How Does the New Yahoo! Merchant Solutions Stack Up?

By Matthew Ledford, ydesigns.com with Dr. Ralph Wilson
Web Commerce Today, Issue 76, January 15, 2004

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For years, Yahoo! Store has been a popular e-commerce platform for Internet merchants. But how do the recent changes affect merchants? My friend Matt Ledford of ydesigns.com has developed high value Yahoo! Stores for merchant clients for years. Since he's close both to the Yahoo! application as well as Yahoo! merchants, I asked him to explain to Web Marketing Today Premium subscribers the effects of the new changes. Editor.

Yahoo! has dramatically changed its e-commerce platform. Several acquisitions have enabled Yahoo! to change its pricing model. Here's how its acquisitions helped it:

• Geocities -- hosting for the masses.
• Inktomi -- a powerful search technology that allows Yahoo! to free itself from licensing Google's search results.
• Overture -- a strong Pay Per Click (PPC) platform.

Yahoo! merchants once had a significant advantage over others since they had almost exclusive access to customers who found their products through the Yahoo! Shopping search system. They had to pay a 3% surcharge on sales that resulted from searches in the Yahoo! system, but this generated a considerable volume for many merchants. In September 2003, Yahoo made significant changes in Yahoo! Stores.

Yahoo! Shopping Is Now Open to Other Merchants

Prior to September, to be included in Yahoo! Shopping meant a merchant had to commit to one of two options:

• Build a Yahoo! Store or
• Spend big advertising bucks

Now, Yahoo! doesn't require either option ... exactly. Now a data feed of a merchant's products to be included in Yahoo! Shopping and the 'Products' tab at Yahoo! is a paid inclusion model. Now smaller merchants who don't have six-figure ad budgets or want to fit into the restriction of hosting the store with Yahoo can be listed in Yahoo! Shopping.

We need to briefly examine the two dimensions of Yahoo!: Yahoo! Store Hosting and Yahoo! Product Submit.

Yahoo! Product Submit

Now it is easier than ever before to get your products in the Yahoo! Directory at www.yahoo.com. In the September, both the Yahoo! Directory and the way Yahoo! Shopping works has changed. There is now a "Products" tab in the directory that separates product results from both directory results and those fed by Overture on a pay-per-click (PPC) basis. With research showing that 16% of online shoppers are using shopping comparison locations, major portals are motivated to refine the power of search beyond their stodgy general directories. http://www.internetretailer.com/dailynews.asp?id=10420

Yahoo! Small Business and Merchant Solutions

Yahoo! now is focusing on business hosting -- with and without e-commerce capabilities. With three levels for each. The monthly plans are as follows:

	Yahoo! Web Hosting Hosting only. Includes optional menu-driven site builder software for novices.	Yahoo! Merchant Solutions Hosting plus e-commerce. Includes a payment gateway with fraud protection. 20% discount rates for Yahoo! Shopping.
Starter	$11.95	$39.95 + 1.5% E-commerce basics, cart, catalog management. Web hosting same as professional plan.
Standard	$19.95	$99.95 + 1% Includes advanced merchandising tools such as gift certificates, orders via fax, click trails, frequent site searches, most popular Yahoo! Shopping searches, automated cross-sell, coupons, inventory control, trackable links, etc. 20% off Yahoo! Shopping.
Professional	$39.95 Adds PHP, Perl, MySQL, and SSL, log access	$299.95 + .75% Similar to Standard, but lower transaction fee.

You can see a feature comparison grid of the Merchant packages on Yahoo's site. http://smallbusiness.yahoo.com/bzinfo/prod/com/compare.php

Yahoo! Product Submit Pricing

Yahoo merchants receive a 20% discount off Yahoo! Product Submit's PPC pricing. The cost per click depends upon the category of product. https://productsubmit.adcentral.yahoo.com/sspi/us/pricing

For example:

Flowers	$1.25
Diamonds	$1.25
Computers and software	38¢-44¢
Jewelry and watches	38¢
DVDs and videos	25¢
Office	25¢
Video games	25¢
Toys	25¢
Apparel	19¢
Arts, antiques, and collectibles	19¢
Music	19¢
Sports and outdoors	19¢

PPC Pricing and Profitability

The problem comes when advertising costs creep beyond profitability. The conversion rate (% of shoppers who actually purchase) for many e-tailers that number is around 2%. So, in a short-term scenario, we look at what the average purchase, combine with the yield and see what should be the PPC spend threshold.

A few caveats: This is a quick and dirty calculation and does not include the value of repeat purchases, newsletter subscriptions, bookmarks, and buyers who come back later. Also, some words/ads convert at a higher rate than others. There is also the issue of margin and markup that must be considered.

Now let's look at an example. Our store has an average purchase price of $30, a markup of 100%, and a conversion rate of 2%. What should the maximum PPC spend be per phrase?

Click-throughs x Conversion Rate	=	Number Conversions
Number Conversions x Average Sales Margin	=	Revenue Generated
Traffic / Revenue	=	Breakeven Point

If we estimate 1,000 click-throughs, 2% conversion rate results in 20 sales. 20 sales x margin of $15 yields revenue of $300. Therefore, you can't spend more than $300 on these 1,000 click-throughs -- 30¢ per click or you'll begin to lose money. Ydesigns has a simple spreadsheet at http://www.ydesigns.com/conversion.html for those who just want to insert the numbers and play with an Excel spreadsheet.

Here’s the problem. The average regular rate card for Yahoo! Product PPC product listing is currently 35¢, with a high being $1.25 in Jewelry and Flowers & Gifts and a low at 19¢ in apparel and some others. You could hope conversion would be higher than 2%, with a higher average purchase price and mark-up. But many merchants won't be able to make money at these rates. If you compare this with the old system of a 3% surcharge for Yahoo! merchants on sales from Yahoo! traffic, you can see the difference.

Advantages for Yahoo! Merchants

Yahoo! merchants receive two advantages in Yahoo! Shopping:

• 20% discount on PPC rates
• Yahoo! Shopping Buyer Protection Program, with an identifying logo next to the merchant's name. This may make shoppers more likely to buy from Yahoo! merchants.

We're finding that many clients who are Yahoo! merchants calculate they will be saving money by switching to Merchant Solutions over prior Yahoo! Hosting and the old system of revenue share fees. In years past, Yahoo! revenue share could be as high as 4% of the transaction, if the traffic was generated by a Yahoo! property. Now, we see revenue share as low as 0.75% of the transaction with Merchant Solutions Professional.

Our recommendation to our clients is that if the numbers work to transition to Yahoo! Merchant Solutions, they should do so. We give them one caveat: domain name management is more complex with that transition than was expected initially, but issues are getting resolved to the satisfaction of our clients.

We find there is still substantial value to the traditional Yahoo! Store platform, managed by uploading a product database. Static HTML pages with custom data fields is still our preference for building stores. For new stores using Dreamweaver, it is easier to put a few products online than ever before and have control with your own WYSIWYG editor, although many users find their skill ceiling fairly quickly with this method.

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About Matthew Ledford & ydesigns.com

Matthew Ledford founded ydesigns.com and has been building successful web stores since 1997. Seeing life as a marathon adventure to live, passions to pursue, and a beauty to rescue, Matthew still dates the same woman he married fifteen years ago. He and Amy have two beautiful kids. ydesigns.com clients include: Sybase/Ianywhere, Service Merchandise, Vern Yip, National Wildlife Federation, TruckStuffUSA.com, and others.

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Other articles from Web Commerce Today, Issue 76, January 15, 2004