Nov 1
Seeing this type of site just makes you so angry that people could make money this way.
The founder blog is here.
I guess I’m just kicking myself for not doing it first. The Ponzi scheme is a historically proven model for allocating money and gaining traction. Like the $1 Million homepage, I guess this business is a 100% based on his ability to generate press and therefore traffic to his single page.
Well, now I’m helping out… sigh.
A big thank you to one of the great product managers at eBay, Rebecca Nathenson, for forwarding me this German study on eBay economics. (I would link to her blog, but she is hiding it from me…)
The Effect of Reputation on Selling Prices in Auctions (PDF)
by Oliver Gürtler & Christian Grund
As I mentioned in my previous post about starting prices, I have a strong interest in academic studies on the economics of eBay, the largest online marketplace globally. I am convinced that our level of understanding of the economics of marketplaces like eBay are still in their infancy.
As someone who has been selling on eBay since 1998, this study covers three topics that are easily familiar: reputation, shipping prices, and ending times. The study is from May 2006, and it is based on the eBay Germany site, but their is no reason to believe that they are country specific.
The first piece of the study looks at the effect of feedback on final selling prices on eBay. They confirm the obvious – reputation does impact final selling price positively. What’s interesting here is that it seems that the overall number of negatives did not have a measurable effect on final selling price. However, the percentage of negatives did. This result verifies anecdotal experience from many eBay buyers and sellers who will tell you that the “percent positive” is their primary measure of eBay reputation, once feedback scores rise beyond an initial threshold.
The second interesting tidbit from this study is their study of shipping prices. Once again, it confirms the obvious – higher shipping prices lower final sale prices. However, the interesting tidbit here is the fact that one dollar of increased shipping led to less than one dollar in reduced final sales price. This means that sellers may be better off charging a fair cost for shipping & handling, rather than assuming that if they offer low shipping that the cost will be made up in the auction price.
When I first started selling computer components in bulk, I experimented with different combinations of price and shipping cost. In one experiment, I took the exact same listing & description, and set different prices for the item & shipping, but left the total the same. They ranged from $15.99 with free shipping all the way to $0.99 with $15 shipping.
The result – the best selling item, measured in page views and conversion rate, was the $9.99 price with $6.00 shipping.
My theory at the time was that two human factors were occurring here. First, people see exorbitant shipping as dishonest. As a result, the listings with ultra high shipping looked dishonest, and it resulted in a lower purchase rate. At the same time, although buyers love free shipping, they were confronted with sticker shock from the high $15.99 price. Clearly, gas stations know what they are doing when they price gasoline to the 9/10 of a cent.
In their words:
The results with respect to the other variables indicate that postage affects sales revenue negatively, which was expected. However, an increase of postage in the amount of 1 € does decrease the price only by the amount of 5 per cent on average, which means by about 60 Cent at an averaged price of 12 €… In our case, however, it seems to be beneficial for sellers to segregate the total revenue into the two dimensions postage and selling price, because potential buyers concentrate on the main price during auctions and neglect the amount of the postage.
The last interesting insight from this research is their investigation of the effect of duration and ending time on the final selling price. Interestingly, there is a surprise here, which they dub the eBay Evening Fallacy. They claim that auctions that end in the evening perform worse than auctions that end earlier. As an interesting side note, they also found no evidence that duration impacts the final selling price.
What’s interesting about this insight is that it doesn’t really explain why this fallacy exists. One possibility is that historically, evening ending times did perform better than earlier times. However, as this became known, supply overwhelmed demand as everyone piled onto the same popular times.
I think actually this is a nice place to end this review, because in the end, while fascinating, the last insight is a warning. eBay is a dynamic marketplace, and as information flows through the market, the profitability of different strategies may change over time. Everyone knows they vary by country, by category, and by season. They also can vary based on what everyone else is doing.
In finance, there is a theory of efficient markets that posits that public information flows nearly instantaneously through the stock market. As a result, all returns are merely compensation for risk. Part of the attraction of private equity is the fact that it operates in a world, by definition, of more limited information and more limited access. That’s what yields those wonderful returns that Venture Capital has seen over time.
It’s interesting to think of eBay in that light. Strategies are always evolving, as information is communicated about how to succeed on eBay. Are proprietary access to inventory, or proprietary strategies the keys to outperformance? Efficient market theory has a risk-free return built into its model. Does eBay have the equivalent of a risk-free return, and if so, what is it?
That’s why I love research like this. It goes beyond the anecdotal and makes you think.
I’m finding the trend of venture backing for blog networks really fascinating. Looks like Sequoia has jumped in with $5M for PopSugar out of San Francisco.
Techcrunch has some coverage here.
I’m guessing that the venture backing is a bet that this is a disruptive way to build a new media outfit with a fundamentally lower cost structure, but with all the revenue upside. Media has always been profitable – witness the longevity and economics of newspapers – so this theory isn’t completely outlandish.
VentureBeat has coverage here. Interesting deal for Mike Moritz.
Oct 17
Jason Steinhorn sent me a link to this fairly interesting blog post on the growth dynamics of social networking sites.
The mathematics of Web 2.0: Why don’t ALL social networking sites experience phenomenal growth?
