. Eric Clemons, and I enjoyed hearing the passionate questions, insights and feedback from the students.  One of the students posted an article about my visit on his blog, The Un-Wharton. 

The eMarket for Lemons and The University of Maryland

Last week, I had the opportunity to speak to a few hundred business school students at the Robert H. Smith School of Business, University of Maryland.  Michael Beveridge, buySAFE's VP of Business Intelligence, joined me in speaking at the invitation of Professors Guodong (Gordon) Gao, Peter Weiss, and Mingfeng Lin.  The students had previously read "buySAFE - Creating and Profiting From the Bonded Seller Advantage", a case study on buySAFE authored by Wharton professor, Dr. Eric Clemons.  Here is the presentation that Michael and I shared with the students... "eMarket for Lemons - The Economics of an Evolving eCommerce Marketplace".

As always, it was a terrific experience for me.  The students were extremely prepared, and they had definitely done their homework on buySAFE, information asymmetry, and the ecommerce marketplace in general.  If you ever want to get an excellent sense of how well your marketing efforts are working or how well you are educating the market about your solution, I highly recommend inviting a couple hundred college students to study your product or service and let them give you feedback.  I loved it!

Read more about Dr. Guodong (Gordon) Gao >>

A Few Interesting, Recent eCommerce and Entrepreneurship Articles

Good morning everyone!  If you know me well, you know that I am a voracious reader of anything and everything that I believe is interesting or useful either personally or professionally.  My colleagues will attest to the fact that their Inbox usually has at least one article that I have recent found that might be useful for them or buySAFE. :)

Today, I have been catching-up on my reading list, and I thought I would share with you a few articles that I found interesting.  Hopefully, you will some of the info interesting as well.

Steve

eBay Merchant Economics

I recently asked Michael Beveridge, buySAFE's Sr. Director of Business Intelligence, to share with us some of the interesting eCommerce data that buySAFE has developed over the last eighteen months.  We consider data and analytics to be critical to buySAFE and our merchant customers' businesses, and obviously, every merchant is interested in having solid, reliable data on the ROI associated with buySAFE.  At the request of hundreds of our merchant customers, buySAFE has invested heavily into developing an amazing data and analytics platform that can deliver incredible insights beneficial to buySAFE Merchants.  We will be sharing some of our new insights with you over the coming months, and I hope you enjoy the content. With that intro, here is Michael Beveridge's first contribution to this blog...

Important eCommerce Trust and Safety Statistics

At the PESA Summit this past week, there was a lot of talk about how to improve e-commerce conversion rates. I believe there are three critical drivers for conversion: product selection, price, and trust. Each of these issues would provide substantial content for an article, but I thought I would dedicate today's post to a number of very important trust-related statistics.

If you have any doubt about the role of trust and buyer confidence in your e-commerce business success, please take a quick look at these stats.

• 55% of online shoppers say trustworthiness of the merchant is most important (vs. price, convenience, pleasure, other)
  (Source: Online Shopper Research Report, 959 respondents, August 2006)
  

• 65% of online shoppers buy only from sites they know and trust
  (Source: VeriSign Secured Seal Research Review 08/06)
  

• 72% of online shoppers are becoming more cautious when buying online
  (Source: Gartner Research, 5000 respondents, May 2005 survey)
  

• 73% of online shoppers are concerned about the item being misrepresented (inaccurately described, counterfeit)
  (Source: Online Shopper Research Report, 959 respondents, 08/06)
  

• 76% of online shoppers are worried about never getting their purchase
  (Source: Online Shopper Research Report, 959 respondents, 08/06)
  

• 81% of online shoppers are concerned about merchant return/refund policies not being honored
  (Source: Online Shopper Research Report, 959 respondents, 08/06)
  

• 84% of online shoppers are concerned about merchants not treating them fairly
  (Source: Online Shopper Research Report, 959 respondents, 08/06)
  

• 85% of online shoppers are concerned about identity theft
  (Source: TNS Research, 08/06) 
  

