Trade Me Math 101

Someone smart once told me that the best way to determine a price for your product or service is to find the point at which the customer will wince, and then take half a step backwards.

I was reminded of that this morning reading some of the comments in the media and online about the latest round of Trade Me price increases announced earlier this week.

The official justification is based on a 91% increase in traffic in the two years since the last increase (holy crap!)

But, I wonder this tweet from David Slack perhaps describes it more succinctly:

That Trade Me price rise rationale in full: “Because we can.”

Perhaps not surprisingly, this announcement was enthustically reported by the NZ Herald, but as far as I can tell ignored by Fairfax.

The Herald article is terrible – as well as being a shameless plug for Sella, which they partly own (although that isn’t disclosed in the article), they also let themselves down with some shoddy maths by miscalculating the impact of the increase on a hypothetical $1000 item.

Choosing $1000 as the example is in itself not very smart – most stuff that sells on Trade Me is much cheaper than that.

So, as a service to numerically-challenged or commercially-conflicted reporters, here is a quick back-of-an-envelope analysis of the impact of this change:

Firstly, let’s take a random sample of 100 listings – auction #348,000,000 through #348,000,099.  These were all listed on the site earlier this month and closed over the last week or so.

Of these, 24 sold and attracted a success fee.  Six were “Buy Now” sales, another three were “Fixed Price Offer” sales and the remaining 15 were standard auctions.  The sale prices ranged from $1.50 to $1300.

Obviously this is way too small to be a statistically relevant sample, but actually those values and proportions feel about right to me, based on the sale rates that are published on the site and a quick look at the list of items closing soon.

The total success fees charged on these 24 sales was $141.98.  If the new fee structure was in place that amount would have been $151.53, which represents an increase of just over 6.7% (the Google Spreadsheet linked to above has the full calculation).

To really understand the possible impact of this change though, you need to multiply that increase across the hundreds of thousands of auctions that close on the site each day.  Trade Me don’t actually publish those numbers, but with a bit of digging you can roughly work it out.

As I type, auction #349,438,751 is about to close (I’m going to assume that this was listed this time last Sunday evening), and the latest auction is #351,145,747. That would imply that in the last week there have been ~1.7million new listings (about the same number currently listed on the site).

Extrapolating the success fee revenue we calculated above across this number of listings gives revenue of $2.576m per week soon vs $2.413m per week currently.  So, approximately $163,000 extra per week or nearly $8.5m per year.  That should pay for some good times!

Of course, all of this assumes that the fee increases have no impact on the number of listings on the site, which may or may not turn out to be true.  I’d be confident though that the smart people at Trade Me will be watching this closely after the change is made to give themselves confidence that the overall impact is positive from their perspective.  I doubt they will be paying much attention to the wailing on the message boards, or in the NZ Herald comments, as similar threats, which have accompanied every single fee increase announcement since the very early days, have to date failed to make any dent in the continued growth in popularity of the site.

Anyway, the much more interesting question, which I haven’t seen anybody ask, is this: what good news does Trade Me have up their sleeve to announce on the 7th Feb? :-)

Disclosure: I am a Trade Me alumnus, but I left when the site was just a fraction of its current size, so really, what do I know?!

9 thoughts on “Trade Me Math 101”

  1. Good analysis. However, unless I’ve simply missed it, you also need to take into account the Top Seller fee decrease (now a 15% discount) when calculating impact on total success fee revenue across all auctions.

    1. True, although I’m guessing that Trade Me are hoping that increasing the discount will increase the listings from these sellers to offset this.

      I don’t know how many sellers currently qualify for these discounts – and I note that the criteria for this is changing too. However, looking at the 24 sales in my tiny sample about two-thirds appear to be from “professional” sellers.

  2. Great article
    TM are getting too greedy
    And if there are 1.7 million new listings each week, it goes to show how low the sell through rate is getting these days.

    But its like every business 80% of your profit comes from 20% of your customers.
    Perhaps they want to get rid of small sellers like ebay is trying to do.

  3. I’m thinking about the Sella plug on the Herald. Do journalists have any guidelines about promoting content where there is a conflict of interest in reporting the information?

    Generally advertisements are supposed to be marked as such. You could see that Sella is relevant to the story but I wonder where the line is.

    I realise they have a code of conduct but imagine that they are probably used more as monitor stands.

    My real fear is that newspaper bias leans more towards the UK state where various papers represent various classes of society.

    1. It’s interesting to me that when the media report on something that you know a lot about it’s obvious how shallow the level of reporting is. But, the rest of the time you read/listen without necessarily realising that is actually true more or less all the time.

  4. Agree this is a good analysis. Without diving into my Stats110 textbook your small sample size should give you a good enough indication of the population. My only query would be your selection is less than random across the year which could skew your result e.g. Anniversay day holidays, people still on holiday in mind if not body…
    IMHO this may have understated the revenues.

    The other point of interest raised in the comments is the top seller fee reduction. Are we going to see more of large blocks of highly priced auctions from dealers? Its happening in the computers section and is a big turnoff. Maybe I should have a look a Sella :)

  5. Good stuff.
    The real issue here is not whether there is short term gain to be made by putting price up – there always is. Similarly there is always a certain amount of complaining when increases go through.

    No – the real issue at stake is what happens to the the feeling everyone has for Trade Me.

    Are Trade Me still providing a great service for a small price, or are they turning into the evil monopolist that is ripping off the market?

    At some stage TM will cross over from the first to the second, and it will actually be pretty difficult to tell at the time. There is still an enormous amount of goodwill out there but I for one would recommend against putting fees up during such tough times. It doesn’t feel right.

    Meanwhile the switch to help larger sellers is also worrying. eBay made it easy (cheaper, easier with tools) for larger sellers than small, and steadily lost the great eBay market feeling of people selling to people. This dropped sell through rates, made for a bunch of junk on the site and they have struggled in recent years to get back to basics. Me Whitman left for a reason.

    These initiatives combine to give better short term return to shareholders, but the long term goodwill and basic market health are both put at risk.

    Was it the right thing to do? I’m not sure. I do believe that there is a ceiling on prices in auctions and the shareholder needs to understand that auctions can only be pushed so far before smaller but free alternatives become the new new thing.

    Back the the basic rules that make trade me work: Usability is king, don’t stuff the marketplace, and only one MBA in the room at any time.

    (also ex Trade Me)

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