The article looks at two interesting questions:
I need to think about this a bit more. My initial reaction was no, these sites are showing N^2 growth (which is huge), and the author is getting confused about the fact that trees don’t grow to the sky, and not all sites are going to fulfill their algorithmic destiny.
However, on further consideration, the growth of groups is really the key. Since groups can continue to form, and can “repeat” membership fairly aggressively, you might be seeing more of a combinatorics equation, like the one in his article. A study of the growth of groups might be the real key here – I’m not sure these sites really support full combinatorics, which is what you’d need to see 2^N behavior.
If you are wondering why this matters, let’s try a mathematical explanation. These equations define the “growth characteristics” of certain types of models.
N^2 (N Squared) tends to get you numbers like:
1, 4, 9, 16, 25, 36, 49, 64, 81, 100
Pretty good. 1 to 100 in just 10 steps.
2^N (2 to the N) tends to get you numbers like:
2, 4, 8, 16, 32, 64, 128, 256, 512, 1024
1024 in just 10 steps. Much more powerful growth, and the difference gets more and more staggering as the model grows.
This is why, by the way, compound interest is your friend. Exponential growth is your savings doubling regularly, over some period of time.
Of course, this article has me thinking… Metcalfe’s Law is about computer networks. But why wouldn’t computer networks actually show exponential growth? After all, I can belong to multiple networks – my ISP’s network, my home LAN, my workplace LAN (VPN)… is there some element of this growth in the networking business as well? Is that why wireless networking has been so powerful? The overlay of these “networking groups”?
There’s something interesting here… but it’s just too late tonight for me to figure it out…
Now that I’m entering my fourth week maintaining this blog, I’ve decided to come back to the subject of why I really believe that these three topics are intertwined. These three topics are the reason that I named this blog Psychohistory, and these three topics seem to completely dominate my education and professional career.
The reason for this belief is crystalizing, and it’s remarkably simple:
I truly believe that incredible opportunity lies at the intersection of the irrational (human emotion) with the rational (finance, technology, business).
Behavioral Finance offers us the opportunity to design financial systems based on the basic insight that the way that human beings relate to money involves far more emotion than intellect. To understand economics, you must understand your very human economic actor.
Product Design is based on the premise that deeply understanding the ways that people interact with technology can lead to profoundly more useful (and desirable) designs and products. To understand product design, you must understand your very human customer.
Entrepreneurship offers us the opportunity to build companies by figuring out how to replicate the economic miracle of creating billions of dollars in new value by unlocking the very human emotions of inspiration, motivation, cooperation, and self-determination. To understand entrepreneurship, you must understand your very human entrepreneur.
Like all good elevator pitches, I probably need to reduce this in complexity by an order of magnitude before I’ll be happy with it. But I’m excited about this insight, and more importantly, I’m already seeing incredible leverage from it in my industry, where everyone is talking about the intersection of technology, commerce, and community.
Sep 7
A good friend of mine just updated his personal blog for the first time in months recently, and I thought this was as good a time as any to introduce the very cool startup that he’s been working on.
The company is called SpotDJ, and his blog post about it is here.
Scott has been a good friend ever since I met him through the CS 198 Section Leader program at Stanford, where he was one of the first section leaders I hired. Scott was one of those great student developers who didn’t just take Computer Science classes – he really wrote code. Shareware, mostly, for the Mac. Even then, Scott always shipped.
Scott had the misfortune of having an internship at Apple Computer in probably the most depressing time possible – in the Advanced Technology Group, in 1997, right as the entire group was disbanded. Since then, he’s done some pretty interesting things – working for several companies and even co-authoring a book.
Doing a startup is something that is very easy to talk about in Silicon Valley, but make no mistake about the fortitude it takes to really quit a good paying job and go out on your own. Scott is doing it right now, and SpotDJ is evolving into something really interesting.
I love the idea that instead of bidding on keywords (Google/Yahoo), you might actually target content/advertising based on a song. If they can crack some success measure like cost-per-click (cost per listen?) and some demand measure like click-through (selection? rating?), it’s a very interesting way to target content/advertising in an environment where keywords aren’t the way people navigate.
In any case, check out the company, and kudos to Scott.
Aug 29
In the spirit of hilighting some of the best blogs that I read and given Google’s product announcement today for “Applications for Your Domain“, I’d like to point you to this humorous press release on Don Dodge’s blog today:
Don Dodge on The Next Big Thing: Google Announces New 24X0 Support Service for Business Users
I find Don’s blog particularly interesting because he:
A worthy addition to anyone’s RSS feed…
Aug 24
If you haven’t checked out this blog, it’s worth adding to your regular RSS reader:
It’s written by a friend and former colleague from eBay, Will Hsu. Very witty and insightful, I like the sharp way he looks at key issues surrounding e-commerce, startups, and venture capital. More importantly, I feel like Will captures some of the real psychology of Silicon Valley.
Take his post yesterday on a great Web 2.0 CEO anecdote.
Now, I’m trying not to hold it against Will that he actually does not live in the 650 area code anymore. Still, the blog is a must-read.
I’ll be posting from time to time the blogs that I really recommend, and adding them to my blogroll on the right.
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Adam Nash Greylock Partners |
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