• And, amazingly, over 50% of all U.S. internet users still don’t buy online (even from Amazon.com!).
  (Source: Bear Stearns, September 2006)
  

With respect to this last statistic, "trust" issues are the primary driver of e-commerce non-participation. Amazingly, more than 50% of your potential customers will not buy online because they are nervous! Are you kidding me? That is a huge number, and obviously, the time has come for the e-commerce industry to take this issue seriously.

eMarket for Lemons at Baruch College

I was recently invited by Dr. Karl Lang to be a guest lecturer at Baruch College on the subject of buySAFE and my experience starting an e-commerce business.  I always love speaking to folks about buySAFE and its important value proposition (Making sure that buyers get what they pay for, and that merchants get paid what they deserve.), but I especially enjoy speaking with college students (in this case they were MBAs) about what I believe is happening with e-commerce today.

As many of you know, I believe there is a fundamental problem emerging with e-commerce.  Specifically, the problem is that buyers have a very difficult time reliably telling the difference between good sellers/product and bad sellers/product.  In economic terms, this is called "information asymmetry".  Sure, if you are large, recognizable brand, buyers know they can trust you.  However, if a merchant is unknown to a buyer, how in the world can that buyer reliably figure out if everything is going to be 100% okay?  The answer is that it is very difficult for them to do so confidently.

When a marketplace suffers from information asymmetry, it inevitably develops into a "Market for Lemons".  You can read my previous blog post on the subject at "What is a Market for Lemons?"

Obviously, buySAFE solves this major e-commerce problem, and as of Q2 2007, there are thousands of online merchants that have signed-up for the buySAFE service in order to help mitigate this issue for shoppers.

I thought you might like to see the presentation I gave the MBA students at Baruch.  You can download the "eMarket for Lemons" presentation here, or you can view the presentation below.

I want to thank give a special thanks to Dr. Lang for inviting me to speak at Baruch College, and I especially want to thank the MBA students for their fascinating questions and additional insights.

Stop Worrying! How to Solve the eCommerce Trust Problem.

Jeff Grass, buySAFE's CEO, recently posted a comprehensive article on the eCommerce Trust problem, and how buySAFE is specifically designed to tackle this big issue.  Jeff does a great job of laying out the requirements for effective online trust and safety solutions, and I thought you might enjoy the read.

"Stop Worrying! How to Solve the eCommerce Trust Problem. (A must read if you sell or buy online!)" by Jeff Grass on buySAFE's blog

If you have any thoughts, insights, or comments on Jeff's article, I would be very interested in hearing from you.

France, Luxury Goods, and the Counterfeit Problem

Travis Brown, buySAFE's General Counsel & VP of International, recently spent a week in France as a guest of the French government.  The purpose of the trip was to learn more about the exploding counterfeit goods industry, and to explain how bonding merchants and buySAFE could significantly mitigate this  huge problem.

I found Travis' post to be one of the best I have ever read on the issue of counterfeit goods, and I am sure you will agree.  I encourage you to give it a quick read.

"buySAFE Invited By French Government to Help Stop Online Sales of Counterfeit Luxury Goods" by Travis Brown on buySAFE's blog

I am very interested in your thoughts and insights regarding the counterfeiting issue, so please share.

Related articles and blog posts:
"buySAFE Takes on the Issue of Counterfeit (Knock Off) Merchandise" by Fraud, Phishing and Financial Misdeeds

eBay and Seller Certification

Skip McGrath is the CEO of Auction Seller's Resource - a terrific newsletter for professional eBay merchants and for those folks aspiring to make a living on eBay.

Skip recently posted a series of interesting articles on the subject of seller certification on eBay.

Part 1
Can Seller Certification Bring Buyers Back to eBay

Part 2
eBay Selling Tools To Build Your Business by Preventing Fraud

Skip has done a nice job of laying out a number of things to consider, and I encourage you to give his posts a read. 

I believe Seller Certification is part of the answer for eBay (and eCommerce in general), but my big fear is that a bunch of eBay marketing folks will get together and roll out a new "seller certification" program, and that the program will fail to actually do anything meaningful for buyers or the economic health of the eBay marketplace.  Tough, effective "seller certification" programs actually require that you have to tell some sellers that they CAN'T be "certified".  In my experience, marketing folks don't like to tell current or prospective customers that they can't do business together.  Tough, effective certification programs are designed to limit the players on the field, and this is usually counter to everything the marketing folks think about each and every day.

eBay Feedback Farms Undermine Feedback Ratings System

Last week, Ina Steiner documented the basic story of 'Feedback Farms' on eBay.

I have to be honest, these scams continue to amaze me, and one has to conclude that these scams are damaging and undermining the entire feedback/merchant rating system.  If fraudsters can so easily create feedback/merchant ratings in the thousands, then buyers will have to increase their vigilance online.  From a buyer's point of view, it continues to be more and more difficult to truly discern good from bad.

"Opportunities and Threats of Online Auctions" - An Interesting Case Study

I ran across a case study this morning that discusses the opportunities and threats of online auctions, and it specifically focuses on the online auction site, eBid.   

The author is Khurram Memon of DeMontfort University.  I believe that as you continue to wrap your head around what is currently happening with the eBay marketplace and what you can expect with other eCommerce channels in the future, this will be an interesting case study for you to read.

Related blog posts, case studies, and presentations:

• "What is a 'Market for Lemons'?" blog post
• "What's Wrong With eBay? It's Simple Economics" blog post
• "buySAFE. Creating and Profiting from the Bonded Seller Advantage " case study by Dr. Eric Clemons, The Wharton School, University of Pennsylvania
• "Building Buyer Confidence: The Economics of Information Asymmetry & Signaling" presentation at 2006 MIVA Small Business Conference
• "Everyone's a Critic. Not So Fast" blog post by Jeff Grass, buySAFE

What is a "Market for Lemons"?

I have had a number of eBay merchants write me about a post that I made earlier this week suggesting that eBay seems to be displaying the early signs of a Market for Lemons problem (Some would argue it is far beyond the beginning stages, but I will let you debate that with your comments below).

Without focusing on eBay or eCommerce in general, it has been requested that I illustrate a simple example of how a "Market for Lemons" develops.  Obviously, there is a lot of academic research on this subject (I posted a Wharton case study by Dr. Eric Clemons earlier this week, and you won't want to miss it since it discusses eBay's challenges in greater depth.), and almost everybody has heard the "Market for Lemons" term utilzed at some point.  Wikipedia provides a basic overview of the Market for Lemons economic concept, so I won't regurgitate what you can read elsewhere.

In short, the "The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a paper written by George Akerlof in 1970 that describes what happens to markets that suffer from information asymmetry problems.  Ultimately, Dr. Akerlof won the Nobel Prize for Economics in 2001 (along with Michael Spence and Joseph Stiglitz) for his analysis of markets with information asymmetry.  While I was at Wharton, I was fascinated by the implications of this research on eCommerce marketplaces.

What's Wrong With eBay? It's Simple Economics

What's wrong with eBay?  Before I answer this question, you should download this Wharton case study by Dr. Eric Clemons of The Wharton School, University of Pennsylvania.  Dr. Clemons is one of the world's most renowned experts on information economics, and this case study is currently being taught at Wharton this semester.  It goes into great detail discussing eBay's current challenges, and I believe you will find it insightful.

Okay back to the question...  What's wrong with eBay?

eBay Sellers Leaving eBay to Sell Elsewhere

Yesterday, I mentioned some very interesting research that AuctionBytes recently completed with a survey of more than 1,000 eBay merchants.

The most interesting finding is that eBay sellers are leaving eBay's platform very quickly.  The chart below details where merchants are currently selling their product, and where they plan to sell product 6 months from now.  There is a massive 64% decrease in the number of sellers planning to sell on eBay 6 months from now versus today.